<SEC-DOCUMENT>0000950117-04-003962.txt : 20151026
<SEC-HEADER>0000950117-04-003962.hdr.sgml : 20151026

<ACCEPTANCE-DATETIME>20041112172710

<PRIVATE-TO-PUBLIC>

ACCESSION NUMBER:		0000950117-04-003962

CONFORMED SUBMISSION TYPE:	N-2/A

PUBLIC DOCUMENT COUNT:		11

FILED AS OF DATE:		20041112

DATE AS OF CHANGE:		20050624


FILER:


	COMPANY DATA:	

		COMPANY CONFORMED NAME:			COHEN & STEERS QUALITY INCOME REALTY FUND INC

		CENTRAL INDEX KEY:			0001157842

		IRS NUMBER:				134189110

		FISCAL YEAR END:			1231



	FILING VALUES:

		FORM TYPE:		N-2/A

		SEC ACT:		1933 Act

		SEC FILE NUMBER:	333-119361

		FILM NUMBER:		041140754



	BUSINESS ADDRESS:	

		STREET 1:		280 PARK AVENUE

		STREET 2:		10TH FLOOR

		CITY:			NEW YORK

		STATE:			NY

		ZIP:			10017

		BUSINESS PHONE:		2128323232



	MAIL ADDRESS:	

		STREET 1:		280 PARK AVENUE

		STREET 2:		10TH FLOOR

		CITY:			NEW YORK

		STATE:			NY

		ZIP:			10017



	FORMER COMPANY:	

		FORMER CONFORMED NAME:	COHEN & STEERS INCOME REALTY FUND INC

		DATE OF NAME CHANGE:	20010821




FILER:


	COMPANY DATA:	

		COMPANY CONFORMED NAME:			COHEN & STEERS QUALITY INCOME REALTY FUND INC

		CENTRAL INDEX KEY:			0001157842

		IRS NUMBER:				134189110

		FISCAL YEAR END:			1231



	FILING VALUES:

		FORM TYPE:		N-2/A

		SEC ACT:		1940 Act

		SEC FILE NUMBER:	811-10481

		FILM NUMBER:		041140753



	BUSINESS ADDRESS:	

		STREET 1:		280 PARK AVENUE

		STREET 2:		10TH FLOOR

		CITY:			NEW YORK

		STATE:			NY

		ZIP:			10017

		BUSINESS PHONE:		2128323232



	MAIL ADDRESS:	

		STREET 1:		280 PARK AVENUE

		STREET 2:		10TH FLOOR

		CITY:			NEW YORK

		STATE:			NY

		ZIP:			10017



	FORMER COMPANY:	

		FORMER CONFORMED NAME:	COHEN & STEERS INCOME REALTY FUND INC

		DATE OF NAME CHANGE:	20010821



</SEC-HEADER>

<DOCUMENT>
<TYPE>N-2/A
<SEQUENCE>1
<FILENAME>a38362.txt
<DESCRIPTION>COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
<TEXT>


<PAGE>



   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 2004



                                              SECURITIES ACT FILE NO. 333-119361

                                       INVESTMENT COMPANY ACT FILE NO. 811-10481
________________________________________________________________________________
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                              -------------------

                                    FORM N-2

(CHECK APPROPRIATE BOX OR BOXES)

[x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[x] PRE-EFFECTIVE AMENDMENT NO. 1

[ ] POST-EFFECTIVE AMENDMENT NO.

                                     AND/OR

[x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

[x] AMENDMENT NO. 11

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

                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
                              -------------------

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 832-3232

                                ROBERT H. STEERS
                    COHEN & STEERS CAPITAL MANAGEMENT, INC.
                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (212) 832-3232
                    (NAME AND ADDRESS OF AGENT FOR SERVICE)
                              -------------------

                                WITH COPIES TO:


<Table>
<S>                                              <C>
             SARAH E. COGAN, ESQ.                         LEONARD B. MACKEY, JR., ESQ.
        SIMPSON THACHER & BARTLETT LLP                       CLIFFORD CHANCE US LLP
             425 LEXINGTON AVENUE                              31 WEST 52ND STREET
           NEW YORK, NEW YORK 10017                         NEW YORK, NEW YORK 10019
</Table>


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

    APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.

    If any securities being registered on this form will be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]
                              -------------------


        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<Table>
<CAPTION>
                                                         PROPOSED         PROPOSED
                                                         MAXIMUM           MAXIMUM
         TITLE OF SECURITIES            AMOUNT BEING  OFFERING PRICE      AGGREGATE      AMOUNT OF REGISTRATION
           BEING REGISTERED              REGISTERED    PER UNIT(1)    OFFERING PRICE(1)        FEE(1)(2)
<S>                                     <C>           <C>             <C>                <C>
Series M7 AMPs, par value $0.001......     3,760         $25,000         $94,000,000           $11,909.80
</Table>


(1) Estimated solely for the purpose of computing the registration fee pursuant
    to Rule 457.


(2) Includes registration fees paid on September 29, 2004, of $126.70

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

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

________________________________________________________________________________



<Page>

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.


                             SUBJECT TO COMPLETION
                 PRELIMINARY PROSPECTUS DATED NOVEMBER 12, 2004


PROSPECTUS                      [COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]


                                  $94,000,000
                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.
                    AUCTION MARKET PREFERRED SHARES ('AMPS')
                            3,760 SHARES, SERIES M7
                    LIQUIDATION PREFERENCE $25,000 PER SHARE

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


   Cohen & Steers Quality Income Realty Fund, Inc. (the 'Fund') is offering
3,760 Series M7 Auction Market Preferred Shares. The shares are referred to in
this Prospectus as 'AMPS.' The Fund is a non-diversified, closed-end management
investment company. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. Under normal market conditions, the Fund will
invest at least 90% of its total assets in common stocks, preferred stocks and
other equity securities issued by real estate companies, such as 'real estate
investment trusts' ('REITs'). At least 80% of the Fund's total assets will be
invested in income producing equity securities issued by high quality REITs. The
Fund may invest up to 10% of its total assets in debt securities issued or
guaranteed by real estate companies. The Fund will not invest more than 20% of
its total assets in non-investment grade preferred stock or debt securities
(commonly known as 'junk bonds'). There can be no assurance that the Fund will
achieve its investment objectives. See 'Investment Objectives and Policies.' The
Fund's investment manager is Cohen & Steers Capital Management, Inc.


                                                   (continued on following page)


   INVESTING IN THE AMPS INVOLVES RISKS THAT ARE DESCRIBED IN THE 'RISK FACTORS'
SECTION BEGINNING ON PAGE 25 OF THIS PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF
THE AMPS IS $25,000.

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


<Table>
<Caption>
                                                              PER SHARE               TOTAL
                                                              ---------               -----
<S>                                                           <C>                  <C>
Public offering price.......................................   $25,000                  $
Sales load..................................................      $250                  $
Proceeds to the Fund(1).....................................   $24,750                  $
</Table>


   (1) Not including offering expenses payable by the Fund estimated to be
       $


   The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the AMPS are first
issued.


   Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.


   The underwriters are offering the AMPS subject to various conditions. The
AMPS will be ready for delivery in book-entry form only through the facilities
of The Depository Trust Company, on or about            , 2004.


-----------------
MERRILL LYNCH & CO.
               CITIGROUP
                                A.G. EDWARDS
                                                UBS INVESTMENT BANK
                                                             WACHOVIA SECURITIES

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

               The date of this Prospectus is            , 2004.





<PAGE>



    Investors in the AMPS will be entitled to receive cash dividends at an
annual rate that may vary for the successive dividend periods for the AMPS. The
AMPS have a liquidation preference of $25,000 per share, plus any accumulated,
unpaid dividends. The AMPS also have priority over the Fund's common shares as
to distribution of assets as described in this Prospectus. See 'Description of
AMPS.' As of November 8, 2004, the Fund has outstanding 13,600 shares of five
other series of preferred stock: 2,800 Series T AMPS, par value $.001 per share
(the 'Series T AMPS'), 2,800 Series W AMPS, par value $.001 per share (the
'Series W AMPS'), 2,800 Series TH AMPS, par value $.001 per share (the
'Series TH AMPS'), 2,800 Series F AMPS, par value $.001 per share (the
'Series F AMPS'), and 2,400 Series M28 AMPS, par value $.001 per share (the
'Series M28 AMPS'). References to the AMPS and the Series T, Series W, Series
TH, Series F and Series M28 AMPS refer to Taxable Auction Market Preferred
Shares. The AMPS offered in this Prospectus rank on a parity with the Series T
AMPS, Series W AMPS, Series TH AMPS, Series F AMPS and Series M28 AMPS with
respect to dividends and liquidation preference. The AMPS and any other
outstanding shares of preferred stock have priority over the Fund's common
shares as to dividends and distribution of assets as described in this
Prospectus. See 'Description of AMPS.' The dividend rate for the initial
dividend period will be    % for the AMPS. The initial dividend period is from
the date of issuance through             , 2004 for the AMPS. For subsequent
dividend periods, the AMPS will pay dividends based on a rate set at auction,
usually held every seven days. Prospective purchasers should note: (1) a buy
order (called a 'bid order') or sell order is a commitment to buy or sell the
AMPS based on the results of an auction; and (2) purchases and sales will be
settled on the next business day after the auction. Investors may only buy or
sell the AMPS through an order placed at an auction with or through a
broker-dealer in accordance with the procedures specified in this Prospectus.
Broker-dealers are not required to maintain a secondary market in the AMPS, and
a secondary market may not provide you with liquidity. The Fund may redeem the
AMPS as described under 'Description of AMPS -- Redemption.'



    The AMPS do not represent a deposit or obligation of, and are not guaranteed
or endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.



    The AMPS will be senior to the Fund's outstanding common shares. The AMPS
are not listed on an exchange. The Fund's common shares are traded on the New
York Stock Exchange (the 'NYSE') under the symbol 'RQI.' It is a condition of
closing this offering that the AMPS be offered with a rating of 'AAA' from
Standard & Poor's Ratings Services Group, a division of The McGraw-Hill
Companies, Inc. ('S&P') and of 'Aaa' from Moody's Investors Service, Inc.
('Moody's').








<PAGE>



                        TABLE OF CONTENTS


<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................    4
Financial Highlights........................................   17
The Fund....................................................   19
Use of Proceeds.............................................   19
Capitalization..............................................   20
Investment Objectives and Policies..........................   21
Use of Leverage.............................................   23
Risk Factors................................................   25
How the Fund Manages Risk...................................   32
Management of the Fund......................................   34
Description of AMPS.........................................   36
The Auction.................................................   44
Description of Common Shares................................   48
Certain Provisions of the Charter and By-Laws...............   48
Conversion to Open-End Fund.................................   50
Repurchase of Common Shares.................................   51
U.S. Federal Taxation.......................................   51
Underwriting................................................   56
Custodian, Auction Agent, Transfer Agent, Dividend Paying
  Agent and Registrar.......................................   57
Legal Opinions..............................................   57
Independent Registered Public Accounting Firm...............   57
Further Information.........................................   57
Table of Contents for the Statement of Additional
  Information...............................................   59
</Table>



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

    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANY
OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU
WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE AND
THE UNDERWRITERS ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS
PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION AND PROSPECTS MAY HAVE CHANGED
SINCE THAT DATE.



    This Prospectus sets forth concisely information about the Fund you should
know before investing. You should read the Prospectus before deciding whether to
invest and retain it for future reference. A Statement of Additional
Information, dated             , 2004, as it may be supplemented (the 'SAI'),
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into (which means it is considered part of) this Prospectus. You can
review the table of contents of the SAI on page 59 of this Prospectus. You may
request a free copy of the SAI by calling (800) 437-9912. You may also obtain
the SAI and other information regarding the Fund on the Securities and Exchange
Commission website (http://www.sec.gov).


                                       3




<PAGE>


                               PROSPECTUS SUMMARY


    This is only a summary. This summary does not contain all of the information
that you should consider before investing in AMPS. You should review the more
detailed information contained in this Prospectus and in the SAI, especially the
information set forth under the heading 'Risk Factors.'



<Table>
<S>                                            <C>
THE FUND.....................................  The Cohen & Steers Quality Income Realty Fund, Inc.
                                               (the 'Fund') is a non-diversified, closed-end
                                               management investment company. The Fund was organized
                                               as a Maryland corporation on August 22, 2001 and is
                                               registered under the Investment Company Act of 1940,
                                               as amended (the '1940 Act'). The Fund commenced
                                               investment operations on February 28, 2002 upon the
                                               closing of an initial public offering of 34,000,000
                                               common shares, par value $.001 per share ('Common
                                               Shares'). On March 8, 2002 and March 21, 2002, the
                                               Fund issued 2,000,000 and 1,700,000 additional Common
                                               Shares, respectively, in connection with a partial
                                               exercise by the underwriters of the overallotment
                                               option. The Fund issued 2,800 Series T AMPS, 2,800
                                               Series W AMPS, 2,800 Series TH AMPS and 2,800
                                               Series F AMPS on April 4, 2002. The Fund issued 2,400
                                               Series M28 AMPS on September 15, 2003. References to
                                               the AMPS and the Series T, Series W, Series TH,
                                               Series F and Series M28 AMPS refer to Taxable Auction
                                               Market Preferred Shares. As of November 8, 2004, the
                                               Fund had 38,856,074 Common Shares outstanding and net
                                               assets, plus the liquidation value of the Series T
                                               AMPS, Series W AMPS, Series TH AMPS, Series F AMPS
                                               and Series M28 AMPS, of $1,148,956,226. The Fund's
                                               principal office is located at 757 Third Avenue, New
                                               York, New York 10017, and its telephone number is
                                               (212) 832-3232.

THE OFFERING.................................  The Fund is offering 3,760 Series M7 Auction Market
                                               Preferred Shares, par value $.001 (the 'AMPS'), at a
                                               purchase price of $25,000 per share plus dividends,
                                               if any, that have accumulated from the date the Fund
                                               first issues the AMPS. The AMPS are offered through a
                                               group of underwriters led by Merrill Lynch, Pierce,
                                               Fenner & Smith Incorporated ('Merrill Lynch').
                                               The AMPS entitle their holders to receive cash
                                               dividends at an annual rate that may vary for the
                                               successive dividend periods for the AMPS. In general,
                                               except as
</Table>


                                       4




<PAGE>



<Table>
<S>                                            <C>
                                               described under ' -- Dividends and Rate Periods'
                                               below and 'Description of AMPS -- Dividends and Rate
                                               Periods,' the dividend period for the AMPS will be
                                               seven days. The auction agent will determine the
                                               dividend rate for a particular period by an auction
                                               conducted on the business day immediately prior to
                                               the start of that rate period. See 'The Auction.'

                                               The AMPS are not listed on an exchange. Instead,
                                               investors may buy or sell the AMPS in an auction by
                                               submitting orders to broker-dealers that have entered
                                               into an agreement with the auction agent and the
                                               Fund.

                                               Generally, investors in the AMPS will not receive
                                               certificates representing ownership of their shares.
                                               The securities depository (The Depository Trust
                                               Company or any successor) or its nominee for the
                                               account of the investor's broker-dealer will maintain
                                               record ownership of the AMPS in book-entry form. An
                                               investor's broker-dealer, in turn, will maintain
                                               records of that investor's beneficial ownership of
                                               the AMPS.

RATINGS......................................  The Fund will issue the AMPS only if such shares have
                                               received a credit quality rating of 'AAA' from S&P
                                               and 'Aaa' from Moody's. These ratings are an
                                               assessment of the capacity and willingness of an
                                               issuer to pay preferred stock obligations. The
                                               ratings are not a recommendation to purchase, hold or
                                               sell those shares inasmuch as the rating does not
                                               comment as to the market price or suitability for a
                                               particular investor. The rating agency guidelines
                                               described above also do not address the likelihood
                                               that an owner of the AMPS will be able to sell such
                                               shares in an auction or otherwise. The ratings are
                                               based on current information furnished to Moody's and
                                               S&P by the Fund and the Investment Manager and
                                               information obtained from other sources. The ratings
                                               may be changed, suspended or withdrawn from other
                                               sources in the rating agencies' discretion as a
                                               result of changes in, or the unavailability of, such
                                               information. See 'Description of AMPS -- Rating
                                               Agency Guidelines.'

USE OF PROCEEDS..............................  The net proceeds of the AMPS will be invested in
                                               accordance with the policies set forth under
                                               'Investment Objectives and Policies.' The Fund
                                               estimates that the net proceeds of this offering will
                                               be fully invested in accordance with the Fund's
                                               investment objectives and
</Table>


                                       5




<PAGE>



<Table>
<S>                                            <C>
                                               policies within four months of the completion of this
                                               offering.

INVESTMENT OBJECTIVES AND POLICIES...........  Our primary investment objective is high current
                                               income through investment in real estate securities.
                                               Capital appreciation is a secondary investment
                                               objective. Our investment objectives and certain
                                               investment policies are considered fundamental and
                                               may not be changed without stockholder approval. See
                                               'Investment Objectives and Policies.'

                                               Under normal market conditions, the Fund seeks to
                                               achieve its investment objectives by investing at
                                               least 90% of its total assets in common stocks,
                                               preferred stocks and other equity securities issued
                                               by real estate companies, such as REITs. At least 80%
                                               of the Fund's total assets will be invested in income
                                               producing equity securities issued by high quality REITs,
                                               and substantially all of the equity securities
                                               of real estate companies in which we intend to invest
                                               are traded on a national securities exchange or in
                                               the over-the-counter market. High quality REITs are
                                               companies that, in the opinion of the Investment
                                               Manager, offer excellent prospects for consistent,
                                               above-average revenue and earnings growth. To
                                               determine whether a company is of high quality, the
                                               Investment Manager generally looks to a strong record
                                               of earnings growth, as well as to a company's current
                                               ratio of debt to capital and the quality of its
                                               management. All of the REITs in which the Fund will
                                               invest will have a market capitalization greater than
                                               $100 million. A real estate company generally derives
                                               at least 50% of its revenue from real estate or has
                                               at least 50% of its assets in real estate. A REIT is
                                               a company dedicated to owning, and usually operating,
                                               income producing real estate, or to financing real
                                               estate. REITs are generally not taxed on income
                                               distributed to stockholders provided they distribute
                                               to their stockholders substantially all of their
                                               income and otherwise comply with the requirements of
                                               the Internal Revenue Code of 1986, as amended (the
                                               'Code'). As a result, REITs generally pay relatively
                                               high dividends (as compared to other types of
                                               companies) and the Fund intends to use these REIT
                                               dividends in an effort to meet its objective of high
                                               current income. The Fund may invest up to 10% of our
                                               total assets in debt
</Table>


                                       6




<PAGE>



<Table>
<S>                                            <C>
                                               securities issued or guaranteed by real estate
                                               companies. The Fund currently invests approximately
                                               19.86% of its total assets in common stocks of real
                                               estate companies and approximately 79.74% of its
                                               total assets in preferred stocks of real estate
                                               companies, although the actual percentage of common
                                               and preferred stocks in the Fund's investment
                                               portfolio may vary over time. The Fund will not
                                               invest more than 20% of the Fund's total assets in
                                               preferred stock or debt securities rated below
                                               investment grade (commonly known as 'junk bonds') or
                                               unrated securities of comparable quality. Preferred
                                               stock or debt securities will be considered to be
                                               investment grade if, at the time of investment, such
                                               security has a rating of 'BBB-' or higher by S&P,
                                               'Baa3' or higher by Moody's or an equivalent rating
                                               by a nationally recognized statistical rating agency.
                                               The Investment Manager may also invest in preferred
                                               stock or debt securities which are unrated but which,
                                               in the opinion of the Investment Manager, are
                                               determined to be of equivalent quality. All of the
                                               Fund's investments will be in securities of U.S.
                                               issuers and we will generally not invest more than
                                               10% of the Fund's total assets in the securities of
                                               one issuer. There can be no assurance that the Fund's
                                               investment objectives will be achieved. See
                                               'Investment Objectives and Policies.'

INVESTMENT MANAGER...........................  Cohen & Steers Capital Management, Inc. (the
                                               'Investment Manager') is the investment manager of
                                               the Fund pursuant to an Investment Management
                                               Agreement. The Investment Manager, which was formed
                                               in 1986, is a leading firm specializing in the
                                               management of real estate securities portfolios and
                                               as of September 30, 2004 had approximately
                                               $16.1 billion in assets under management. Its clients
                                               include pension plans, endowment funds and mutual
                                               funds, including some of the largest open-end and
                                               closed-end real estate funds. The Investment Manager,
                                               whose principal business address is 757 Third Avenue,
                                               New York, New York 10017, is also responsible for
                                               providing administrative services, and assisting the
                                               Fund with operational needs pursuant to an
                                               administration agreement (the 'Administration
                                               Agreement'). In accordance with the terms of the
                                               Administration Agreement, the Fund has entered into
                                               an agreement with State Street Bank and
</Table>


                                       7




<PAGE>



<Table>
<S>                                            <C>
                                               Trust Company ('State Street Bank') to perform
                                               certain administrative functions subject to the
                                               supervision of the Investment Manager (the
                                               'Sub-Administration Agreement'). See 'Management of
                                               the Fund -- Administration and Sub-Administration
                                               Agreement.'

USE OF LEVERAGE..............................  The Fund may, but is not required to, use financial
                                               leverage for investment purposes. In addition to
                                               issuing the AMPS, the Fund may borrow money or issue
                                               debt securities such as commercial paper or notes.
                                               Any such borrowings will have seniority over the AMPS
                                               and any other outstanding shares of preferred stock,
                                               and payments to holders of the AMPS and any other
                                               outstanding shares of preferred stock in liquidation
                                               or otherwise will be subject to the prior payment of
                                               any borrowings. Since the Investment Manager's fee is
                                               based upon a percentage of the Fund's managed assets,
                                               which include assets attributable to any outstanding
                                               leverage, the investment management fee will be
                                               higher if the Fund is leveraged and the Investment
                                               Manager will have an incentive to be more aggressive
                                               and leverage the Fund. See 'Use of Leverage.'

PRINCIPAL INVESTMENT RISKS...................  Risk is inherent in all investing. Therefore, before
                                               investing in the AMPS and the Fund you should
                                               consider certain risks carefully. The primary risks
                                               of investing in the AMPS are:

                                                  the Fund will not be permitted to declare
                                                  dividends or other distributions with respect to your
                                                  AMPS or redeem your AMPS unless the Fund meets
                                                  certain asset coverage requirements required by
                                                  the 1940 Act and the rating agencies;

                                                  if you try to sell your AMPS between auctions you
                                                  may not be able to sell any or all of your shares
                                                  or you may not be able to sell them for $25,000
                                                  per share or $25,000 per share plus accumulated
                                                  but unpaid dividends, if any, whether or not
                                                  earned or declared. If the Fund has designated a
                                                  special rate period, changes in interest rates
                                                  could affect the price you would receive if you
                                                  sold your shares in the secondary market. You may
                                                  transfer your shares outside of auctions only to
                                                  or through a broker-dealer that has entered into
                                                  an agreement with the auction agent and the Fund
                                                  or other person as the Fund permits.
</Table>


                                       8




<PAGE>



<Table>
<S>                                            <C>
                                                  if an auction fails, you may not be able to sell
                                                  some or all of your AMPS;

                                                  you may receive less than the price you paid for
                                                  your AMPS if you sell them outside of the auction,
                                                  especially when market interest rates are rising;

                                                  a rating agency could downgrade the rating
                                                  assigned to the AMPS, which could affect liquidity;
                                                  the Fund may be forced to redeem your AMPS to meet
                                                  regulatory or rating agency requirements or may
                                                  voluntarily redeem your shares in certain
                                                  circumstances;

                                                  restrictions imposed by the 1940 Act and by rating
                                                  agencies on the declaration and payment of
                                                  dividends to the holders of the Fund's Common
                                                  Shares and AMPS and any other outstanding shares
                                                  of preferred stock might impair the Fund's ability
                                                  to maintain its qualification as a regulated
                                                  investment company for federal income tax
                                                  purposes;

                                                  in certain circumstances the Fund may not earn
                                                  sufficient income from its investments to pay
                                                  dividends on the AMPS;

                                                  the AMPS will be junior to any borrowings;

                                                  any borrowings may constitute a substantial lien
                                                  and burden on the AMPS by reason of its priority
                                                  claim against the income of the Fund and against
                                                  the net assets of the Fund in liquidation;

                                                  if the Fund leverages through borrowings, the Fund
                                                  may not be permitted to declare dividends or other
                                                  distributions with respect to the AMPS or purchase
                                                  the AMPS unless at the time thereof the Fund meets
                                                  certain asset coverage requirements and the
                                                  payments of principal and of interest on any such
                                                  borrowings are not in default;

                                                  the value of the Fund's investment portfolio may
                                                  decline, reducing the asset coverage for the AMPS;
                                                  and

                                                  if an issuer of a common stock in which the Fund
                                                  invests experiences financial difficulties or if
                                                  an issuer's preferred stock or debt security is
                                                  downgraded or defaults or if an issuer in which
                                                  the Fund invests is affected by other adverse
                                                  market factors, there may be
</Table>


                                       9




<PAGE>



<Table>
<S>                                            <C>
                                                  a negative impact on the income and/or asset value
                                                  of the Fund's investment portfolio. See 'Risk
                                                  Factors -- Risks of Investing in AMPS.'

                                               In addition, although the offering of the AMPS is
                                               conditioned upon receipt of ratings of 'AAA' from S&P
                                               and 'Aaa' from Moody's for the AMPS, there are
                                               additional risks related to the investment policies
                                               of and an investment in the Fund, such as:

                                               Real Estate Risks. Since the Fund concentrate its
                                               assets in the real estate industry, the Fund's
                                               investments will be closely linked to the performance
                                               of the real estate markets. Property values may fall
                                               due to increasing vacancies or declining rents
                                               resulting from economic, legal, cultural or
                                               technological developments. REIT prices also may drop
                                               because of the failure of borrowers to pay their
                                               loans and poor management. Many REITs utilize
                                               leverage, which increases investment risk and could
                                               adversely affect a REIT's operations and market value
                                               in periods of rising interest rates as well as risks
                                               normally associated with debt financing. In addition,
                                               there are specific risks associated with particular
                                               sectors of real estate investments such as retail,
                                               office, hotel, healthcare, and multifamily
                                               properties.

                                               The Fund may also invest in preferred stocks and debt
                                               securities of real estate companies. These securities
                                               also are more sensitive to changes in interest rates
                                               than common stocks. When interest rates rise, the
                                               value of preferred stocks and debt securities may
                                               fall. See 'Risk Factors -- General Risks of Investing
                                               in the Fund -- General Real Estate Risks.'

                                               Lower-Rated Securities Risk. Lower-rated preferred
                                               stock or debt securities, or equivalent unrated
                                               securities, which are commonly known as 'junk bonds,'
                                               generally involve greater volatility of price and
                                               risk of loss of income and principal, and may be more
                                               susceptible to real or perceived adverse economic and
                                               competitive industry conditions than higher grade
                                               securities. It is reasonable to expect that any
                                               adverse economic conditions could disrupt the market
                                               for lower-rated securities, have an adverse impact on
                                               the value of those securities, and adversely affect
                                               the ability of the issuers of those securities to
                                               repay principal and interest on those
</Table>


                                       10




<PAGE>



<Table>
<S>                                            <C>
                                               securities. See 'Risk Factors -- General Risks of
                                               Investing in the Fund -- Lower-Rated Securities
                                               Risk.'

                                               Tax Risk. The Fund's investment program and the tax
                                               treatment of Fund distributions may be affected by
                                               Internal Revenue Service ('IRS') interpretations of
                                               the Code and future changes in tax laws and
                                               regulations. In particular, the provisions that
                                               currently apply to the favorable tax treatment of
                                               qualified dividend income are scheduled to expire on
                                               December 31, 2008 unless future legislation is passed
                                               to make the provisions effective beyond this date.
                                               The Fund does not expect a significant portion of the
                                               Fund's distributions to be derived from qualified
                                               dividend income. See 'Risk Factors -- General Risks
                                               of Investing in the Fund -- Tax Risk.' See also 'U.S.
                                               Federal Taxation.'

                                               Non-Diversified Status. Because we, as a
                                               non-diversified investment company, may invest in a
                                               smaller number of individual issuers than a
                                               diversified investment company, an investment in the
                                               Fund presents greater risk to you than an investment
                                               in a diversified company. We intend to comply with
                                               the diversification requirements of the Code
                                               applicable to regulated investment companies. See
                                               'Risk Factors -- General Risks of Investing in the
                                               Fund -- Non-Diversified Status.' See also 'U.S.
                                               Federal Taxation' in the SAI.

                                               Anti-Takeover Provisions. Certain provisions of the
                                               Fund's Articles of Incorporation (which, as hereafter
                                               amended, restated or supplemented from time to time,
                                               and together with the Articles Supplementary, is
                                               referred to as the 'Charter') and By-Laws may have
                                               the effect of limiting the ability of other entities
                                               or persons to acquire control of the Fund or to
                                               change the Fund's structure. These provisions may
                                               also have the effect of depriving you of an
                                               opportunity to redeem your AMPS. These include
                                               provisions for staggered terms of office for
                                               directors, super-majority voting requirements for
                                               merger, consolidation, liquidation, termination and
                                               asset sale transactions, amendments to the Charter
                                               and conversion to open-end status. See 'Risk
                                               Factors -- Anti-Takeover Provisions.' See also
                                               'Description of Common Shares' and 'Certain
                                               Provisions of the Charter and By-Laws.'

                                               Market Disruption Risk. The aftermath of the war in
                                               Iraq and the continuing occupation of Iraq,
                                               instability in
</Table>


                                       11




<PAGE>



<Table>
<S>                                            <C>
                                               the Middle East and terrorist attacks in the U.S. and
                                               around the world may have resulted in market
                                               volatility and may have long-term effects on the U.S.
                                               and worldwide financial markets and may cause further
                                               economic uncertainties in the U.S. and worldwide.
                                               These events could also adversely affect individual
                                               issuers and securities markets, interest rates,
                                               auctions and auction participants, secondary trading,
                                               ratings, credit risk, inflation, deflation and other
                                               factors relating to the AMPS. The Fund does not know
                                               how long the securities markets will continue to be
                                               affected by these events and cannot predict the
                                               effects of the occupation or similar events in the
                                               future on the U.S. economy and securities markets.
                                               See 'Risk Factors -- General Risks of Investing in
                                               the Fund -- Market Disruption Risk.'

                                               For further discussion of the risks associated with
                                               investing in the AMPS and the Fund, see 'Risk
                                               Factors.'

DIVIDENDS AND RATE PERIODS...................  The table below shows the dividend rate, the dividend
                                               payment date and the number of days for the initial
                                               rate period on the AMPS offered in this Prospectus.
                                               For subsequent dividend periods, the AMPS will pay
                                               dividends based on a rate set at auctions normally
                                               held every seven days. In most instances, dividends
                                               are payable on the first business day following the
                                               end of the rate period. The rate set at auction will
                                               not exceed the applicable maximum rate.

                                               The dividend payment date for special rate periods
                                               will be set out in the notice designating a special
                                               rate period. Dividends on the AMPS will be cumulative
                                               from the date the shares are first issued and will be
                                               paid out of legally available funds.
</Table>



<Table>
<Caption>
                                                            INITIAL    DIVIDEND PAYMENT DATE      NUMBER OF
                                                            DIVIDEND        FOR INITIAL        DAYS OF INITIAL
                                                              RATE          RATE PERIOD          RATE PERIOD
                                                              ----          -----------          -----------
                                                <S>         <C>        <C>                     <C>
                                                Series M7..       %                   , 2004           days
</Table>



<Table>
<S>                                            <C>
                                               The Fund may, subject to certain conditions,
                                               designate special rate periods of more than seven
                                               days.

                                               The Fund may not designate a special rate period
                                               unless sufficient clearing bids were made in the most
                                               recent auction. In addition, full cumulative
                                               dividends, any amounts due with respect to mandatory
                                               redemptions and
</Table>


                                       12




<PAGE>



<Table>
<S>                                            <C>
                                               any additional dividends payable prior to such date
                                               must be paid in full. The Fund also must have
                                               received confirmation from Moody's and S&P or any
                                               substitute rating agency that the proposed special
                                               rate period will not adversely affect such agency's
                                               then-current rating on the AMPS and the lead
                                               Broker-Dealer designated by the Fund, initially
                                               Merrill Lynch, must not have objected to declaration
                                               of a special rate period.

                                               See 'Description of AMPS -- Dividends and Rate
                                               Periods' and ' -- Designation of Special Rate
                                               Periods' and 'The Auction.'

SECONDARY MARKET TRADING.....................  Broker-dealers may, but are not obligated to,
                                               maintain a secondary trading market in the AMPS
                                               outside of auctions. There can be no assurance that a
                                               secondary market will provide owners with liquidity.
                                               You may transfer shares outside of auctions only to
                                               or through a broker-dealer that has entered into an
                                               agreement with the auction agent and the Fund, or
                                               other persons as the Fund permits.

INTEREST RATE TRANSACTIONS...................  In order to seek to reduce the interest rate risk
                                               inherent in the Fund's underlying investments and
                                               capital structure, the Fund may enter into interest
                                               rate swap or cap transactions. The use of interest
                                               rate swaps and caps is a highly specialized activity
                                               that involves investment techniques and risks
                                               different from those associated with ordinary
                                               portfolio security transactions. In an interest rate
                                               swap, the Fund would agree to pay to the other party
                                               to the interest rate swap (which is known as the
                                               'counterparty') a fixed rate payment in exchange for
                                               the counterparty agreeing to pay to the Fund a
                                               variable rate payment that is intended to approximate
                                               the Fund's variable rate payment obligation on the
                                               AMPS and any other outstanding shares of preferred
                                               stock. The payment would be based on the notional
                                               amount of the swap. In an interest rate cap, the Fund
                                               would pay a premium to the counterparty to the
                                               interest rate cap and, to the extent that a specified
                                               variable rate index exceeds a predetermined fixed
                                               rate, would receive from the counterparty payments of
                                               the difference based on the notional amount of such
                                               cap. If the counterparty to an interest rate swap or
                                               cap defaults, the Fund would be obligated to make the
                                               payments that it had intended to avoid. Depending on
                                               the general state of short-term interest rates and
                                               the returns on the Fund's portfolio
</Table>


                                       13




<PAGE>



<Table>
<S>                                            <C>
                                               securities at that point in time, this default could
                                               negatively impact the Fund's ability to make dividend
                                               payments on the AMPS and any other outstanding shares
                                               of preferred stock. In addition, at the time an
                                               interest rate swap or cap transaction reaches its
                                               scheduled termination date, there is a risk that the
                                               Fund will not be able to obtain a replacement
                                               transaction or that the terms of the replacement will
                                               not be as favorable as on the expiring transaction.
                                               If this occurs, it could have a negative impact on
                                               the Fund's ability to make dividend payments on the
                                               AMPS. If the Fund fails to maintain the required
                                               asset coverage on the AMPS and any other outstanding
                                               shares of preferred stock or fails to comply with
                                               other covenants, the Fund may be required to redeem
                                               some or all of these shares. Such redemption likely
                                               would result in the Fund seeking to terminate early
                                               all or a portion of any swap or cap transaction.
                                               Early termination of the swap could result in a
                                               termination payment by or to the Fund. Early
                                               termination of a cap could result in a termination
                                               payment to the Fund. The Fund would not enter into
                                               interest rate swap or cap transactions having a
                                               notional amount that exceeded the outstanding amount
                                               of the AMPS and any other outstanding shares of
                                               preferred stock. See 'How the Fund Manages
                                               Risk -- Interest Rate Transactions' for additional
                                               information.

ASSET MAINTENANCE............................  Under the Fund's Articles Supplementary for the AMPS,
                                               which establishes and fixes the rights and
                                               preferences of the shares of the AMPS and the
                                               respective Articles Supplementary for the Series T,
                                               Series W, Series TH, Series F and Series M28 AMPS,
                                               the Fund must maintain:

                                                  asset coverage of the AMPS and the Series T,
                                                  Series W, Series TH, Series F and Series M28 AMPS
                                                  as required by the rating agency or agencies
                                                  rating each of those AMPS, and

                                                  asset coverage of at least 200% with respect to
                                                  senior securities that are stock, including the AMPS
                                                  and the Series T, Series W, Series TH, Series F
                                                  and Series M28 AMPS.

                                               In the event that the Fund does not maintain or cure
                                               these coverage tests, some or all of the AMPS will be
                                               subject to mandatory redemption. See 'Description of
                                               AMPS -- Redemption.'
</Table>


                                       14




<PAGE>



<Table>
<S>                                            <C>
                                               Based on the composition of the Fund's portfolio as
                                               of November 8, 2004, the asset coverage of the AMPS
                                               (and the Series T, Series W, Series TH, Series F and
                                               Series M28 AMPS) as measured pursuant to the 1940 Act
                                               would be approximately 286% if the Fund were to issue
                                               all of the AMPS offered in this Prospectus,
                                               representing approximately 35% of the Fund's managed
                                               assets (as defined below).

REDEMPTION...................................  The Fund does not expect to and ordinarily will not
                                               redeem the AMPS. However, under the Articles
                                               Supplementary, it may be required to redeem the AMPS
                                               in order, for example, to meet an asset coverage
                                               ratio or to correct a failure to meet a rating agency
                                               guideline in a timely manner. The Fund may also
                                               voluntarily redeem the AMPS without the consent of
                                               holders of the AMPS under certain conditions. See
                                               'Description of AMPS -- Redemption.'

LIQUIDATION PREFERENCE.......................  The liquidation preference (that is, the amount the
                                               Fund must pay to holders of the AMPS if the Fund is
                                               liquidated) for the AMPS will be $25,000 per share
                                               plus accumulated but unpaid dividends, if any,
                                               whether or not earned or declared.

VOTING RIGHTS................................  The 1940 Act requires that holders of the AMPS and
                                               the holders of any other series of outstanding
                                               preferred stock of the Fund, voting together as a
                                               separate class, have the right to:

                                                  elect at least two directors at all times, and

                                                  elect a majority of the directors if at any time
                                                  the Fund fails to pay dividends on the AMPS, or any
                                                  other series of preferred stock of the Fund, for
                                                  two full years and will continue to be so
                                                  represented until all dividends in arrears have
                                                  been paid or otherwise provided for.

                                               The holders of the AMPS, and the holders of any other
                                               series of preferred stock of the Fund, will vote as a
                                               separate class or series on other matters as required
                                               under the Fund's Charter, the 1940 Act and Maryland
                                               law. On all other matters, holders of the AMPS will
                                               vote together with the holders of Common Shares and
                                               each share of any other series of preferred stock of
                                               the Fund. Each Common Share, each share of the AMPS
                                               and each share of any other series of preferred stock
                                               of the Fund is entitled to one vote per share.
</Table>


                                       15




<PAGE>



<Table>
<S>                                            <C>
FEDERAL INCOME TAXATION......................  The distributions with respect to the AMPS (other
                                               than distributions in redemption of the AMPS subject
                                               to Section 302(b) of the Code) will constitute
                                               dividends to the extent of the Fund's current or
                                               accumulated earnings and profits, as calculated for
                                               federal income tax purposes. Such dividends generally
                                               will, except in the case of distributions of
                                               qualified dividend income and net capital gains, be
                                               taxable as ordinary income to holders. Distributions
                                               of net capital gain that are designated by the Fund
                                               as capital gain dividends will be treated as
                                               long-term capital gains in the hands of holders
                                               receiving such distributions. The IRS currently
                                               requires that a regulated investment company that has
                                               two or more classes of stock allocate to each such
                                               class proportionate amounts of each type of its
                                               income (such as ordinary income, capital gains,
                                               dividends qualifying for the dividends received
                                               deduction, qualified dividend income,
                                               interest-related dividends and short-term capital
                                               gain dividends) based upon the percentage of total
                                               dividends distributed to each class for the tax year.
                                               Accordingly, the Fund intends each year to allocate
                                               capital gain dividends, dividends qualifying for the
                                               dividends received deduction, dividends derived from
                                               qualified dividend income, interest-related dividends
                                               and short-term capital gain dividends, if any,
                                               between its Common Shares, the AMPS and the
                                               Series T, Series TH, Series F, Series W and
                                               Series M28 AMPS in proportion to the total dividends
                                               paid to each class or series during or with respect
                                               to such year. The Fund does not expect a significant
                                               portion of Fund distributions to be eligible for the
                                               dividends received deduction or derived from
                                               qualified dividend income. See 'U.S. Federal
                                               Taxation.'

CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND REGISTRAR..........  State Street Bank and Trust Company acts as the
                                               Fund's custodian. The Bank of New York will act as
                                               auction agent, transfer agent, dividend paying agent
                                               and registrar for the AMPS.
</Table>


                                       16




<PAGE>


                              FINANCIAL HIGHLIGHTS

    Information contained in the table below under the heading 'Per Share
Operating Performance' and 'Ratios/Supplemental Data' shows the operating
performance of the Fund for the periods indicated.

    The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the Fund's
Financial Statements included in the SAI dated             , 2004. The table
should be read in conjunction with the Financial Statements and notes thereto.

<Table>
<Caption>
                                                                                                     FOR THE PERIOD
                                                                FOR THE             FOR THE       FEBRUARY 28, 2002(a)
                                                            SIX MONTHS ENDED      YEAR ENDED            THROUGH
                                                             JUNE 30, 2004     DECEMBER 31, 2003   DECEMBER 31, 2002
                                                              (UNAUDITED)          (AUDITED)           (AUDITED)
PER SHARE OPERATING PERFORMANCE:                              -----------          ---------           ---------
<S>                                                         <C>                <C>                 <C>
Net asset value per common share, beginning of period.....       $18.43             $13.25               $14.57
                                                                 ------             ------               ------
Income from investment operations:
   Net investment income..................................         0.55(b)            1.04(b)              0.78
   Net realized and unrealized gain/(loss) on investments
    and interest rate swap transactions...................         0.24               5.69                (0.90)
                                                                 ------             ------               ------
      Total income from investment operations.............         0.79               6.73                (0.12)
                                                                 ------             ------               ------
Less dividends and distributions to preferred shareholders
 from:
   Net investment income..................................        (0.05)             (0.07)               (0.09)
   Net realized gain on investments.......................           --              (0.03)               (0.01)
                                                                 ------             ------               ------
      Total dividends and distributions to preferred
        shareholders......................................        (0.05)             (0.10)               (0.10)
                                                                 ------             ------               ------
      Total from investment operations applicable to
        common shares.....................................         0.74               6.63                (0.22)
                                                                 ------             ------               ------
 Less: Offering and organization costs charged to paid-in
      capital -- common shares............................           --                 --                (0.03)
    Offering and organization costs charged to paid-in
      capital -- preferred shares.........................           --              (0.02)               (0.09)
    Preferred Offering Cost Adjustment....................           --(c)              --                   --
    Dilutive effect of common share offering..............           --                 --                (0.03)
                                                                 ------             ------               ------
      Total offering and organization costs...............           --              (0.02)               (0.15)
                                                                 ------             ------               ------
Less dividends and distributions to common shareholders
 from:
   Net investment income..................................        (0.68)             (0.76)               (0.64)
   Net realized gain on investments.......................           --              (0.41)               (0.08)
   Tax return of capital..................................           --              (0.26)               (0.23)
                                                                 ------             ------               ------
      Total dividends and distributions to common
        shareholders......................................        (0.68)             (1.43)               (0.95)
                                                                 ------             ------               ------
Net increase/(decrease) in net asset value per common
 share....................................................         0.06               5.18                (1.32)
                                                                 ------             ------               ------
Net asset value, per common share, end of period..........       $18.49             $18.43               $13.25
                                                                 ------             ------               ------
                                                                 ------             ------               ------
Market value, per common share, end of period.............       $16.70             $17.85               $13.05
                                                                 ------             ------               ------
                                                                 ------             ------               ------
Net asset value total return(d)...........................         4.26%(e)          52.61%               -2.73%(e)
                                                                 ------             ------               ------
                                                                 ------             ------               ------
Market value return(d)....................................        -2.77%(e)          50.07%               -6.95%(e)
                                                                 ------             ------               ------
                                                                 ------             ------               ------
</Table>

---------
(a) Commencement of operations.
(b) Calculation based on average shares outstanding.

(c) Less than $.005 per share. See Note 5 to the financial statements.


(d) Total market value return is computed based upon the New York Stock Exchange
    market price of the Fund's shares and excludes the effects of brokerage
    commissions that would have been paid by investors. Dividends and
    distributions, if any, are assumed for purposes of this calculation, to be
    reinvested at prices obtained under the Fund's dividend reinvestment plan.
    Net asset value total return measures the changes in value over the period
    indicated, taking into account dividends as reinvested.

(e) Not annualized.

                                       17




<PAGE>


                      FINANCIAL HIGHLIGHTS -- (CONTINUED)

<Table>
<Caption>
                                                                                                 FOR THE PERIOD
                                                            FOR THE             FOR THE       FEBRUARY 28, 2002(a)
                                                        SIX MONTHS ENDED      YEAR ENDED            THROUGH
                                                         JUNE 30, 2004     DECEMBER 31, 2003   DECEMBER 31, 2002
                                                          (UNAUDITED)          (AUDITED)           (AUDITED)
RATIOS/SUPPLEMENTAL DATA:                                 -----------          ---------           ---------
<S>                                                     <C>                <C>                 <C>
Net assets applicable to common shares, end of period
 (in millions)........................................      $  718.4           $  716.1             $  512.0
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of expenses to average daily net assets
 applicable to common shares (before expense
 reduction)(f)........................................          1.53%(c)           1.57%                1.52%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of expenses to average daily net assets
 applicable to common shares (net of expense
 reduction)(f)........................................          1.06%(c)           1.09%                1.05%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of net investment income to average daily net
 assets applicable to common shares (before expense
 reduction)(f)........................................          5.53%(c)           6.39%                6.82%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of net investment income to average daily net
 assets applicable to common shares (net of expense
 reduction)(f)........................................          6.00%(c)           6.88%                7.29%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of expenses to average daily managed assets
 (before expense reduction)(b,f)......................          1.04%(c)           1.04%                1.04%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Ratio of expenses to average daily managed assets
 (net of expense reduction)(b,f)......................          0.72%(c)           0.72%                0.72%(c)
                                                            --------           --------             --------
                                                            --------           --------             --------
Portfolio turnover rate...............................          2.05%(d)          20.51%               12.37%(d)
                                                            --------           --------             --------
                                                            --------           --------             --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)...........      $340,000           $340,000             $280,000
                                                            --------           --------             --------
                                                            --------           --------             --------
Total shares outstanding (in 000's)...................            14                 14                   11
                                                            --------           --------             --------
                                                            --------           --------             --------
Asset coverage per share..............................      $ 77,827           $ 77,653             $ 70,710
                                                            --------           --------             --------
                                                            --------           --------             --------
Liquidation preference per share......................      $ 25,000           $ 25,000             $ 25,000
                                                            --------           --------             --------
                                                            --------           --------             --------
Average market value per share(e).....................      $ 25,000           $ 25,000             $ 25,000
                                                            --------           --------             --------
                                                            --------           --------             --------
</Table>

---------
(a) Commencement of operations.

(b) Average daily managed assets represent the net assets applicable to common
    shares plus the liquidation preference of preferred shares.

(c) Annualized.

(d) Not annualized.

(e) Based on weekly prices.

(f) Ratios do not reflect the effects of dividend payments to preferred
shareholders.

                                       18




<PAGE>


                                    THE FUND

    The Fund is a non-diversified, closed-end management investment company. The
Fund was organized as a Maryland corporation on August 22, 2001 and is
registered as an investment company with the Securities and Exchange Commission
under the Investment Company Act of 1940 (the '1940 Act'). The Fund issued an
aggregate of 34,000,000 Common Shares, par value $.001 per share, pursuant to
the initial public offering thereof and commenced its operations with the
closing of this initial public offering on February 28, 2002. On March 8, 2002
and March 21, 2002, the Fund issued 2,000,000 and 1,700,000 additional Common
Shares, respectively, in connection with a partial exercise by the underwriters
of the overallotment option. On April 4, 2002, the Fund issued 2,800 Series T
AMPS, 2,800 Series W AMPS, 2,800 Series TH AMPS and 2,800 Series F AMPS. On
September 15, 2003, the Fund issued 2,400 Series M28 AMPS. The Fund's Common
Shares are traded on the NYSE under the symbol 'RQI.' The Fund's principal
office is located at 757 Third Avenue, New York, New York 10017, and our
telephone number is (212) 832-3232.


    The following provides information about the Fund's outstanding shares as of
November 8, 2004:



<Table>
<Caption>
                                                                AMOUNT HELD
                                                  AMOUNT      BY THE FUND OR      AMOUNT
TITLE OF CLASS                                  AUTHORIZED    FOR ITS ACCOUNT   OUTSTANDING
--------------                                  ----------    ---------------   -----------
<S>                                             <C>           <C>               <C>
Common Shares.................................   99,986,400          0          38,856,074
Preferred Shares
    Series T AMPS.............................        2,800          0               2,800
    Series TH AMPS............................        2,800          0               2,800
    Series F AMPS.............................        2,800          0               2,800
    Series W AMPS.............................        2,800          0               2,800
    Series M28 AMPS...........................        2,400          0               2,400
    Series M7 AMPS............................            0          0                   0
</Table>


                                USE OF PROCEEDS


    The Fund estimates that the net proceeds of this offering of the AMPS, after
payment of the sales load and offering expenses, will be $         . The net
proceeds of this offering will be invested in accordance with the policies set
forth under 'Investment Objectives and Policies.' The Fund estimates that the
net proceeds of this offering will be fully invested in accordance with our
investment objectives and policies within four months of the completion of this
offering. Pending such investment, those proceeds may be invested in U.S.
Government securities or high quality, short-term money market instruments. See
'Investment Objectives and Policies.'


                                       19




<PAGE>


                           CAPITALIZATION (UNAUDITED)


    The following table sets forth the unaudited capitalization of the Fund as
of November 8, 2004, and as adjusted to give effect to the issuance of the AMPS
offered in this Prospectus.



<Table>
<Caption>
                                                            AS OF NOVEMBER 8, 2004
                                                        -------------------------------
                                                            ACTUAL        AS ADJUSTED
                                                            ------        -----------
                                                                  (UNAUDITED)
<S>                                                     <C>              <C>
Preferred Shares, $0.001 par value, $25,000
  liquidation value; 13,600 shares authorized (2,800
  Series T AMPS, 2,800 Series W AMPS, 2,800
  Series TH AMPS, 2,800 Series F AMPS and 2,400
  Series M28 AMPS outstanding) and 17,360 shares
  authorized after giving effect to the issuance of
  3,760 shares of Series M7 AMPS......................  $  340,000,000   $  434,000,000
                                                        --------------   --------------
Common Shares, $.001 par value per share; As of
  November 8, 2004, 99,986,400 shares authorized
  (before giving effect to the issuance of 3,760
  shares of Series M7 AMPS), 38,856,074 shares
  outstanding.........................................  $       38,856   $       38,856
Paid-in surplus.......................................  $  541,280,114   $  539,944,595
Distributions in excess of net investment income......  $  (36,352,645)  $  (36,352,645)
Accumulated net realized gain (loss) from investment
  transactions........................................  $    6,948,125   $    6,948,125
Net unrealized appreciation (depreciation) of
  investments.........................................  $  297,041,776   $  297,041,776
                                                        --------------   --------------
Net assets applicable to common shares................  $  808,956,226   $  807,620,707
                                                        --------------   --------------
Net assets, plus liquidation preference of Preferred
  Shares..............................................  $1,148,956,226   $1,241,620,707
                                                        --------------   --------------
                                                        --------------   --------------
</Table>



    As used in this Prospectus, unless otherwise noted, the Fund's 'managed
assets' include assets of the Fund attributable to the AMPS and any other
outstanding shares of preferred stock, with no deduction for the liquidation
preference of such shares. For financial reporting purposes, however, the Fund
is required to deduct the liquidation preference of the AMPS and any other
outstanding shares of preferred stock from 'managed assets' so long as the AMPS
and any other outstanding shares of preferred stock have redemption features
that are not solely within the control of the Fund. In connection with the
rating of the AMPS and any other outstanding shares of preferred stock, the Fund
has established various portfolio covenants to meet third-party rating agency
guidelines in its Charter. These covenants include, among other things,
investment diversification requirements and requirements that investments
included in the Fund's portfolio meet specific industry and credit quality
criteria. Market factors outside the Fund's control may affect its ability to
meet the criteria of third-party rating agencies set forth in the Fund's
portfolio covenants. If the Fund violates these covenants, it may be required to
cure the violation by redeeming all or a portion of the AMPS. For all regulatory
purposes, the Fund's AMPS will be treated as stock (rather than indebtedness).


                                       20




<PAGE>


                       INVESTMENT OBJECTIVES AND POLICIES

GENERAL


    Our primary investment objective is high current income through investment
in real estate securities. Capital appreciation is a secondary investment
objective. The Fund's investment objectives and certain other policies are
fundamental and may not be changed without the approval of stockholders. Unless
otherwise indicated, the Fund's investment policies are not fundamental and may
be changed by the Board of Directors without the approval of stockholders,
although the Fund has no current intention of doing so. The Fund has a
fundamental investment policy of concentrating its investments in the U.S. real
estate industry and not in any other industry. Under normal market conditions,
the Fund will invest at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as REITs. At least 80% of our total assets will be invested in income
producing equity securities issued by high quality REITs and substantially all
of the equity securities of real estate companies in which the Fund intends to
invest are traded on a national securities exchange or in the over-the-counter
market. High quality REITs are companies that, in the opinion of the Investment
Manager, offer excellent prospects for consistent, above-average revenue and
earnings growth. To determine whether a company is of high quality, the
Investment Manager generally looks to a strong record of earnings growth, as
well as to a company's current ratio of debt to capital and the quality of its
management. All of the REITs in which the Fund will invest will have a market
capitalization greater than $100 million. The Fund may invest up to 10% of its
total assets in debt securities issued or guaranteed by real estate companies.
We will not invest more than 20% of its total assets in preferred stock or debt
securities rated below investment grade (commonly known as 'junk bonds') or
unrated securities of comparable quality. Preferred stock or debt securities
will be considered investment grade if, at the time of investment, it is rated
'BBB-' or higher by S&P, 'Baa3' or higher by Moody's or an equivalent rating
by a nationally recognized statistical rating agency, or is unrated but judged
to be of comparable quality by the Investment Manager. Preferred stock or debt
securities of below investment grade (BB/Ba or below) are commonly referred to
as 'junk bonds.' The Investment Manager may also invest in preferred stock or
debt securities which are unrated but which, in the opinion of the Investment
Manager, are determined to be of equivalent quality. See Appendix A in the SAI
for a description of bond ratings. These two policies are fundamental and cannot
be changed without the approval of a majority of the Fund's voting securities,
as defined in the 1940 Act, as amended. The Fund will invest only in securities
of U.S. issuers and generally will not invest more than 10% of the Fund's total
assets in the securities of one issuer.


    The Fund will not enter into short sales or invest in derivatives, except as
described in this Prospectus in connection with the interest rate swap or
interest rate cap transactions. See 'How the Fund Manages Risk -- Interest Rate
Transactions.' There can be no assurance that the Fund's investment objectives
will be achieved.

INVESTMENT STRATEGIES

    In making investment decisions on behalf of the Fund, the Investment Manager
relies on a fundamental analysis of each company. The Investment Manager reviews
each company's potential for success in light of the company's current financial
condition, its industry and sector position, and economic and market conditions.
The Investment Manager also evaluates a number of factors, including growth
potential, earnings estimates and the quality of management.

                                       21




<PAGE>



PORTFOLIO COMPOSITION

    The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the SAI.

    Real Estate Companies. For purposes of the Fund's investment policies, a
real estate company is one that:

      derives at least 50% of its revenues from the ownership, construction,
      financing, management or sale of commercial, industrial, or residential
      real estate; or

      has at least 50% of its assets in such real estate.

    Under normal market conditions, the Fund will invest at least 90% of its
total assets in the equity securities of real estate companies. These equity
securities can consist of:

      common stocks (including REIT shares);

      preferred stocks;

      rights or warrants to purchase common and preferred stocks; and

      securities convertible into common and preferred stocks where the
      conversion feature represents, in the Investment Manager's view, a
      significant element of the securities' value.


    Real Estate Investment Trusts. Under normal market conditions, at least 80%
of the Fund's total assets will be invested in income producing equity
securities of REITs. A REIT is a company dedicated to owning, and usually
operating, income producing real estate, or to financing real estate. REITs pool
investors' funds for investment primarily in income producing real estate or
real estate-related loans or interests. A REIT is not taxed on income
distributed to stockholders if, among other things, it distributes to its
stockholders substantially all of its taxable income (other than net capital
gains) for each taxable year. As a result, REITs tend to pay relatively higher
dividends than other types of companies and we intend to use these REIT
dividends in an effort to meet the current income goal of our investment
objectives.


    REITs can generally be classified as Equity REITs, Mortgage REITs and Hybrid
REITs. Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Fund
does not currently intend to invest more than 10% of its total assets in
Mortgage REITs or Hybrid REITs.


    Preferred Stocks. Preferred stocks pay fixed or floating dividends to
investors, and have a 'preference' over common stock in the payment of dividends
and the liquidation of a company's assets. This means that a company must pay
dividends on preferred stock before paying any dividends on its common stock.
Preferred stockholders usually have no right to vote for corporate directors or
on other matters. Under current market conditions, the Investment Manager
invests approximately 19.86% of the Fund's total assets in common shares of real
estate companies and approximately 79.74% in preferred shares of real estate
companies. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.


    Debt Securities. The Fund may invest a maximum of 10% of its total assets in
investment grade and non-investment grade debt securities issued or guaranteed
by real estate companies.

                                       22




<PAGE>




    Lower-rated Securities. The Fund will not invest more than 20% of its total
assets in preferred stock and debt securities rated below investment grade
(commonly known as 'junk bonds') and equivalent unrated securities of comparable
quality. Securities rated non-investment grade (lower than 'BBB-' by S&P or
lower than 'Baa3' by Moody's) are sometimes referred to as 'high yield' or
'junk' bonds. The Fund may only invest in high yield securities that are rated
'CCC' or higher by S&P, or rated 'Caa' or higher by Moody's, or unrated
securities determined by the Investment Manager to be of comparable quality. The
issuers of these securities have a currently identifiable vulnerability to
default and such issues may be in default or there may be present elements of
danger with respect to principal or interest. The Fund will not invest in
securities that are in default at the time of purchase. For a description of
bond ratings, see Appendix A of the SAI.


    Defensive Position. When the Investment Manager believes that market or
general economic conditions justify a temporary defensive position, we may
deviate from our investment objectives and invest all or any portion of its
assets in investment grade debt securities, without regard to whether the issuer
is a real estate company. When and to the extent, we assume a temporary
defensive position, we may not pursue or achieve our investment objectives.

OTHER INVESTMENTS

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments. Money market instruments in which we may
invest our cash reserves will generally consist of obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities and such
obligations that are subject to repurchase agreements and commercial paper. See
'Additional Information about Fund Investment Objectives and Policies' in the
SAI.

                                USE OF LEVERAGE


    The Fund may issue other preferred shares, in addition to the AMPS and the
outstanding Series T, Series W, Series TH, Series F and Series M28 AMPS, or
borrow or issue short-term debt securities to increase its assets available for
investment. The Fund is authorized to issue preferred shares, borrow or issue
debt obligations. Before issuing such preferred shares to increase its assets
available for investment, the Fund must have received confirmation from Moody's
and S&P or any substitute rating agency that the proposed issuance will not
adversely affect such rating agency's then-current rating on the AMPS and any
other outstanding shares of preferred stock. The Fund must also comply with
certain asset coverage requirements under the 1940 Act. See 'Description of
AMPS -- Rating Agency Guidelines.' The Fund also may borrow money as a temporary
measure for extraordinary or emergency purposes, including the payment of
dividends and the settlement of securities transactions which otherwise might
require untimely dispositions of the Fund's holdings. When the Fund leverages
its assets, the fees paid to the Investment Manager for investment management
services will be higher than if the Fund did not borrow because the Investment
Manager's fees are calculated based on the Fund's managed assets, which include
the liquidation preference of any preferred shares, including the AMPS, or any
outstanding borrowings. Consequently, the Fund and the Investment Manager may
have differing interests in determining whether to leverage the Fund's assets.



    The Fund's use of leverage is premised upon the expectation that the Fund's
preferred share dividends or borrowing cost will be lower than the return the
Fund achieves on its investments


                                       23




<PAGE>




with the proceeds of the issuance of preferred shares or borrowing. Such
difference in return may result from the Fund's higher credit rating or the
short-term nature of its borrowing compared to the long-term nature of its
investments. Since the total assets of the Fund (including the assets obtained
from leverage) will be invested in the higher yielding portfolio investments or
portfolio investments with the potential for capital appreciation, holders of
Common Shares will be the beneficiaries of the incremental return. Should the
differential between the underlying assets and cost of leverage narrow, the
incremental return 'pick up' will be reduced. Furthermore, if long-term rates
rise or the Fund otherwise incurs losses on its investments, the Fund's net
asset value attributable to its common shares will reflect the decline in the
value of portfolio holdings resulting therefrom.



    To the extent the income or capital appreciation derived from securities
purchased with funds received from leverage exceeds the cost of leverage, the
Fund's return to the holders of Common Shares will be greater than if leverage
had not been used. Conversely, if the income or capital appreciation from the
securities purchased with such funds is not sufficient to cover the cost of
leverage or if the Fund incurs capital losses, the return of the Fund to holders
of Common Shares will be less than if leverage had not been used. The Investment
Manager may determine to maintain the Fund's leveraged position if it expects
that the long-term benefits to the Fund's holders of Common Shares of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through the issuance of preferred shares or borrowing will be
subject to dividend payments or interest costs that may or may not exceed the
income and appreciation on the assets purchased. The Fund also may be required
to maintain minimum average balances in connection with borrowings or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements will increase the cost of borrowing over the stated interest rate.



    The Fund may be subject to certain restrictions on investments imposed by
guidelines of one or more nationally recognized rating organizations which may
issue ratings for the AMPS, other preferred shares or short-term debt
instruments issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed by
the 1940 Act. Certain types of borrowings may result in the Fund being subject
to covenants in credit agreements, including those relating to asset coverage,
borrowing base and portfolio composition requirements and additional covenants.
The Fund may also be required to pledge its assets to the lenders in connection
with certain types of borrowing. The Investment Manager does not anticipate that
these covenants or restrictions will adversely affect its ability to manage the
Fund's portfolio in accordance with the Fund's investment objective and
policies. Due to these covenants or restrictions, the Fund may be forced to
liquidate investments at times and at prices that are not favorable to the Fund,
or the Fund may be forced to forgo investments that the Investment Manager
otherwise views as favorable.



    If and the extent to which the Fund employs leverage in addition to the AMPS
and the outstanding Series T, Series W, Series TH, Series F and Series M28 AMPS
will depend on many factors, the most important of which are investment outlook,
market conditions and interest rates.


                                       24




<PAGE>


                                  RISK FACTORS


    Risk is inherent in all investing. Before investing you should consider
carefully the following risks that you assume when you invest in the AMPS.



RISKS OF INVESTING IN AMPS



    Leverage Risk. The Fund uses financial leverage for investment purposes by
issuing preferred shares, including the AMPS. It is currently anticipated that,
taking into account the AMPS being offered in this Prospectus, the amount of
leverage will represent approximately 35% of the Fund's managed assets (as
defined below).



    The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the
Fund's Common Shares and the asset coverage of the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS. As long as the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS are outstanding, the
Fund does not intend to utilize other forms of leverage.



    Because the fees paid to the Investment Manager will be calculated on the
basis of the Fund's managed assets (which equals the aggregate net asset value
('NAV') of the Common Shares plus the liquidation preference of the AMPS and the
Fund's other outstanding shares of preferred stock), the fee will be higher when
leverage is utilized, giving the Investment Manager an incentive to utilize
leverage.



    Interest Rate Risk. The Fund issues preferred shares, such as the AMPS,
which pay dividends based on short-term interest rates. The Fund purchases real
estate equity securities that pay dividends that are based on the performance of
the issuing companies. The Fund also may buy real estate debt securities that
pay interest based on longer-term yields. These dividends and interest payments
are typically, although not always, higher than short-term interest rates. Real
estate company dividends, as well as long-term and short-term interest rates,
fluctuate. If short-term interest rates rise, dividend rates on the AMPS may
rise so that the amount of dividends to be paid to stockholders of the AMPS
exceeds the income from the portfolio securities. Because income from the Fund's
entire investment portfolio (not just the portion of the portfolio purchased
with the proceeds of the AMPS offering) is available to pay dividends on the
AMPS, however, dividend rates on the AMPS would need to greatly exceed the
Fund's net portfolio income before the Fund's ability to pay dividends on the
AMPS would be jeopardized. If long-term interest rates rise, this could
negatively impact the value of the Fund's investment portfolio, reducing the
amount of assets serving as asset coverage for the AMPS. The Fund anticipates
entering into interest rate swap or cap transactions with the intent to reduce
or eliminate the risk posed by an increase in short-term interest rates. There
is no guarantee that the Fund will engage in these transactions or that these
transactions will be successful in reducing or eliminating interest rate risk.
See 'How the Fund Manages Risk.'



    Auction Risk. You may not be able to sell your AMPS at an auction if the
auction fails, i.e., if there are more AMPS offered for sale than there are
buyers for those shares. Also, if you place hold orders (orders to retain your
AMPS) at an auction only at a specified rate, and that bid rate exceeds the rate
set at the auction, you will not retain your AMPS. Additionally, if you buy
shares or elect to retain shares without specifying a rate below which you would
not wish to continue to hold those shares, and the auction sets a below-market
rate, you may receive a lower rate of return on your shares than the market
rate. Finally, the dividend period may be changed, subject


                                       25




<PAGE>




to certain conditions and with notice to the holders of the AMPS, which could
also affect the liquidity of your investment. See 'Description of AMPS' and 'The
Auction.'



    Secondary Market Risk. If you try to sell your AMPS between auctions, you
may not be able to sell any or all of your shares, or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated but unpaid
dividends, if any, whether or not earned or declared. If the Fund has designated
a special rate period (a dividend period of more than seven days in the case of
the AMPS), changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market. You may transfer shares outside of
auctions only to or through a broker-dealer that has entered into an agreement
with the auction agent and the Fund or other person as the Fund permits. The
Fund does not anticipate imposing significant restrictions on transfers to other
persons. However, unless any such other person has entered into a relationship
with a broker-dealer that has entered into a broker-dealer agreement with the
Auction Agent, that person will not be able to submit bids at auctions with
respect to the AMPS. Broker-dealers that maintain a secondary trading market for
the AMPS are not required to maintain this market, and the Fund is not required
to redeem shares either if an auction or an attempted secondary market sale
fails because of a lack of buyers. The AMPS are not registered on a stock
exchange or the National Association of Securities Dealers Automated Quotations,
Inc. ('NASDAQ') stock market. If you sell your AMPS to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially when
market interest rates have risen since the last auction and during a special
rate period. In addition, a broker-dealer may, in its own discretion, decide to
sell the AMPS in the secondary market to investors at any time and at any price,
including at prices equivalent to, below or above the liquidation preference of
the AMPS.



    Securities and Exchange Commission Inquiries. Merrill Lynch has advised the
Fund that it and certain broker-dealers and other participants in the auction
rate securities markets, including both taxable and tax exempt markets, have
received letters from the Securities and Exchange Commission requesting that
each of them voluntarily conduct an investigation regarding their respective
practices and procedures in those markets. Those broker-dealers are cooperating
and expect to continue to cooperate with the Securities and Exchange Commission
in providing the requested information. No assurance can be given as to whether
the results of this process will affect the market for the AMPS or the auctions.



    Ratings and Asset Coverage Risk. While it is a condition to the closing of
the offering that S&P assigns a rating of 'AAA' and Moody's assigns a rating of
'Aaa' to the AMPS, the ratings do not eliminate or necessarily mitigate the
risks of investing in the AMPS. In addition, Moody's, S&P or another rating
agency then rating the AMPS could downgrade the AMPS, which may make your shares
less liquid at an auction or in the secondary market. If a rating agency
downgrades the AMPS, the dividend rate on the AMPS will be the applicable
maximum rate based on the credit rating of the AMPS, which will be a rate higher
than is payable currently on the AMPS. See 'Description of AMPS -- Rating Agency
Guidelines' for a description of the asset maintenance tests the Fund must meet.
The Fund may not redeem AMPS if such a redemption would cause the Fund to fail
to meet regulatory or rating agency asset coverage requirements, and the Fund
may not declare, pay or set apart for payment any dividend or other distribution
if immediately thereafter the Fund would fail to meet regulatory asset coverage
requirements.



    Portfolio Security Risk. Portfolio security risk is the risk that an issuer
of a security in which the Fund invests will not be able, in the case of common
stocks, to make dividend distributions at the level forecast by the Fund's
Investment Manager, or that the issuer becomes unable to meet its


                                       26




<PAGE>




obligation to pay fixed dividends at the specified rate, in the case of
preferred stock, or to make interest and principal payments in the case of debt
securities. Common stock is not rated by rating agencies and it is incumbent on
the Investment Manager to select securities of real estate companies that it
believes have the ability to pay dividends at the forecasted level. Preferred
stock and debt securities may be rated. The Fund may invest up to 20% of its
total assets in preferred stock or debt securities rated below investment grade
(commonly known as 'junk bonds') by S&P or Moody's, or unrated securities
considered to be of comparable quality by the Investment Manager. In general,
lower-rated securities carry a greater degree of risk. If rating agencies lower
their ratings of securities held in the Fund's portfolio, the value of those
securities could decline, which would jeopardize the rating agencies' ratings of
the AMPS. The failure of a company to pay common stock or preferred stock
dividends, or interest payments, at forecasted or contractual rates, could have
a negative impact on the Fund's ability to pay dividends on the AMPS and could
result in the redemption of some or all of the AMPS.



    Restrictions on Dividends and other Distributions. Restrictions imposed on
the declaration and payment of dividends or other distributions to the holders
of the Fund's Common Shares, the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS, both by the 1940 Act and by requirements imposed
by rating agencies, might impair the Fund's ability to maintain its
qualification as a regulated investment company for federal income tax purposes.
While the Fund intends to redeem the Series T, Series W, Series TH, Series F and
Series M28 AMPS, and the AMPS to enable the Fund to distribute its income as
required to maintain its qualification as a regulated investment company under
the Code, there can be no assurance that such actions can be effected in time to
meet the Code requirements. See 'U.S. Federal Taxation.'


GENERAL RISKS OF INVESTING IN THE FUND

    We are a non-diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that we will achieve our
investment objectives.


    Investment Risk. An investment in the Fund is subject to investment risk,
including the possible loss of the entire amount that you invest.


    Stock Market Risk. Because prices of equity securities fluctuate from
day-to-day, the value of our portfolio will vary based upon general market
conditions.

    General Risks of Securities Linked to the Real Estate Market. The Fund will
not invest in real estate directly, but only in securities issued by real estate
companies, including REITs. However, because of the Fund's policy of
concentration in the securities of companies in the real estate industry, the
Fund is also subject to the risks associated with the direct ownership of real
estate. These risks include:

      declines in the value of real estate

      risks related to general and local economic conditions

      possible lack of availability of mortgage funds

      overbuilding

      extended vacancies of properties

      increased competition

                                       27




<PAGE>



      increases in property taxes and operating expenses

      changes in zoning laws

      losses due to costs resulting from the clean-up of environmental problems

      liability to third parties for damages resulting from environmental
      problems

      casualty or condemnation losses

      limitations on rents

      changes in neighborhood values and the appeal of properties to tenants

      changes in interest rates

    Thus, the value of the Fund's portfolio securities may change at different
rates compared to the value of portfolio securities of a registered investment
company with investments in a mix of different industries and will depend on the
general condition of the economy. An economic downturn could have a material
adverse effect on the real estate markets and on real estate companies in which
the Fund invests, which in turn could result in the Fund not achieving its
investment objectives.

    General Real Estate Risks. Real property investments are subject to varying
degrees of risk. The yields available from investments in real estate depend on
the amount of income and capital appreciation generated by the related
properties. Income and real estate values may also be adversely affected by such
factors as applicable laws (e.g., Americans with Disabilities Act and tax laws),
interest rate levels and the availability of financing. If the properties do not
generate sufficient income to meet operating expenses, including, where
applicable, debt service, ground lease payments, tenant improvements,
third-party leasing commissions and other capital expenditures, the income and
ability of the real estate company to make payments of any interest and
principal on its debt securities will be adversely affected. In addition, real
property may be subject to the quality of credit extended and defaults by
borrowers and tenants. The performance of the economy in each of the regions in
which the real estate owned by the portfolio company is located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the income from such properties and their underlying values. The financial
results of major local employers also may have an impact on the cash flow and
value of certain properties. In addition, real estate investments are relatively
illiquid and, therefore, the ability of real estate companies to vary their
portfolios promptly in response to changes in economic or other conditions is
limited. A real estate company may also have joint venture investments in
certain of its properties, and, consequently, its ability to control decisions
relating to such properties may be limited.

    Real property investments are also subject to risks which are specific to
the investment sector or type of property in which the real estate companies are
investing.

    Retail Properties. Retail properties are affected by the overall health of
the applicable economy. A retail property may be adversely affected by the
growth of alternative forms of retailing, bankruptcy, decline in drawing power,
departure or cessation of operations of an anchor tenant, a shift in consumer
demand due to demographic changes, and/or changes in consumer preference (for
example, to discount retailers) and spending patterns. A retail property may
also be adversely affected if a significant tenant ceases operation at such
location, voluntarily or otherwise. Certain tenants at retail properties may be
entitled to terminate their leases if an anchor tenant ceases operations at such
property.

    Office Properties. Office properties generally require their owners to
expend significant amounts for general capital improvements, tenant improvements
and costs of reletting space. In

                                       28


<PAGE>




addition, office properties that are not equipped to accommodate the needs of
modern businesses may become functionally obsolete and thus non-competitive.
Office properties may also be adversely affected if there is an economic decline
in the businesses operated by their tenants. The risks of such an adverse effect
is increased if the property revenue is dependent on a single tenant or if there
is a significant concentration of tenants in a particular business or industry.

    Hotel Properties. The risks of hotel properties include, among other things,
the necessity of a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily be
offset in the future by increased room rates), dependence on business and
commercial travelers and tourism, increases in fuel costs and other expenses of
travel, changes to regulation of operating liquor and other licenses, and
adverse effects of general and local economic conditions. Due to the fact that
hotel rooms are generally rented for short periods of time, hotel properties
tend to be more sensitive to adverse economic conditions and competition than
many other commercial properties.

    Also, hotels may be operated pursuant to franchise, management and operating
agreements that may be terminable by the franchiser, the manager or the
operator. Contrarily, it may be difficult to terminate an ineffective operator
of a hotel property subsequent to a foreclosure of such property.

    Healthcare Properties. Healthcare properties and healthcare providers are
affected by several significant factors including federal, state and local laws
governing licenses, certification, adequacy of care, pharmaceutical
distribution, rates, equipment, personnel and other factors regarding
operations; continued availability of revenue from government reimbursement
programs (primarily Medicaid and Medicare); and competition in terms of
appearance, reputation, quality and cost of care with similar properties on a
local and regional basis.

    These governmental laws and regulations are subject to frequent and
substantial changes resulting from legislation, adoption of rules and
regulations, and administrative and judicial interpretations of existing law.
Changes may also be applied retroactively and the timing of such changes cannot
be predicted. The failure of any healthcare operator to comply with governmental
laws and regulations may affect its ability to operate its facility or receive
government reimbursement. In addition, in the event that a tenant is in default
on its lease, a new operator or purchaser at a foreclosure sale will have to
apply in its own right for all relevant licenses if such new operator does not
already hold such licenses. There can be no assurance that such new licenses
could be obtained, and consequently, there can be no assurance that any
healthcare property subject to foreclosure will be disposed of in a timely
manner.

    Multifamily Properties. The value and successful operation of a multifamily
property may be affected by a number of factors such as the location of the
property, the ability of management to provide adequate maintenance and
insurance, types of services provided by the property, the level of mortgage
rates, presence of competing properties, the relocation of tenants to new
projects with better amenities, adverse economic conditions in the locale, the
amount of rent charged, and oversupply of units due to new construction. In
addition, multifamily properties may be subject to rent control laws or other
laws affecting such properties, which could impact the future cash flows of such
properties.

    Insurance Issues. Certain of the portfolio companies may, in connection with
the issuance of securities, have disclosed that they carry comprehensive
liability, fire, flood, extended coverage and rental loss insurance with policy
specifications, limits and deductibles customarily carried for similar

                                       29




<PAGE>



properties. However such insurance is not uniform among the portfolio companies.
Moreover, there are certain types of extraordinary losses that may be
uninsurable, or not economically insurable. Certain of the properties may be
located in areas that are subject to earthquake activity for which insurance may
not be maintained. Should a property sustain damage as a result of an
earthquake, even if the portfolio company maintains earthquake insurance, the
portfolio company may incur substantial losses due to insurance deductibles,
co-payments on insured losses or uninsured losses. Should any type of uninsured
loss occur, the portfolio company could lose its investment in, and anticipated
profits and cash flows from, a number of properties and, as a result, impact the
Fund's investment performance.

    Credit Risk. REITs may be highly leveraged and financial covenants may
affect the ability of REITs to operate effectively. The portfolio companies are
subject to risks normally associated with debt financing. If the principal
payments of a real estate company's debt cannot be refinanced, extended or paid
with proceeds from other capital transactions, such as new equity capital, the
real estate company's cash flow may not be sufficient to repay all maturing debt
outstanding.

    In addition, a portfolio company's obligation to comply with financial
covenants, such as debt-to-asset ratios, secured debt-to-total asset ratios and
other contractual obligations, may restrict a REIT's range of operating
activity. A portfolio company, therefore, may be limited from incurring
additional indebtedness, selling its assets and engaging in mergers or making
acquisitions which may be beneficial to the operation of the REIT.

    Environmental Issues. In connection with the ownership (direct or indirect),
operation, management and development of real properties that may contain
hazardous or toxic substances, a portfolio company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and liabilities for injuries to persons and property. The
existence of any such material environmental liability could have a material
adverse effect on the results of operations and cash flow of any such portfolio
company and, as a result, the amount available to make distributions on the
shares could be reduced.

    Smaller Companies. Even the larger REITs in the industry tend to be small to
medium-sized companies in relation to the equity markets as a whole. There may
be less trading in a smaller company's stock, which means that buy and sell
transactions in that stock could have a larger impact on the stock's price than
is the case with larger company stocks. Smaller companies also may have fewer
lines of business so that changes in any one line of business may have a greater
impact on a smaller company's stock price than is the case for a larger company.
Further, smaller company stocks may perform in different cycles than larger
company stocks. Accordingly, REIT shares can be more volatile than -- and at
times will perform differently from -- large company stocks such as those found
in the Dow Jones Industrial Average.


    Tax Issues. REITs are subject to a highly technical and complex set of
provisions in the Code. It is possible that the Fund may invest in a real estate
company which purports to be a REIT and that the real estate company could fail
to qualify as a REIT. In the event of any such unexpected failure to qualify as
a REIT, the real estate company would be subject to corporate-level taxation,
significantly reducing the return to the Fund on its investment in such company.
REITs could possibly fail to qualify for tax free pass-through of income under
the Code, or to maintain their exemptions from registration under the 1940 Act.
The above factors may also adversely affect a borrower's or a lessee's ability
to meet its obligations to the REIT. In the event of a default by a


                                       30




<PAGE>




borrower or lessee, the REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
its investments.


    Preferred Stocks and Debt Securities Risk. In addition to the risks of
equity securities and securities linked to the real estate market, preferred
stocks and debt securities also are more sensitive to changes in interest rates
than common stocks. When interest rates rise, the value of preferred stocks and
debt securities may fall.


    Lower-Rated Securities Risk. Lower-rated securities may be considered
speculative with respect to the issuer's continuing ability to make principal
and interest payments. Analysis of the creditworthiness of issuers of
lower-rated securities may be more complex than for issuers of higher quality
debt securities, and the Fund's ability to achieve the Fund's investment
objectives may, to the extent the Fund is invested in lower-rated debt
securities, be more dependent upon such creditworthiness analysis than would be
the case if the Fund was investing in higher quality securities. The Fund may
invest in high yield securities that are rated 'CCC' or higher by S&P or 'Caa'
or higher by Moody's or unrated securities that are determined by the Investment
Manager to be of comparable quality. An issuer of these securities has a
currently identifiable vulnerability to default and the issues may be in default
or there may be present elements of danger with respect to principal or
interest. The Fund will not invest in securities which are in default at the
time of purchase.


    Lower-rated securities, or equivalent unrated securities, which are commonly
known as 'junk bonds,' generally involve greater volatility of price and risk of
loss of income and principal and may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of lower-rated securities have been found to be less
sensitive to interest-rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments.
Yields on lower-rated securities will fluctuate. If the issuer of lower-rated
securities defaults and the Fund may incur additional expenses to seek recovery.

    The secondary markets in which lower-rated securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect the price at which the Fund
could sell a particular lower-rated security when necessary to meet liquidity
needs or in response to a specific economic event, such as a deterioration in
the creditworthiness of the issuer, and could adversely affect and cause large
fluctuations in the NAV of our shares. Adverse publicity and investor
perceptions may decrease the values and liquidity of high yield securities.

    It is reasonable to expect that any adverse economic conditions could
disrupt the market for lower-rated securities, have an adverse impact on the
value of those securities, and adversely affect the ability of the issuers of
those securities to repay principal and pay interest on those securities. New
laws and proposed new laws may adversely impact the market for lower-rated
securities.


    Tax Risk. The Fund's investment program and the tax treatment of Fund
distributions may be affected by IRS interpretations of the Code and future
changes in tax laws and regulations. In particular, the provisions that
currently apply to the favorable tax treatment of qualified dividend income are
scheduled to expire on December 31, 2008 unless future legislation is passed to
make the provisions effective beyond this date. The Fund does not expect a
significant portion of the Fund's distributions to be derived from qualified
dividend income. See 'U.S. Federal Taxation.'


                                       31




<PAGE>




    Non-Diversified Status. The Fund is classified as a 'non-diversified'
investment company under the 1940 Act, which means we are not limited by the
1940 Act in the proportion of our assets that may be invested in the securities
of a single issuer. However, we intend to conduct our operations so as to
qualify as a regulated investment company for purposes of the Code, which
generally will relieve the Fund of any liability for Federal income tax to the
extent our earnings are distributed to stockholders. See 'U.S. Federal Taxation'
in the SAI. To so qualify, among other requirements, we will limit our
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the value of our total assets will be invested in the
securities (other than U.S. Government securities or the securities of other
regulated investment companies) of a single issuer, or two or more issuers which
the Fund controls and are engaged in the same, similar or related trades or
businesses and (ii) at least 50% of the value of our total assets will be
invested in cash and cash items, U.S. Government securities, securities of other
regulated investment companies and other securities; provided, however, that
with respect to such other securities, not more than 5% of the value of our
total assets will be invested in the securities of a single issuer and we will
not own more than 10% of the outstanding voting securities of a single issuer.
In addition, pursuant to recently enacted legislation, at the close of each
quarter for taxable years beginning after October 22, 2004, no more than 25% of
the value of our total assets may be invested in the securities of one or more
'qualified publicly traded partnerships,' as defined in the Code. Because we, as
a non-diversified investment company, may invest in a smaller number of
individual issuers than a diversified investment company, an investment in the
Fund presents greater risk to you than an investment in a diversified company.
The Fund intends to comply with the diversification requirements of the Code
applicable to regulated investment companies.



    Anti-Takeover Provisions. Certain provisions of the Fund's Charter and
By-Laws could have the effect of limiting the ability of other entities or
persons to acquire control of the Fund or to change the Fund's structure. The
provisions may also have the effect of depriving stockholders of an opportunity
to redeem their AMPS. These include provisions for staggered terms of office for
directors, super-majority voting requirements for merger, consolidation,
liquidation, termination and asset sale transactions, amendments to the Charter
and conversion to open-end status. See 'Certain Provisions of the Charter and
By-Laws.'



    Market Disruption Risk. The aftermath of the war in Iraq and the continuing
occupation of Iraq, and instability in the Middle East and terrorist attacks in
the U.S. and around the world may have resulted in market volatility and may
have long-term effects on the U.S. and worldwide financial markets and may cause
further economic uncertainties in the U.S. and worldwide. These events could
also adversely affect individual issuers and securities markets, interest rates,
auctions and auction participants, secondary trading, ratings, credit risk,
inflation, deflation and other factors relating to the AMPS. The Fund does not
know how long the securities markets will continue to be affected by these
events and cannot predict the effects of the occupation or similar events in the
future on the U.S. economy and securities markets.


                           HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS


    The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed


                                       32




<PAGE>




without the approval of the holders of a majority, as defined in the 1940 Act,
of the outstanding Common Shares, the AMPS and the Series T, Series W,
Series TH, Series F and Series M28 AMPS, voting together as a single class, and
the approval of the holders of a majority, as defined in the 1940 Act, of the
outstanding Series T, Series W, Series TH, Series F and Series M28 AMPS, and the
AMPS voting together as a separate class. The Fund will not invest more than 20%
of its total assets in preferred stock or debt securities rated below investment
grade (commonly known as 'junk bonds') or unrated securities of comparable
quality. All of our investments will be in securities of U.S. issuers and we
will generally not invest more than 10% of our total assets in the securities of
one issuer. The Fund may become subject to guidelines that are more limiting
than the investment restrictions set forth above in order to obtain and maintain
ratings from S&P or Moody's on the AMPS. See 'Investment Restrictions' in the
SAI for a complete list of the fundamental and non-fundamental investment
policies of the Fund.


INTEREST RATE TRANSACTIONS

    In order to seek to reduce the interest rate risk inherent in the fund's
capital structure and underlying investments and capital structure, the Fund may
enter into interest rate swap or cap transactions.


    The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. In an interest rate swap, the
Fund would agree to pay to the other party to the interest rate swap (which is
known as the 'counterparty') a fixed rate payment in exchange for the
counterparty agreeing to pay to the Fund a variable rate payment that is
intended to approximate the Fund's variable rate payment obligation on the
Fund's outstanding preferred stock, including the AMPS, or any variable rate
borrowing. The payment would be based on the notional amount of the swap. In an
interest rate cap, the Fund would pay a premium to the counterparty to the
interest rate cap and, to the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive from the counterparty payments
of the difference based on the notional amount of such cap. If the counterparty
to an interest rate swap or cap defaults, the Fund would not be able to use the
anticipated net receipts under the swap or cap to offset the dividend payments
on the Fund's outstanding preferred stock, including the AMPS, or rate of
interest on borrowings. Depending on the general state of short-term interest
rates and the returns on the Fund's portfolio securities at that point in time,
a default could negatively impact the Fund's ability to make dividend payments
on the Fund's outstanding preferred stock, including the AMPS. In addition, at
the time an interest rate swap or cap transaction reaches its scheduled
termination date, there is a risk that the Fund will not be able to obtain a
replacement transaction or that the terms of the replacement will not be as
favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the Fund's ability to make dividend payments on the Fund's
outstanding preferred stock, including the AMPS. To the extent there is a
decline in interest rates, the value of the interest rate swap or cap could
decline, resulting in a decline in the asset coverage for the AMPS. A sudden and
dramatic decline in interest rates may result in a significant decline in the
asset coverage. Under the terms of the AMPS, if the Fund fails to maintain the
required asset coverage on the outstanding AMPS or fails to comply with other
covenants, the Fund may be required to redeem some or all of the AMPS. The Fund
may choose or be required to redeem some or all of the Fund's outstanding
preferred stock, including the AMPS, or prepay any borrowings. This redemption
or prepayment would likely result in the Fund seeking to terminate


                                       33




<PAGE>




early all or a portion of any swap or cap transaction. Such early termination of
a swap could result in termination payment by or to the Fund. An early
termination of a cap could result in a termination payment to the Fund.


    The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked to market daily. The Fund would not enter into interest
rate swap or cap transactions having a notional amount that exceeded the
outstanding amount of the Fund's leverage. The Fund will monitor any interest
rate swap or cap transactions with a view to ensuring that it remains in
compliance with applicable tax requirements.

                             MANAGEMENT OF THE FUND

    The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreement with its Investment Manager, administrator, custodian and transfer
agent. The management of the Fund's day-to-day operations is delegated to its
officers, the Investment Manager and the Fund's administrator, subject always to
the investment objectives and policies of the Fund and to the general
supervision of the Directors. The names and business addresses of the Directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth under 'Management of the Fund' in the
SAI.

INVESTMENT MANAGER


    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, has been retained to provide investment
advice, and, in general, to conduct the management and investment program of the
Fund under the overall supervision and control of the Directors of the Fund. The
Investment Manager was formed in 1986 and had approximately $16.1 billion of
assets under management as of September 30, 2004. Its current clients include
pension plans, endowment funds, mutual funds and registered investment
companies, including the Fund, Cohen & Steers REIT and Utility Income Fund,
Inc., Cohen & Steers REIT and Preferred Income Fund, Inc., Cohen & Steers
Advantage Income Realty Fund, Inc., Cohen & Steers Select Utility Fund, Inc.,
Cohen & Steers Premium Income Realty Fund, Inc., and Cohen & Steers Total Return
Realty Fund, Inc., which are closed-end investment companies, and Cohen & Steers
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Realty Focus Fund, Inc., Cohen & Steers Realty Income Fund, Inc. and
Cohen & Steers Utility Fund, Inc., which are open-end investment companies. The
Investment Manager is a wholly owned subsidiary of Cohen & Steers, Inc., a
publicly traded company whose common stock is listed on the New York Stock
Exchange under the symbol 'CNS.'


INVESTMENT MANAGEMENT AGREEMENT

    Under its Investment Management Agreement with the Fund (the 'Investment
Management Agreement'), the Investment Manager furnishes a continuous investment
program for the Fund's

                                       34




<PAGE>



portfolio, makes the day-to-day investment decisions for the Fund, and generally
manages the Fund's investments in accordance with the stated policies of the
Fund, subject to the general supervision of the Board of Directors of the Fund.
The Investment Manager also performs certain administrative services for the
Fund and provides persons satisfactory to the Directors of the Fund to serve as
officers of the Fund. Such officers, as well as certain other employees and
Directors of the Fund, may be directors, officers, or employees of the
Investment Manager.


    For its services under the Investment Management Agreement, the Fund pays
the Investment Manager a monthly management fee computed at the annual rate of
..85% of the average daily managed asset value of the Fund. Managed asset value
is the net asset value of the Common Shares plus the liquidation preference of
the AMPS and the Series T, Series W, Series TH, Series F and Series M28 AMPS.
This fee is higher than the fees incurred by many other investment companies but
is comparable to fees paid by many registered management investment companies
that invest primarily in real estate securities. The Investment Manager has
contractually agreed to waive its investment management fees in the amount of
..32% of average daily managed assets for the first five fiscal years of the
Fund's operations, .26% of average daily managed assets in year six, .20% of
average daily managed assets in year seven, .14% of average daily managed assets
in year eight, .08% of average daily managed assets in year nine and .02% of
average daily managed assets in year 10. In addition to the monthly management
fee, the Fund pays all other costs and expenses of its operations, including
compensation of its directors, custodian, transfer agency and dividend
disbursing expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, listing expenses, expenses of preparing, printing and
distributing stockholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.



    When the Fund is utilizing leverage, the fees paid to the Investment Manager
for investment advisory and management services will be higher than if the Fund
did not utilize leverage because the fees paid will be calculated based on the
Fund's managed assets, which includes the liquidation preference of the AMPS and
the Series T, Series W, Series TH, Series F and Series M28 AMPS.


    The Fund's portfolio managers are:

        Martin Cohen -- Mr. Cohen is a Director, President and Treasurer of the
    Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
    Capital Management, Inc., the Fund's Investment Manager. Mr. Cohen is a
    'controlling person' of the Investment Manager on the basis of his ownership
    of common stock of the Investment Manager's parent company.

        Robert H. Steers -- Mr. Steers is a Director, Chairman and Secretary of
    the Fund. He is Co-Chairman and Co-Chief Executive Officer of Cohen & Steers
    Capital Management, Inc., the Fund's Investment Manager. Mr. Steers is a
    'controlling person' of the Investment Manager on the basis of his ownership
    of the common stock of Investment Manager's parent company.

        Joseph M. Harvey -- Mr. Harvey has been President of Cohen & Steers
    Capital Management, Inc., the Fund's Investment Manager, since 2003, and was
    Senior Vice President and Director of Investment Research prior thereto.
    Prior to joining Cohen & Steers in 1992, he was a vice president with Robert
    A. Stanger Co. for five years, where he was an analyst specializing in real
    estate and related securities for the firm's research and consulting
    activities.

                                       35




<PAGE>



ADMINISTRATION AND SUB-ADMINISTRATION AGREEMENT

    Under its Administration Agreement with the Fund, the Investment Manager has
responsibility for providing administrative and accounting services and
assisting the Fund, including providing administrative services necessary for
the operations of the Fund and furnishing office space and facilities required
for conducting the business of the Fund.

    In accordance with the Administration Agreement and with the approval of the
Board of Directors of the Fund, the Fund has entered into an agreement with
State Street Bank as sub-administrator under a fund accounting and
administration agreement (the 'Sub-Administration Agreement'). Under the
Sub-Administration Agreement, State Street Bank has assumed responsibility for
certain fund administration services.


    Under the Administration Agreement, the Fund pays the Investment Manager an
amount equal to on an annual basis .02% of the Fund's managed assets. Under the
Sub-Administration agreement, the Fund pays State Street Bank a monthly
administration fee. The sub-administration fee paid by the Fund to State Street
Bank is computed on the basis of the managed assets (including the liquidation
preference of AMPS and the liquidation preference of any other outstanding
shares of preferred stock) in the Fund at an annual rate equal to .04% of the
first $200 million in assets, .03% of the next $200 million, and .015% of assets
in excess of $400 million, with a minimum fee of $120,000. The aggregate fee
paid by the Fund and the other funds advised by the Investment Manager to State
Street Bank is computed by multiplying the total number of funds by each break
point in the above schedule in order to determine the aggregate break points to
be used in calculating the total fee paid by the Cohen & Steers family of funds
(i.e., six funds at $200 million or $1.2 billion at .04%, etc.). The Fund is
then responsible for its pro rata amount of the aggregate sub-administration
fee. State Street Bank also serves as the Fund's custodian and The Bank of New
York has been retained to serve as the Fund's auction agent, transfer agent,
dividend paying agent and registrar for the Fund's AMPS. See 'Custodian, Auction
Agent, Transfer Agent, Dividend Paying Agent and Registrar.'



                              DESCRIPTION OF AMPS



    The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in the Fund's Articles Supplementary attached as Appendix B to the SAI.


GENERAL


    Under its Charter, the Fund is authorized to issue shares of preferred
stock, with rights as determined by the Board of Directors, without the approval
of the holders of Common Shares. The AMPS will have a liquidation preference of
$25,000 per share, plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared). The AMPS will rank on a parity with the
Series T, Series W, Series TH, Series F and Series M28 AMPS, and with shares of
any other series of preferred stock of the Fund, as to the payment of dividends
and the distribution of assets upon liquidation. The AMPS carry one vote per
share on all matters on which such shares are entitled to vote. The AMPS, when
issued by the Fund and paid for pursuant to the terms of this Prospectus, will
be fully paid and non-assessable and will have no preemptive, exchange or
conversion rights. Any AMPS repurchased or redeemed by the Fund will be
classified as authorized and unissued AMPS. The Board of Directors may by
resolution classify or reclassify any authorized and unissued AMPS from time to
time by setting or changing the


                                       36




<PAGE>




preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares. The AMPS
will not be subject to any sinking fund, but will be subject to mandatory
redemption under certain circumstances described below.


DIVIDENDS AND RATE PERIODS


    General. The following is a general description of dividends and rate
periods for the AMPS. The initial rate period for the AMPS will be   days and
the initial dividend rate for this period will be the rate set out on the cover
of this Prospectus. For subsequent dividend rate periods, the dividend rates for
those periods will be determined by auction, normally held every seven days, but
the rate set at the auction will not exceed the Maximum Rate. The Fund, subject
to certain conditions, may change the length of subsequent rate periods by
designating them as special rate periods. See 'Designation of Special Rate
Periods' below.



    Dividend Payment Dates. Dividends on the AMPS will be payable, when, as and
if declared by the Board, out of legally available funds in accordance with the
Fund's Charter and applicable law. Dividend periods generally will begin on the
first business day after an auction. If dividends are payable on a day that is
not a business day, then dividends will generally be payable on the next day if
such day is a business day, or as otherwise specified in the Articles
Supplementary.



    Dividends will be paid through the Depository Trust Company ('DTC') on each
dividend payment date. The dividend payment date will normally be the first
business day after the dividend period ends. DTC, in accordance with its current
procedures, is expected to distribute dividends received from the auction agent
in same-day funds on each dividend payment date to agent members (members of DTC
that will act on behalf of existing or potential holders of the AMPS). These
agent members are in turn expected to distribute such dividends to the persons
for whom they are acting as agents. Each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds
on each dividend payment date to customers that use a Broker-Dealer or a
Broker-Dealer's designee as agent member.



    Calculation of Dividend Payment. The Fund computes the dividends per share
payable on shares of the AMPS by multiplying the applicable rate in effect by a
fraction. The numerator of this fraction will normally be the number of days in
the rate period and the denominator will normally be 360. This rate is then
multiplied by $25,000 to arrive at the dividends per share.



    Dividends on the AMPS will accumulate from the date of their original issue,
which is             , 2004. For each dividend payment period after the initial
rate period, the dividend will be the dividend rate determined at auction. The
dividend rate that results from an auction will not be greater than the maximum
rate described below.



    The maximum applicable rate for any regular period will be the applicable
percentage (set forth in the table below) of the applicable 'AA' Composite
Commercial Paper Rate. In the case of a special rate period, the maximum
applicable rate will be specified by the Fund in the notice of the special rate
period for such dividend payment period. The applicable percentage is determined
on the day that a notice of a special rate period is delivered if the notice
specifies a maximum applicable rate for a special rate period. The applicable
percentage will be determined based on the lower of the credit rating or ratings
assigned to the AMPS by Moody's and S&P. If


                                       37




<PAGE>




Moody's or S&P or both shall not make such rating available, the rate shall be
determined by reference to equivalent ratings issued by a substitute rating
agency.


<Table>
<Caption>
                                                 APPLICABLE
              CREDIT RATINGS                     PERCENTAGE:
      MOODY'S                 S&P              NO NOTIFICATION
      -------                 ---              ---------------
<S>                   <C>                    <C>
  'Aa3' or higher        AA- or higher              150%
   'A3' to 'A1'            A- to A+                 200%
 'Baa3' to 'Baa1'        BBB- to BBB+               225%
   Below 'Baa3'           Below BBB-                275%
</Table>

    On or prior to each dividend payment date, the Fund is required to deposit
with the auction agent sufficient funds for the payment of declared dividends.
The failure to make such deposit, subject to applicable cure periods, will
result in a default period during which no auction will be held. The Fund does
not intend to establish any reserves for the payment of dividends.


    Restriction on Dividends and Other Distributions. While any of the AMPS are
outstanding, the Fund generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its common shares (other than
in additional shares of common stock or rights to purchase common stock) or
repurchase any of its common shares (except by conversion into or exchange for
shares of the Fund ranking junior to the AMPS as to the payment of dividends and
the distribution of assets upon liquidation) unless each of the following
conditions have been satisfied:



      In the case of the Moody's coverage requirements, immediately after such
      transaction, the aggregate Moody's Coverage Value (i.e., the aggregate
      value of the Fund's portfolio discounted according to Moody's criteria)
      would be equal to or greater than the Preferred Shares Basic Maintenance
      Amount (i.e., the amount necessary to pay all outstanding obligations of
      the Fund with respect to the AMPS, any preferred stock outstanding,
      expenses for the next 90 days and any other liabilities of the Fund) (see
      'Rating Agency Guidelines' below);


      In the case of S&P's coverage requirements, immediately after such
      transaction, the aggregate S&P value (i.e., the aggregate value of the
      Fund's portfolio discounted according to S&P criteria) would be equal to
      or greater than the Preferred Shares Basic Maintenance Amount;

      Immediately after such transaction, the 1940 Act Preferred Shares Asset
      Coverage (as defined in this Prospectus under 'Rating Agency Guidelines'
      below) is met;


      Full cumulative dividends on the AMPS due on or prior to the date of the
      transaction have been declared and paid or shall have been declared and
      sufficient funds for the payment thereof deposited with the auction agent;
      and



      The Fund has redeemed the full number of the AMPS required to be redeemed
      by any provision for mandatory redemption contained in the Articles
      Supplementary.



    The Fund generally will not declare, pay or set apart for payment any
dividend on any shares of the Fund ranking as to the payment of dividends on a
parity with the AMPS unless the Fund has declared and paid or contemporaneously
declares and pays full cumulative dividends on the AMPS through its most recent
dividend payment date. However, when the Fund has not paid dividends in full on
the AMPS through the most recent dividend payment date or upon any shares of the
Fund ranking, as to the payment of dividends, on a parity with the AMPS through
their


                                       38




<PAGE>




most recent respective dividend payment dates, the amount of dividends declared
per share on the AMPS and such other class or series of shares will in all cases
bear to each other the same ratio that accumulated dividends per share on the
AMPS and such other class or series of shares bear to each other.



    Designation of Special Rate Periods. The Fund may, in certain situations, at
its sole option, declare a special rate period. Prior to declaring a special
rate period, the Fund will give notice (a 'notice of special rate period') to
the auction agent and to each Broker-Dealer. The notice will state that the next
succeeding rate period for the AMPS will be a number of days as specified in
such notice. The Fund may not designate a special rate period unless sufficient
clearing bids were made in the most recent auction. In addition, full cumulative
dividends, any amounts due with respect to mandatory redemptions and any
additional dividends payable prior to such date must be paid in full or
deposited with the auction agent. The Fund also must have received confirmation
from Moody's and S&P or any substitute rating agency that the proposed special
rate period will not adversely affect such agency's then-current rating on the
AMPS and the lead Broker-Dealer designated by the Fund, initially Merrill Lynch,
must not have objected to declaration of a special rate period. A notice of
special rate period also will specify whether the shares of the AMPS will be
subject to optional redemption during such special rate period and, if so, the
redemption premium, if any, required to be paid by the Fund in connection with
such optional redemption.


VOTING RIGHTS


    Except as noted below, the Fund's Common Shares and the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) have equal voting
rights of one vote per share and vote together as a single class. In elections
of directors, the holders of the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS, as a separate class, together vote to elect two
directors, and the holders of the Common Shares and holders of the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) vote together as a
single class to elect the remaining directors. In addition, during any period
('Voting Period') in which the Fund has not paid dividends on the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) in an amount equal
to two full years dividends, the holders of the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS), voting together as a single
class, are entitled to elect (in addition to the two directors set forth above)
the smallest number of additional directors as is necessary to ensure that a
majority of the directors has been elected by the holders of the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS). The holders of the
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS) will
continue to have these rights until all dividends in arrears have been paid or
otherwise provided for.



    In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
Directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) of the number of
directors that such holders are entitled to elect. The persons elected by the
holders of the AMPS (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS), together with the incumbent directors, will constitute the
duly elected Directors of the Fund. When all dividends in arrears on the AMPS
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) have been
paid or provided for, the terms of office of the additional directors elected by
the


                                       39




<PAGE>




holders of the AMPS (and the Series T, Series W, Series TH, Series F and
Series M28 AMPS) will terminate.



    So long as any of the AMPS (and the Series T, Series W, Series TH, Series F
and Series M28 AMPS) are outstanding, the Fund will not, without the affirmative
vote of the holders of a majority of the outstanding AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS), (i) institute any
proceedings to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it, or file a
petition seeking or consenting to reorganization or relief under any applicable
federal or state law relating to bankruptcy or insolvency, or consent to the
appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Fund or a substantial part of its property, or make any
assignment for the benefit of creditors, or, except as may be required by
applicable law, admit in writing its inability to pay its debts generally as
they become due or take any corporate action in furtherance of any such action;
(ii) create, incur or suffer to exist, or agree to create, incur or suffer to
exist, or consent to cause or permit in the future (upon the happening of a
contingency or otherwise) the creation, incurrence or existence of any material
lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or Fund receipt or other material encumbrance of any kind upon
any of the Fund's assets as a whole, except (A) liens the validity of which are
being contested in good faith by appropriate proceedings, (B) liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (C) liens, pledges, charges, security interests, security agreements or
other encumbrances arising in connection with any indebtedness senior to the
AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS),
(D) liens, pledges, charges, security interests, security agreements or other
encumbrances arising in connection with any indebtedness permitted under
clause (iii) below and (E) liens to secure payment for services rendered
including, without limitation, services rendered by the Fund's Paying Agent and
the auction agent; or (iii) create, authorize, issue, incur or suffer to exist
any indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness for borrowed money or any direct or indirect guarantee of such
indebtedness, except the Fund may borrow as may be permitted by the Fund's
investment restrictions; provided, however, that transfers of assets by the Fund
subject to an obligation to repurchase shall not be deemed to be indebtedness
for purposes of this provision to the extent that after any such transaction the
Fund has eligible assets with an aggregate discounted value at least equal to
the Preferred Shares Basic Maintenance Amount as of the immediately preceding
valuation date.



    In addition, the affirmative vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding AMPS (together with the Series T, Series W,
Series TH, Series F and Series M28 AMPS) shall be required to approve any plan
of reorganization (as such term is used in the 1940 Act) adversely affecting
such shares or any action requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act, including, among other things, changes in the
Fund's investment restrictions described under 'Investment Restrictions' in the
SAI and changes in the Fund's subclassification as a closed-end investment
company.



    The affirmative vote of the holders of a majority, as defined in the 1940
Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, shall be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the Fund's
shares of capital stock. For purposes of the foregoing, no matter shall be
deemed to adversely affect any right, preference or power unless such matter
(i) alters or abolishes any preferential


                                       40




<PAGE>




right of such series; (ii) creates, alters or abolishes any right in respect of
redemption of such series; or (iii) creates or alters (other than to abolish)
any restriction on transfer applicable to such series. The vote of holders of
any series described in this paragraph will in each case be in addition to a
separate vote of the requisite percentage of Common Shares and/or preferred
stock necessary to authorize the action in question.



    The Common Shares and the AMPS (together with the Series T, Series W,
Series TH, Series F and Series M28 AMPS) also will vote separately to the extent
otherwise required under Maryland law or the 1940 Act as in effect from time to
time. The class votes of holders of the AMPS (together with the Series T,
Series W, Series TH, Series F and Series M28 AMPS) described above will in each
case be in addition to any separate vote of the requisite percentage of Common
Shares and the AMPS (together with the Series T, Series W, Series TH, Series F
and Series M28 AMPS), voting together as a single class, necessary to authorize
the action in question.



    For purpose of any right of the holders of the AMPS to vote on any matter,
whether the right is created by the Charter, by statute or otherwise, a holder
of the AMPS is not entitled to vote and the AMPS will not be deemed to be
outstanding for the purpose of voting or determining the number of the AMPS
required to constitute a quorum, if prior to or concurrently with a
determination of the AMPS entitled to vote or of the AMPS deemed outstanding for
quorum purposes, as the case may be, a notice of redemption was given in respect
of those AMPS and sufficient Deposit Securities (as defined in the SAI) for the
redemption of those AMPS were deposited.


RATING AGENCY GUIDELINES


    The Fund is required under S&P and Moody's guidelines to maintain assets
having in the aggregate a discounted value at least equal to the Preferred
Shares Basic Maintenance Amount (as defined below). S&P and Moody's have each
established separate guidelines for determining discounted value. To the extent
any particular portfolio holding does not satisfy the applicable rating agency's
guidelines, all or a portion of such holding's value will not be included in the
calculation of discounted value (as defined by the rating agency). The S&P and
Moody's guidelines also impose certain diversification requirements on the
Fund's overall portfolio. The 'Preferred Shares Basic Maintenance Amount'
includes the sum of (i) the aggregate liquidation preference of the AMPS (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) then
outstanding (plus accrued and projected dividends), (ii) the total principal of
any senior debt, (iii) certain Fund expenses and (iv) certain other current
liabilities.



    The Fund also is required under rating agency guidelines to maintain, with
respect to the AMPS, as of the last business day of each month in which the AMPS
(and the Series T, Series W, Series TH, Series F and Series M28 AMPS) are
outstanding, asset coverage of at least 200% with respect to senior securities
that are shares of the Fund, including the AMPS (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities that are shares of a closed-end investment
company as a condition of declaring dividends on its Common Shares) ('1940 Act
Preferred Shares Asset Coverage'). S&P and Moody's have agreed that the auditors
must certify once per year the asset coverage test on a date randomly selected
by the auditor. Based on the Fund's assets and liabilities as of November 8,
2004, and assuming the issuance of all of the AMPS offered hereby and the use of
the proceeds as intended, the 1940 Act Preferred Shares Asset Coverage with
respect to the


                                       41




<PAGE>




AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS) would
be computed as follows:



<Table>
<S>                                             <C>  <C>             <C>  <C>
    Value of Fund assets less liabilities
      not constituting senior securities             $1,241,620,707
 ----------------------------------------------  =   --------------   =  286%
 Senior securities representing indebtedness           $434,000,000
plus liquidation value of the preferred shares
</Table>



    If the Fund does not timely cure a failure to maintain (1) a discounted
value of its portfolio equal to the Preferred Shares Basic Maintenance Amount or
(2) the 1940 Act Preferred Shares Asset Coverage, in each case in accordance
with the requirements of the rating agency or agencies then rating the
AMPS, the Fund will be required to redeem the AMPS as described below under
' -- Redemption.'



    The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change or a withdrawal of the
ratings altogether. In addition, any rating agency providing a rating for the
AMPS may, at any time, change or withdraw any such rating. The Board of
Directors may, without stockholder approval, amend, alter, add to or repeal any
or all of the definitions and related provisions that have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from S&P or Moody's, or both, as appropriate, that any
such change would not impair the ratings then assigned by S&P and Moody's
to the AMPS.



    The Board of Directors may amend the definition of the Maximum Rate to
increase the percentage amount by which the Reference Rate is multiplied to
determine the Maximum Rate shown therein without the vote or consent of the
holders of the AMPS, or any other stockholder of the Fund, but only with
confirmation from each Rating Agency, and after consultation with the
broker-dealers, provided that immediately following any such increase the Fund
could meet the Preferred Shares Basic Maintenance Amount Test.



    As described by S&P and Moody's, the AMPS rating is an assessment of the
capacity and willingness of the Fund to pay the AMPS' obligations. The ratings
on the AMPS are not recommendations to purchase, hold or sell the AMPS, inasmuch
as the ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines also do not address the likelihood that
an owner of the AMPS will be able to sell such shares in an auction or
otherwise. The ratings are based on current information furnished to S&P and
Moody's by the Fund and the Investment Manager and information obtained from
other sources. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.



    The rating agency guidelines will apply to the AMPS only so long as such
rating agency is rating these shares. The Fund will pay fees to S&P and Moody's
for rating the AMPS.


REDEMPTION


    Mandatory Redemption. If the Fund does not timely cure a failure to
(1) maintain a discounted value of its portfolio equal to the Preferred Shares
Basic Maintenance Amount, (2) maintain the 1940 Act Preferred Shares Asset
Coverage, or (3) file a required certificate related to asset coverage on time,
the AMPS will be subject to mandatory redemption out of funds legally available
therefor in accordance with the Articles Supplementary and applicable law,


                                       42




<PAGE>




at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of the AMPS necessary to restore the required discounted value or the
1940 Act Preferred Shares Asset Coverage, as the case may be.



    In determining the number of AMPS required to be redeemed in accordance with
the foregoing, the Fund will allocate the number of shares required to be
redeemed to satisfy the Preferred Shares Basic Maintenance Amount or the 1940
Act Preferred Shares Asset Coverage, as the case may be, pro rata among the AMPS
of the Fund and any other preferred stock of the Fund, subject to redemption or
retirement. If fewer than all outstanding shares of any series are, as a result,
to be redeemed, the Fund may redeem such shares by lot or other method that it
deems fair and equitable.



    Optional Redemption. To the extent permitted under the 1940 Act and Maryland
law, the Fund at its option may without the consent of the holders of the AMPS,
redeem AMPS having a dividend period of one year or less, in whole or in part,
on the business day after the last day of such dividend period upon not less
than 15 calendar days and not more than 40 calendar days prior notice. The
optional redemption price per share will be $25,000 per share, plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) to the date fixed for redemption. AMPS having a dividend period of
more than one year are redeemable at the option of the Fund, in whole or in
part, prior to the end of the relevant dividend period, subject to any specific
redemption provisions, which may include the payment of redemption premiums to
the extent required under any applicable specific redemption provisions. The
Fund will not make any optional redemption unless, after giving effect thereto,
(i) the Fund has available certain deposit securities with maturities or tender
dates not later than the day preceding the applicable redemption date and having
a value not less than the amount (including any applicable premium) due to
holders of the AMPS by reason of the redemption of the AMPS on such date fixed
for the redemption and (ii) the Fund has eligible assets with an aggregate
discounted value at least equal to the Preferred Shares Basic Maintenance
Amount.



    Notwithstanding the foregoing, the AMPS may not be redeemed at the option of
the Fund unless all dividends in arrears on the outstanding AMPS, including all
outstanding shares of preferred stock, have been or are being contemporaneously
paid or set aside for payment. This would not prevent the lawful purchase or
exchange offer for the AMPS made on the same terms to holders of all outstanding
shares of preferred stock.


LIQUIDATION


    Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with the AMPS with respect to the distribution of assets
upon liquidation of the Fund, upon a liquidation of the Fund, whether voluntary
or involuntary, the holders of the AMPS then outstanding will be entitled to
receive and to be paid out of the assets of the Fund available for distribution
to its stockholders, before any payment or distribution shall be made on the
Common Shares, an amount equal to the liquidation preference with respect to
such shares ($25,000 per share), plus an amount equal to all dividends thereon
(whether or not earned or declared by the Fund, but excluding the interest
thereon) accumulated but unpaid to and including the date of final distribution
in same-day funds in connection with the liquidation of the Fund. After the
payment to the holders of the AMPS of the full preferential amounts provided for
as described


                                       43




<PAGE>




herein, the holders of the AMPS as such shall have no right or claim to any of
the remaining assets of the Fund.


    Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.

                                  THE AUCTION

GENERAL


    The Articles Supplementary provide that, except as otherwise described in
this Prospectus, the applicable rate for the AMPS for each rate period after the
initial rate period will be the rate that results from an auction conducted as
set forth in the Articles Supplementary and summarized below. In such an
auction, persons determine to hold or offer to sell or, based on dividend rates
bid by them, offer to purchase or sell the AMPS. See the Articles Supplementary
for a more complete description of the auction process.



    Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (initially, The Bank of New York) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for the AMPS so long as the
applicable rate for the AMPS is to be based on the results of an auction.


    The auction agent may terminate the auction agency agreement upon notice to
the Fund no earlier than 60 days after the delivery of such notice. If the
auction agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor auction agent containing substantially the same terms
and conditions as the auction agency agreement. The Fund may remove the auction
agent provided that prior to such removal the Fund has entered into such an
agreement with a successor auction agent.


    Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for the AMPS.



    The auction agent will pay to each Broker-Dealer after each auction from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% of
the stated value ($25,000 per share) of the AMPS held by a Broker-Dealer's
customer upon settlement in an auction. For any special rate period, the service
charge will be determined by mutual consent of the Fund and any such
Broker-Dealer or Broker-Dealers and will be based upon a selling concession that
would be applicable to an underwriting of fixed or variable rate preferred
shares with a similar final maturity or variable rate dividend period,
respectively, at the commencement of the dividend period with respect to such
auction. For purposes of the foregoing, the AMPS will be placed by a broker-
dealer if such shares were (i) the subject of hold orders deemed to have been
made by beneficial owners that were acquired by such beneficial owners through
such Broker-Dealer or (ii) the subject of the following orders submitted by such
Broker-Dealer: (A) a submitted bid of a Beneficial Owner that resulted in such
Beneficial Owner continuing to hold such shares as a result of the auction,
(B) a submitted bid of a potential Beneficial Owner that resulted in such
potential Beneficial Owner purchasing such shares as a result of the auction or
(C) a submitted hold order. A Broker-Dealer may share a portion of any such fees
with non-participating Broker-Dealers that


                                       44




<PAGE>




submit orders to the Broker-Dealer for an auction that are placed by that
Broker-Dealer in such auction.


AUCTION PROCEDURES


    Prior to the submission deadline on each auction date for the AMPS, each
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the auction agent) as a beneficial owner of the AMPS may
submit the following types of orders with respect to the AMPS to that
Broker-Dealer:



    1. Hold Order -- indicating its desire to hold the AMPS without regard to
       the applicable rate for the next rate period.



    2. Bid -- indicating its desire to purchase or hold the indicated number of
       AMPS at $25,000 per share if the applicable rate for shares of such
       series for the next rate period is not less than the rate or spread
       specified in the bid and which shall be deemed an irrevocable offer to
       sell the AMPS at $25,000 per share if the applicable rate for shares of
       such series for the next rate period is less than the rate or spread
       specified in the bid.



    3. Sell Order -- indicating its desire to sell the AMPS at $25,000 per share
       without regard to the applicable rate for shares of such series for the
       next rate period.



    A beneficial owner of the AMPS may submit different types of orders to its
Broker-Dealer with respect to the AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner that fails to
submit an order to its Broker-Dealer will ordinarily be deemed to have submitted
a hold order to its Broker-Dealer. However, if a beneficial owner fails to
submit an order for some or all of its shares to its Broker-Dealer for an
auction relating to a rate period of more than 91 days, such beneficial owner
will be deemed to have submitted a sell order for such shares to its Broker-
Dealer. A sell order constitutes an irrevocable offer to sell the AMPS subject
to the sell order. A beneficial owner that offers to become the beneficial owner
of additional AMPS is, for the purposes of such offer, a potential holder as
discussed below.



    A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of the AMPS but that wishes to purchase the AMPS or a
beneficial owner that wishes to purchase additional AMPS. A potential holder may
submit bids to its Broker-Dealer in which it offers to purchase the AMPS at
$25,000 per share if the applicable rate for the next rate period is not less
than the rate specified in such bid. A bid placed by a potential holder
specifying a rate higher than the maximum applicable rate on the auction date
will not be accepted.



    The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
However, neither the Fund nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of the AMPS
held by it. A Broker-Dealer may also submit orders to the auction agent for its
own account as an existing holder or potential holder, provided it is not an
affiliate of the Fund. If a


                                       45




<PAGE>




Broker-Dealer submits an order for its own account in any auction, it may have
knowledge of orders placed through it in that auction and therefore have an
advantage over other bidders, but such Broker-Dealer would not have knowledge of
orders submitted by other Broker-Dealers in that auction. As a result of bidding
by the Broker-Dealer in an auction, the auction rate may be higher or lower than
the rate that would have prevailed had the Broker-Dealer not bid.



    There are sufficient clearing bids in an auction if the number of shares
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates or spreads equal to or lower
than the maximum applicable rate is at least equal to the number of AMPS subject
to sell orders submitted or deemed submitted to the auction agent by
Broker-Dealers for existing holders. If there are sufficient clearing bids, the
applicable rate for the AMPS for the next succeeding rate period thereof will be
the lowest rate specified in the submitted bids which, taking into account such
rate and all lower rates bid by Broker-Dealers as or on behalf of existing
holders and potential holders, would result in existing holders and potential
holders owning the AMPS available for purchase in the auction.



    If there are not sufficient clearing bids, the applicable rate for the next
rate period will be the maximum rate on the auction date. However, if the Fund
has declared a special rate period and there not sufficient clearing bids, the
applicable rate for the next rate period will be the same as during the current
rate period. If there are not sufficient clearing bids, beneficial owners of the
AMPS that have submitted or are deemed to have submitted sell orders may not be
able to sell in the auction all shares subject to such sell orders. If all of
the outstanding AMPS are the subject of submitted hold orders, then the rate
period following the auction will automatically be the same length as the
preceding rate period and the applicable rate for the next rate period will be
the 30 day 'AA' Composite Commercial Paper Rate in the case of a standard
dividend period for the AMPS. The 'AA' Composite Commercial Paper Rate is the
rate on commercial paper issued by financial corporations whose bonds are rated
AA by S&P as made available by the Federal Reserve Bank of New York or, if such
rate is not made available by the Federal Reserve Bank of New York, the
arithmetical average of such rates as quoted to the auction agent by a
commercial paper dealer as may be appointed by the Fund.



    A Broker-Dealer may also bid in an auction in order to prevent what would
otherwise be (i) a failed auction, (ii) an 'all-hold' auction or (iii) an
applicable rate that the Broker-Dealer believes, in its sole discretion, does
not reflect the market for the AMPS at the time of the auction. A Broker-Dealer
may, but is not obligated to, advise beneficial owners of AMPS that the
applicable rate that would apply in an 'all-hold' auction may be lower than
would apply if beneficial owners submit bids, and such advice, if given, may
facilitate the submission of bids by beneficial owners that would avoid the
occurrence of an 'all-hold' auction.



    The auction procedures include a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of AMPS that is different than the
number of shares specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as existing
holders or potential holders in respect of customer orders will be required to
make appropriate pro rata allocations among their respective customers.


    Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their agent members in same-day funds to
DTC against delivery to their respective agent

                                       46




<PAGE>



members. DTC will make payment to the sellers' agent members in accordance with
DTC's normal procedures, which now provide for payment against delivery by their
agent members in same-day funds.


    The first auction for the AMPS will be held on             , 2004, the
business day preceding the dividend payment date for the initial dividend
period. Thereafter, except during special rate periods, auctions for the AMPS
normally will be held every seven days, and each subsequent dividend period for
the AMPS normally will begin on the following business day.



    The following is a simplified example of how a typical auction works. Assume
that the Fund has 1,000 outstanding AMPS of any series, and three current
holders. The three current holders and three potential holders submit orders
through Broker-Dealers at the auction:

<Table>
<S>                   <C>                             <C>
Current Holder A....  Owns 500 shares, wants to sell  Bid order of 4.1% rate for all
                      all 500 shares if auction rate  500 Shares
                      is less than 4.1%
Current Holder B....  Owns 300 shares, wants to hold  Hold order -- will take the
                                                      auction rate
Current Holder C....  Owns 200 shares, wants to sell  Bid order of 3.9% rate for all
                      all 200 shares                  200 shares if auction rate is
                                                      less than 3.9%
Potential Holder D..  Wants to buy 200 shares         Places order to buy at or
                                                      above 4.0%
Potential Holder E..  Wants to buy 300 shares         Places order to buy at or
                                                      above 3.9%
Potential Holder F..  Wants to buy 200 shares         Places order to buy at or
                                                      above 4.1%
</Table>


    The lowest dividend rate that will result in all 1,000 AMPS continuing to be
held is 4.0% (the offer by D). Therefore, the dividend rate will be 4.0%.
Current holders B and C will continue to own their shares. Current holder A will
sell its shares because A's dividend rate bid was higher than the dividend rate.
Potential holder D will buy 200 shares and potential holder E will buy 300
shares because their bid rates were at or below the dividend rate. Potential
holder F will not buy any shares because its bid rate was above the dividend
rate.



SECONDARY MARKET TRADING AND TRANSFER OF AMPS



    The underwriters are not required to make a market in the AMPS. The
Broker-Dealers (including the underwriters) may maintain a secondary trading
market for outside of auctions, but they are not required to do so. There can be
no assurance that a secondary trading market for the AMPS will develop or, if it
does develop, that it will provide owners with liquidity of investment. The AMPS
will not be registered on any stock exchange or on the NASDAQ market. Investors
who purchase the AMPS in an auction for a special rate period should note that
because the dividend rate on such shares will be fixed for the length of that
dividend period, the value of such shares may fluctuate in response to the
changes in interest rates, and may be more or less than their original cost if
sold on the open market in advance of the next auction thereof, depending on
market conditions. In addition, a Broker-Dealer may, in its own discretion,
decide to sell AMPS in the secondary market to investors at any time and at any
price, including at prices equivalent to, below or above the liquidation
preference of the AMPS.


                                       47




<PAGE>



    You may sell, transfer, or otherwise dispose of the AMPS only in whole
shares and only


      pursuant to a bid or sell order placed with the auction agent in
      accordance with the auction procedures;

       to a Broker-Dealer; or


      to such other persons as may be permitted by the Fund; provided, however,
      that (x) if you hold your AMPS in the name of a Broker-Dealer, a sale or
      transfer of your AMPS to that Broker-Dealer, or to another customer of
      that Broker-Dealer, will not be considered a sale or transfer for purposes
      of the foregoing if that Broker-Dealer remains the existing holder of the
      AMPS immediately after the transaction; and (y) in the case of all
      transfers, other than through an auction, the Broker-Dealer (or other
      person, if the Fund permits) receiving the transfer will advise the
      auction agent of the transfer.


    Further description of the auction procedures can be found in the Articles
Supplementary.

                          DESCRIPTION OF COMMON SHARES


    The Fund is authorized to issue     Common Shares, par value $.001 per
share. Common Shares have equal rights to the payment of dividends and the
distribution of assets upon liquidation. Common Shares are fully paid and
non-assessable when issued and have no preemptive, conversion, exchange,
redemption or cumulative voting rights. Holders of Common Shares are entitled to
one vote per share. Whenever the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS are outstanding, holders of Common Shares will not
be entitled to receive any distributions from the Fund unless all accrued
dividends on the AMPS and the shares of Series T, Series W, Series TH, Series F
and Series M28 AMPS have been paid, and unless the applicable asset coverage
requirements under the 1940 Act with respect to the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS would be at least 200% after
giving effect to the distributions. Under the rules of the NYSE applicable to
listed companies, the Fund is required to hold an annual meeting of stockholders
each year.


                 CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS


    The Fund has provisions in its Charter and By-Laws ('By-Laws') that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions or to modify
its structure. The Board of Directors has been divided into three classes. At
the annual meeting of stockholders held each year, the term of one class will
expire and directors will be elected to serve in that class for terms of three
years. This provision could delay for up to two years the replacement of a
majority of the Board of Directors. A Director may be removed from office only
for cause and only by a vote of the holders of at least 75% of the outstanding
shares of the Fund entitled to vote on the matter.



    The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. Such conversion also requires the affirmative vote
of the holders of at least 75% of Common Shares and the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS) outstanding at the time,
voting together as a single class, unless it is approved by a vote of at least
75% of the Continuing Directors (as defined below), in which event such
conversion requires the approval of the holders of a majority of the votes
entitled to be cast thereon by the


                                       48




<PAGE>




stockholders of the Fund. A 'Continuing Director' is any member of the Board of
Directors of the Fund who (i) is not a person or affiliate of a person who
enters or proposes to enter into a Business Combination (as defined below) with
the Fund (an 'Interested Party') and (ii) who has been a member of the Board of
Directors of the Fund for a period of at least 12 months, or has been a member
of the Board of Directors since the Fund's initial public offering of Common
Shares, or is a successor of a Continuing Director who is unaffiliated with an
Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of Directors of the Fund.
The affirmative vote of at least 75% of the entire Board of Directors and at
least 75% of the holders of Common Shares and the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS) outstanding at the time,
voting as a single class, will be required to amend the Charter to change any of
the provisions in this paragraph and the preceding paragraph.



    The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of Common Shares and the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at the
time, voting together as a single class, and (ii) in the case of a Business
Combination (as defined below), 66 2/3% of the Common Shares and the AMPS (and
the Series T, Series W, Series TH, Series F and Series M28 AMPS) outstanding at
the time, voting together as a single class, other than votes held by an
Interested Party who is (or whose affiliate is) a party to a Business
Combination (as defined below) or an affiliate or associate of the Interested
Party, are required to authorize any of the following transactions:


        (i) merger, consolidation or statutory share exchange of the Fund with
    or into any other entity;

        (ii) issuance or transfer by the Fund (in one or a series of
    transactions in any 12-month period) of any securities of the Fund to any
    person or entity for cash, securities or other property (or combination
    thereof) having an aggregate fair market value of $1,000,000 or more,
    excluding (a) issuances or transfers of debt securities of the Fund,
    (b) sales of securities of the Fund in connection with a public offering,
    (c) issuances of securities of the Fund pursuant to a dividend reinvestment
    plan adopted by the Fund, (d) issuances of securities of the Fund upon the
    exercise of any stock subscription rights distributed by the Fund and
    (e) portfolio transactions effected by the Fund in the ordinary course of
    business;

        (iii) sale, lease, exchange, mortgage, pledge, transfer or other
    disposition by the Fund (in one or a series of transactions in any 12 month
    period) to or with any person or entity of any assets of the Fund having an
    aggregate fair market value of $1,000,000 or more except for portfolio
    transactions (including pledges of portfolio securities in connection with
    borrowings) effected by the Fund in the ordinary course of its business
    (transactions within clauses (i), (ii) and (iii) above being known
    individually as a 'Business Combination');

        (iv) any voluntary liquidation or dissolution of the Fund or an
    amendment to the Fund's Charter to terminate the Fund's existence; or

        (v) any stockholder proposal as to specific investment decisions made or
    to be made with respect to the Fund's assets as to which stockholder
    approval is required under federal or Maryland law.

    However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v) above)
if they are approved by a vote of

                                       49




<PAGE>



at least 75% of the Continuing Directors (as defined above). In that case, if
Maryland law requires stockholder approval, the affirmative vote of a majority
of votes entitled to be cast thereon shall be required and if Maryland law does
not require stockholder approval, no stockholder approval will be required. The
Fund's By-Laws contain provisions the effect of which is to prevent matters,
including nominations of directors, from being considered at a stockholders'
meeting where the Fund has not received notice of the matters generally at least
90 but no more than 120 days prior to the first anniversary of the preceding
year's annual meeting.


    These provisions are in addition to any special voting rights granted to the
holders of the AMPS in the Charter. See 'Description of AMPS -- Voting Rights.'
The Board of Directors has determined that the foregoing voting requirements,
which are generally greater than the minimum requirements under Maryland law and
the 1940 Act, are in the best interest of the Fund's stockholders generally.


    Reference is made to the Charter and By-Laws of the Fund, on file with the
Securities and Exchange Commission, for the full text of these provisions. 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 the Fund in a tender offer or
similar transaction. In the opinion of the Investment Manager, however, these
provisions offer several possible advantages. They may require persons seeking
control of a Fund to negotiate with its management regarding the price to be
paid for the shares required to obtain such control, they promote continuity and
stability and they enhance the Fund's ability to pursue long-term strategies
that are consistent with its investment objectives.

                          CONVERSION TO OPEN-END FUND


    The Fund is a closed-end investment company and it may be converted to an
open-end investment company at any time by a vote of the outstanding shares. See
'Description of AMPS -- Voting Rights' and 'Certain Provisions of the Charter
and By-Laws' for a discussion of voting requirements applicable to conversion of
the Fund to an open-end investment company. If the Fund converted to an open-end
investment company, it would be required to redeem all the AMPS (and the
Series T, Series W, Series TH, Series F and Series M28 AMPS) then outstanding
(requiring in turn that it liquidate a portion of its investment portfolio), and
the Common Shares would no longer be listed on the NYSE. Conversion to open-end
status could also require the Fund to modify certain investment restrictions and
policies. Stockholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or permitted under the 1940 Act) at their net asset value, less
such redemption charge, if any, as might be in effect at the time of redemption.
In order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end investment companies typically engage
in a continuous offering of their shares. Open-end investment companies are thus
subject to periodic asset in-flows and out-flows that can complicate portfolio
management. The Board of Directors may at any time propose conversion of the
Fund to open-end status, depending upon its judgment regarding the advisability
of such action in light of circumstances then prevailing. The Board of Directors
believes, however, that the closed-end structure is desirable in light of the
Fund's investment objectives and policies and it is currently not likely that
the Board of Directors would vote to convert the Fund to an open-end fund.


                                       50




<PAGE>



                          REPURCHASE OF COMMON SHARES


    Common shares of closed-end investment companies often trade at a discount
to net asset value, and the Fund's Common Shares may also trade at a discount to
their net asset value, although it is possible that they may trade at a premium
above net asset value. The market price of the Fund's Common Shares will be
determined by such factors as relative demand for and supply of the Common
Shares in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. Although holders of
Common Shares will not have the right to redeem the Common Shares, the Fund may
take action to repurchase Common Shares in the open market or make tender offers
for its Common Shares at net asset value.



    The acquisition of Common Shares by the Fund will decrease the total assets
of the Fund and, therefore, have the effect of increasing the Fund's expense
ratio and may adversely affect the ability of the Fund to achieve its investment
objectives. Furthermore, the acquisition of Common Shares by the Fund may
require the Fund to redeem the AMPS in order to maintain certain asset coverage
requirements. To the extent the Fund may need to liquidate investments to fund
repurchases of Common Shares, this may result in portfolio turnover which will
result in additional expenses being borne by the Fund. The Board of Directors
currently considers the following factors to be relevant to a potential decision
to repurchase Common Shares: the extent and duration of the discount, the
liquidity of the Fund's portfolio, the impact of any action on the Fund or its
stockholders and market considerations. Any share repurchases or tender offers
will be made in accordance with the requirements of the Securities Exchange Act
of 1934, as amended, and the 1940 Act. See 'U.S. Federal Taxation' for a
description of the potential tax consequences of a repurchase of Common Shares.


                             U.S. FEDERAL TAXATION

    The following discussion offers only a brief outline of the U.S. federal
income tax consequences of investing in the Fund and is based on the U.S.
federal tax laws in effect on the date hereof. Such tax laws are subject to
change by legislative, judicial or administrative action, possibly with
retroactive effect. Investors should consult their own tax advisers for more
detailed information and for information regarding the impact of state, local
and foreign taxes on an investment in the Fund.

U.S. FEDERAL INCOME TAX TREATMENT OF THE FUND


    The Fund has elected to be treated as, and intends to qualify annually as, a
regulated investment company (a 'RIC') under Subchapter M of the Code. To
qualify, the Fund must, among other things, (a) derive at least 90% of its gross
income each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived from its business of
investing in stock, securities or foreign currencies (the 'Income Requirement');
and (b) diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of its total assets is represented
by cash, U.S. Government securities, securities of other RICs and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities and (ii) not more than 25% of the value of its total assets is


                                       51




<PAGE>




invested in the securities (other than U.S. Government securities or the
securities of other RICs) of any one issuer, or of two or more issuers which the
Fund controls and which are engaged in the same, similar or related trades or
businesses. The American Jobs Creation Act of 2004 (the 'Act'), which the
President recently signed into law, provides that for taxable years of a RIC
beginning after October 22, 2004, net income derived from an interest in a
'qualified publicly traded partnership,' as defined in the Code, will be treated
as qualifying income for purposes of the Income Requirement in clause
(a) above. In addition, for the purposes of the diversification requirements in
clause (b) above, the outstanding voting securities of any issuer includes the
equity securities of a qualified publicly traded partnership, and no more than
25% of the value of a RIC's total assets may be invested in the securities of
one or more qualified publicly traded partnerships. The Act also provides that
the separate treatment for publicly traded partnerships under the passive loss
rules of the Code applies to a RIC holding an interest in a qualified publicly
traded partnership, with respect to items attributable to such interest.


    For each taxable year that the Fund otherwise qualifies as a RIC, it will
not be subject to U.S. federal income tax on that part of its investment company
taxable income (as that term is defined in the Code, but determined without
regard to any deduction for dividends paid) and net capital gain (the excess of
net long-term capital gain over net short-term capital loss) that it distributes
to its stockholders, if it distributes at least 90% of the sum of its investment
company taxable income and any net tax-exempt interest income for that year (the
'Distribution Requirement'). The Fund intends to make sufficient distributions
of its investment company taxable income each taxable year to meet the
Distribution Requirement. If the Fund failed to qualify for treatment as a RIC
for any taxable year or failed to satisfy the Distribution Requirement in any
taxable year, (a) it would be taxed as an ordinary corporation on the full
amount of its taxable income for that year without being able to deduct the
distributions it makes to its stockholders, and (b) its stockholders would treat
any such distributions, including distributions of net capital gain, as
dividends (that is, ordinary income) to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally would be eligible
(i) for the dividends received deduction available to corporate stockholders and
(ii) for treatment as qualified dividend income in the case of individual
stockholders.

    The Fund also currently intends to distribute all realized net capital gain
annually. If, however, the Board of Directors determines for any taxable year to
retain all or a portion of the Fund's net capital gain, that decision will not
affect the Fund's ability to qualify for treatment as a RIC, but will subject
the Fund to a maximum tax rate of 35% of the amount retained. In that event, the
Fund expects to designate the retained amount as undistributed capital gains in
a notice to its stockholders, who (i) will be required to include their
proportionate shares of the undistributed amount in their gross income as
long-term capital gain, and (ii) will be entitled to credit their proportionate
shares of the 35% tax paid by the Fund against their U.S. federal income tax
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned
by a Fund stockholder will be increased by an amount equal to 65% of the amount
of undistributed capital gains included in the stockholder's gross income.


    The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year an amount at least equal to
the sum of (i) 98% of its ordinary income for that calendar year, (ii) 98% of
its capital gain net income for the one-year period ending on October 31 of that
calendar year and (iii) any ordinary income and capital gains for previous years
that were not distributed during those years and on which the Fund paid no U.S.


                                       52




<PAGE>




federal income tax. For this and other purposes, a distribution will be treated
as paid by the Fund and received by the stockholders on December 31 if it is
declared by the Fund in October, November or December of such year, made payable
to stockholders of record on a date in such a month and paid by the Fund during
January of the following year. Any such distribution thus will be taxable to
stockholders whose taxable year is the calendar year in the year the
distribution is declared, rather than the year in which the distribution is
received. To prevent application of the excise tax, the Fund intends to make its
distributions in accordance with the calendar year distribution requirement.



U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF AMPS



    Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund believes that
under present law the AMPS will constitute stock of the Fund and distributions
with respect to the AMPS (other than distributions in redemption of the AMPS
that are treated as exchanges of stock under Section 302(b) of the Code) thus
will constitute dividends to the extent of the Fund's current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income to holders (other than
distributions of qualified dividend income and capital gain dividends, as
described below). The foregoing discussion relies in part on a published
ruling of the IRS stating that certain preferred stock similar in many
material respects to the AMPS represents equity. The following discussion
assumes such treatment will apply. It is possible, however, that the IRS
might take a contrary position asserting, for example, that the AMPS
constitute debt of the Fund. If this position were upheld, the discussion of
the treatment of distributions above would not apply. Instead, distributions
by the Fund to holders of AMPS would constitute interest, whether or not such
distributions exceeded the earnings and profits of the Fund, would be included
in full in the income of the recipient, would be taxed as ordinary income and
none of the distributions would be treated as capital gain dividends
or as qualified dividend income.



    Dividends paid out of the Fund's current or accumulated earnings and profits
will, except in the case of distributions of qualified dividend income and
capital gain dividends described below, be taxable to stockholders as ordinary
income. If a portion of the Fund's income consists of qualifying
dividends paid by U.S. corporations (other than REITs), a portion of the
dividends paid by the Fund to corporate stockholders, if properly designated,
may qualify for the dividends received deduction. In addition, for taxable years
beginning on or before December 31, 2008, distributions of investment income
designated by the Fund as derived from qualified dividend income will be taxed
in the hands of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met by both the Fund and the
stockholder. The Fund does not expect a significant portion of Fund
distributions to be eligible for the dividends received deduction or derived
from qualified dividend income. Distributions of net capital gain that are
designated by the Fund as capital gain dividends will be treated as long-term
capital gains in the hands of holders regardless of the holders' respective
holding periods for their AMPS. Distributions, if any, in excess of the Fund's
current and accumulated earnings and profits will first reduce the adjusted
tax basis of a stockholder's shares and, after that basis has been reduced to
zero, will constitute a capital gain to the stockholder (assuming the shares
are held as a capital asset). The IRS currently requires that a regulated
investment company that has two or more classes of stock allocate to each
such class proportionate amounts of each type of its income (such as ordinary
income, capital


                                       53




<PAGE>




gains, dividends qualifying for the dividends received deduction, qualified
dividend income, interest-related dividends and short-term capital gain
dividends) based upon the percentage of total dividends paid out of current or
accumulated earnings and profits to each class for the tax year. Accordingly,
the Fund intends each year to allocate capital gain dividends, dividends
qualifying for the dividends received deduction, dividends derived from
qualifying dividend income, interest-related dividends and short-term capital
gain dividends, if any, between its Common Shares, the AMPS and the Series T,
Series W, Series TH, Series F and Series M28 AMPS in proportion to the total
dividends paid out of current or accumulated earnings and profits to each class
or series with respect to such tax year. Distributions in excess of the Fund's
current and accumulated earnings and profits, if any, however, will not be
allocated proportionately among the Common Shares, the AMPS, Series T,
Series W, Series TH, Series F and Series M28 AMPS. Since the Fund's current and
accumulated earnings and profits will first be used to pay dividends on the
AMPS, and the Series T, Series W, Series TH, Series F and Series M28 AMPS
distributions in excess of such earnings and profits, if any, will be made
disproportionately to holders of Common Shares.


    Stockholders will be notified annually as to the U.S. federal tax status of
distributions.

SALE OF SHARES


    The sale or other disposition of the AMPS generally will be a taxable
transaction for U.S. federal income tax purposes. Selling holders of the AMPS
generally will recognize gain or loss in an amount equal to the difference
between the amount received in exchange therefor and their respective bases in
such AMPS. If the AMPS are held as a capital asset, the gain or loss generally
will be a capital gain or loss. Similarly, a redemption (including a redemption
resulting from liquidation of the Fund), if any, of the AMPS by the Fund
generally will give rise to capital gain or loss if the holder does not own (and
is not regarded under certain tax law rules of constructive ownership as owning)
any shares of Common Shares in the Fund and provided that the redemption
proceeds do not represent declared but unpaid dividends.



    Generally, a holder's gain or loss will be a long-term gain or loss if the
shares have been held for more than one year. Capital gains of individuals are
generally taxed at a maximum rate of tax of 15% for taxable years beginning on
or before December 31, 2008 (after which time the maximum rate will increase to
20%). However, any loss realized upon a taxable disposition of the AMPS held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received by the holder (or amounts credited to the
holder as undistributed capital gains) with respect to such shares. Also, any
loss realized upon a taxable disposition of AMPS may be disallowed if other AMPS
are acquired within a 61-day period beginning 30 days before and ending 30 days
after the date the shares are disposed of. If disallowed, the loss will be
reflected by an upward adjustment to the basis of the AMPS acquired. The ability
to otherwise deduct capital losses may be subject to other limitations under the
Code.


BACKUP WITHHOLDING

    The Fund may be required to withhold at a current rate of 28%, for U.S.
federal income taxes, a portion of all taxable dividends and redemption proceeds
payable to stockholders who fail to provide the Fund with their correct taxpayer
identification numbers or who otherwise fail to make required certifications, or
if the Fund or a Series stockholder has been notified by the IRS

                                       54




<PAGE>



that such stockholder is subject to backup withholding. Corporate stockholders
and other stockholders specified in the Code and the Treasury regulations
promulgated thereunder are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld will be allowed as a
refund or a credit against the stockholder's federal income tax liability if the
appropriate information is provided to the IRS.

OTHER TAXATION


    Foreign stockholders, including stockholders who are nonresident aliens, may
be subject to U.S. withholding tax on certain distributions at a rate of 30% or
such lower rates as may be prescribed by any applicable treaty. Under the Act, a
new exemption is created under which U.S. source withholding taxes are no longer
imposed on dividends paid by RICs to the extent the dividends are designated as
'interest-related dividends' or 'short-term capital gain dividends.' Under this
exemption, interest-related dividends and short-term capital gain dividends
generally represent distributions of interest or short-term capital gains that
would not have been subject to U.S. withholding tax at the source if they had
been received directly by a foreign person, and that satisfy certain other
requirements. In addition, the Act provides that distributions of the Fund
attributable to gains from sales or exchanges of 'U.S. real property interests,'
as defined in the Code and Treasury Regulations (including gains on the sale or
exchange of shares in certain U.S. real property holding corporations, which may
include certain 'non-domestically controlled' REITs, and certain REIT capital
gain dividends) will generally cause the foreign stockholder to be treated as
recognizing such gain as income effectively connected to a trade or business
within the United States, generally subject to tax at the same rates applicable
to U.S. stockholders. Also, such gain may be subject to a 30% branch profits tax
in the hands of a foreign stockholder that is a corporation. Such distributions
may be subject to U.S. withholding tax and may give rise to an obligation on the
part of the foreign stockholder to file a U.S. federal income tax return. These
rules apply to dividends with respect to taxable years of RICs beginning after
December 31, 2004 and before January 1, 2008. Investors are advised to consult
their own tax advisers with respect to the application to their own
circumstances of the above-described general taxation rules and with respect to
the state, local, foreign and other tax consequences to them of an investment in
the AMPS.


FURTHER INFORMATION


    The SAI summarizes further federal income tax considerations that may apply
to the Fund and its stockholders and may qualify the considerations discussed
herein. Fund distributions may also be subject to State and local taxes. You
should consult with your own tax adviser regarding the particular consequences
of investing in the Fund.


                                       55




<PAGE>



                                  UNDERWRITING


    Subject to the terms and conditions of the purchase agreement dated
            , 2004, each underwriter named below, acting through Merrill Lynch,
Pierce, Fenner & Smith Incorporated, has severally agreed to purchase, and the
Fund has agreed to sell, the number of AMPS set forth opposite the name of such
underwriter.



<Table>
<Caption>
                                                              NUMBER OF
            UNDERWRITER                                          AMPS
            -----------                                       ---------
<S>                                                           <C>
Merrill Lynch, Pierce, Fenner & Smith
            Incorporated....................................
Citigroup Global Markets Inc. ..............................
A.G. Edwards & Sons, Inc. ..................................
UBS Securities LLC..........................................
Wachovia Capital Markets, LLC...............................
                                                               -------
           Total............................................     3,760
                                                               -------
                                                               -------
</Table>



    The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to approval of certain
legal matters by counsel and to certain other conditions, including without
limitation, the receipt by the underwriters of customary closing certificates,
opinions and other documents and the receipt by the Fund of Aaa and AAA ratings
on the AMPS by Moody's and S&P, respectively, as of the time of the offering.
The underwriters are obligated to purchase all the AMPS if they purchase any of
the AMPS. In the purchase agreement, the Fund and the Investment Manager have
agreed to indemnify the underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make for any of those
liabilities.



    The underwriters propose to initially offer some of the AMPS directly to the
public at the public offering price set forth on the cover page of this
Prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not to exceed of $     per share. The sales load the Fund will
pay of $250 per share is equal to 1% of the initial offering price of the AMPS.
After this offering, the underwriters may change the public offering price and
the concession. Investors must pay for any AMPS purchased in this offering on or
before             , 2004.


    The Fund anticipates that the underwriters may from time to time act as
brokers or dealers in executing the Fund's portfolio transactions and that the
underwriters, or their affiliates, may act as counterparties in connection with
the interest rate transactions described above after they have ceased to be
underwriters. The underwriters are active underwriters of, and dealers in,
securities and act as market makers in a number of such securities, and
therefore can be expected to engage in portfolio transactions with, and perform
services for, the Fund.


    Merrill Lynch has advised the Fund that it and certain broker-dealers and
other participants in the auction rate securities markets, including both
taxable and tax exempt markets, have received letters from the Securities and
Exchange Commission requesting that each of them voluntarily conduct an
investigation regarding their respective practices and procedures in those
markets. Those broker-dealers are cooperating and expect to continue to
cooperate with the Securities and Exchange Commission in providing the requested
information. No assurance can be given as to whether the results of this process
will affect the market for the AMPS or the auctions.


                                       56




<PAGE>



    The Fund anticipates that the Underwriters or their respective affiliates
may, from time to time, act in auctions as broker-dealers and receive fees as
set forth under 'The Auction' and in the SAI.


    The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York 10080.



    The settlement date for the purchase of the AMPS will be             , 2004,
as agreed upon by the underwriters, the Fund and the Investment Manager pursuant
to Rule 15c6-1 under the Securities Exchange Act of 1934.


                       CUSTODIAN, AUCTION AGENT, TRANSFER
                   AGENT, DIVIDEND PAYING AGENT AND REGISTRAR


    The Bank of New York, whose address is 101 Barclay Street, Floor 7W, New
York, New York 10286, will act as auction agent, transfer agent, dividend paying
agent, and registrar for the AMPS. State Street Bank, whose principal business
address is 225 Franklin Street, Boston, Massachusetts 02110, has been retained
to act as custodian of the Fund's investments. Neither The Bank of New York nor
State Street Bank has any part in deciding the Fund's investment policies or
which securities are to be purchased or sold for the Fund's portfolio.


                                 LEGAL OPINIONS


    The validity of the AMPS offered hereby is being passed on for the Fund by
Simpson Thacher & Bartlett LLP, New York, New York, and certain other legal
matters will be passed on for the Underwriters by Clifford Chance US LLP,
New York, New York. Venable LLP will opine on certain matters pertaining to
Maryland law. Simpson Thacher & Bartlett LLP and Clifford Chance US LLP may rely
as to certain matters of Maryland law on the opinion of Venable LLP.


                 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

    The financial statements of the Fund for the year ended December 31, 2003,
have been audited by PricewaterhouseCoopers LLP, independent registered public
accountants, as set forth in their report given upon the authority of said firm
as experts in auditing and accounting. The address of PricewaterhouseCoopers LLP
is 300 Madison Avenue, New York, NY 10017.

                              FURTHER INFORMATION

    The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and is required to file reports, proxy
statements and other information with the Securities and Exchange Commission.
These documents can be inspected and copied for a fee at the Securities and
Exchange Commission's public reference room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Reports, proxy statements, and other information about the Fund can
be inspected at the offices of the NYSE.

    This Prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.


    Additional information about the Fund and the AMPS can be found in the
Fund's Registration Statement (including amendments, exhibits, and schedules) on
Form N-2 filed with the


                                       57




<PAGE>




Securities and Exchange Commission. The Fund's SAI dated             , 2004
contains additional information about the Fund and is incorporated by reference
into (which means it is considered to be a part of) this Prospectus. The
Securities and Exchange Commission maintains a website (http://www.sec.gov) that
contains the Fund's Registration Statement, the SAI, other documents
incorporated by reference, and other information the Fund has filed
electronically with the Securities and Exchange Commission, including proxy
statements and reports filed under the Securities Exchange Act of 1934, as
amended. Additional information may be found on the Internet at
http://www.cohenandsteers.com.


                                       58




<PAGE>



 TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................    3
Additional Information about Fund Investment Objectives and
  Policies..................................................    3
Investment Restrictions.....................................    4
Management of the Fund......................................    7
Compensation of Directors...................................   12
Investment Advisory and Other Services......................   13
Portfolio Transactions and Brokerage........................   22
Determination of Net Asset Value............................   22
Additional Information Concerning the Auctions for AMPS.....   23
S&P and Moody's Guidelines..................................   24
U.S. Federal Taxation.......................................   31
Performance Data and Index Returns..........................   37
Experts.....................................................   38
Report of Independent Registered Public Accounting Firm.....   39
Financial Statements........................................   40
Appendix A: Ratings of Investments..........................  A-1
Appendix B: Articles Supplementary..........................  B-1
</Table>


                                       59




<PAGE>


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




                                  $94,000,000

              [COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]

                                 COHEN & STEERS
                        QUALITY INCOME REALTY FUND, INC.
                    AUCTION MARKET PREFERRED SHARES ('AMPS')
                            3,760 SHARES, SERIES M7
                    LIQUIDATION PREFERENCE $25,000 PER SHARE


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


                              MERRILL LYNCH & CO.
                                   CITIGROUP
                                  A.G. EDWARDS
                              UBS INVESTMENT BANK
                              WACHOVIA SECURITIES


                                           , 2004

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








<PAGE>




                 SUBJECT TO COMPLETION, DATED NOVEMBER 12, 2004




    THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.


             [COHEN & STEERS QUALITY INCOME REALTY FUND LOGO]

                                757 THIRD AVENUE
                            NEW YORK, NEW YORK 10017
                                 (800) 437-9912

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


                      STATEMENT OF ADDITIONAL INFORMATION
                        Auction Market Preferred Shares
                                  Shares, Series M7
                                             , 2004


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





    THIS STATEMENT OF ADDITIONAL INFORMATION ('SAI') OF COHEN & STEERS QUALITY
INCOME REALTY FUND, INC. (THE 'FUND') RELATING TO THIS OFFERING OF THE FUND'S
AUCTION MARKET PREFERRED SHARES, SERIES M7 (THE 'AMPS') DOES NOT CONSTITUTE A
PROSPECTUS, BUT SHOULD BE READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS
RELATING TO THE AMPS DATED             , 2004, AS IT MAY BE SUPPLEMENTED.



    THIS SAI DOES NOT INCLUDE ALL INFORMATION THAT A PROSPECTIVE INVESTOR SHOULD
CONSIDER BEFORE PURCHASING AMPS IN THIS OFFERING, AND INVESTORS SHOULD OBTAIN
AND READ THE PROSPECTUS PRIOR TO PURCHASING AMPS. A COPY OF THE PROSPECTUS MAY
BE OBTAINED WITHOUT CHARGE BY WRITING TO THE ADDRESS OR CALLING THE PHONE NUMBER
SHOWN ABOVE.



    Capitalized terms used in this SAI have the meanings assigned to them in the
Prospectus or in the glossary of this SAI.







<PAGE>


                               TABLE OF CONTENTS


<Table>
<Caption>
                                                              PAGE
                                                              ----
<S>                                                           <C>
General Information.........................................    3
Additional Information about Fund Investment Objectives and
  Policies..................................................    3
Investment Restrictions.....................................    4
Management of the Fund......................................    7
Compensation of Directors...................................   12
Investment Advisory and Other Services......................   13
Portfolio Transactions and Brokerage........................   22
Determination of Net Asset Value............................   22
Additional Information Concerning the Auctions for AMPS.....   23
S&P and Moody's Guidelines..................................   24
U.S. Federal Taxation.......................................   31
Performance Data and Index Returns..........................   37
Experts.....................................................   38
Report of Independent Registered Public Accounting Firm.....   39
Financial Statements........................................   40
Appendix A: Ratings of Investments..........................  A-1
Appendix B: Articles Supplementary..........................  B-1
</Table>


                                       2







<PAGE>


                              GENERAL INFORMATION


    The Fund is a non-diversified, closed-end management investment company
registered under the Investment Company Act of 1940 (the '1940 Act'). Cohen &
Steers Capital Management, Inc. (the 'Investment Manager') serves as the Fund's
investment manager. The Fund's primary investment objective is high current
income through investment in real estate securities and its secondary investment
objective is capital appreciation. No assurance can be given that the Fund will
achieve its investment objectives. Much of the information contained in this SAI
expounds on subjects discussed in the Prospectus. Defined terms used herein have
the same meaning as in the Prospectus. No investment in the AMPS should be made
without first reading the Prospectus.


                          ADDITIONAL INFORMATION ABOUT
                    FUND INVESTMENT OBJECTIVES AND POLICIES

    The following descriptions supplement the descriptions of the principal
investment objectives, strategies and risks as set forth in the Prospectus.
Except as otherwise provided, the Fund's investment policies are not fundamental
and may be changed by the Board of Directors of the Fund without the approval of
the stockholders; however, the Fund will not change its non-fundamental
investment policies without written notice to stockholders.

INVESTMENTS IN REAL ESTATE COMPANIES AND REAL ESTATE INVESTMENT TRUSTS

    It is the Fund's fundamental policy to concentrate its investments in the
U.S. real estate market and not in any other industry. Under normal market
conditions, the Fund invests at least 90% of its total assets in common stocks,
preferred stocks and other equity securities issued by real estate companies,
such as real estate investment trusts ('REITs').

REAL ESTATE COMPANIES

    For purposes of the Fund's investment policies, a real estate company is one
that derives at least 50% of its revenues from the ownership, construction,
financing, management or sale of commercial, industrial, or residential real
estate; or has at least 50% of its assets in real estate.

REAL ESTATE INVESTMENT TRUSTS

    A REIT is a company dedicated to owning, and usually operating, income
producing real estate, or to financing real estate. REITs can generally be
classified as Equity REITs, Mortgage REITs and Hybrid REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and
buildings and derives its income primarily from rental income. An Equity REIT
may also realize capital gains (or losses) by selling real estate properties in
its portfolio that have appreciated (or depreciated) in value. A Mortgage REIT
invests primarily in mortgages on real estate, which may secure construction,
development or long-term loans. A Mortgage REIT generally derives its income
primarily from interest payments on the credit it has extended. A Hybrid REIT
combines the characteristics of both Equity REITs and Mortgage REITs. It is
anticipated, although not required, that under normal market conditions at least
90% of the Fund's investments in REITs consist of securities issued by Equity
REITs. At least 80% of our total assets will be invested in income producing
equity securities issued by REITs.

PREFERRED STOCKS

    Preferred stocks pay fixed or floating dividends to investors, and have a
'preference' over common stock in the payment of dividends and the liquidation
of a company's assets. This means that a company must pay dividends on preferred
stock before paying any dividends on its common stock. Preferred stockholders
usually have no right to vote for corporate directors or on other matters. Under
current market conditions, the Investment Manager invests approximately 70% of
our total assets in common shares of real estate companies and approximately 30%
in preferred

                                       3




<PAGE>


shares of REITs. The actual percentage of common and preferred shares in our
investment portfolio may vary over time based on the Investment Manager's
assessment of market conditions.

LOWER-RATED SECURITIES


    Securities rated non-investment grade (lower than BBB - by Standard & Poor's
Rating Services ('S&P') or lower than Baa3 by Moody's Investors Service Inc.
('Moody's')) are sometimes referred to as 'high yield' or 'junk' bonds. We may
only invest in securities rated 'CCC' or higher by S&P, or rated 'caa' or higher
by Moody's, or unrated securities of comparable quality. The issuers of these
securities have a currently identifiable vulnerability to default and the issues
may be in default or there may be present elements of danger with respect to
principal or interest. We may invest no more than 20% of our assets in preferred
stock and debt securities rated below investment grade and unrated securities of
comparable quality. This is a fundamental investment policy. We will not invest
in securities which are in default at the time of purchase.


ILLIQUID SECURITIES

    A security is illiquid if, for legal or market reasons, it cannot be
promptly sold (i.e., within seven days) at a price which approximates its fair
value. Although substantially all of the equity securities of real estate
companies in which we intend to invest are traded on a national securities
exchange or in the over-the-counter market, there are no limitations on our
ability to invest in illiquid securities.

CASH RESERVES

    The Fund's cash reserves, held to provide sufficient flexibility to take
advantage of new opportunities for investments and for other cash needs, will be
invested in money market instruments.

    Money market instruments in which the Fund may invest its cash reserves will
generally consist of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities and such obligations which are subject to
repurchase agreements. Repurchase agreements may be entered into with member
banks of the Federal Reserve System or 'primary dealers' (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities. Other
acceptable money market instruments include commercial paper rated by any
nationally recognized rating agency, such as S&P or Moody's, certificates of
deposit, bankers' acceptances issued by domestic banks having total assets in
excess of one billion dollars, and money market mutual funds.

    In entering into a repurchase agreement for the Fund, the Investment Manager
will evaluate and monitor the creditworthiness of the vendor. In the event that
a vendor should default on its repurchase obligation, the Fund might suffer a
loss to the extent that the proceeds from the sale of the collateral were less
than the repurchase price. If the vendor becomes bankrupt, the Fund might be
delayed, or may incur costs or possible losses of principal and income, in
selling the collateral.

                            INVESTMENT RESTRICTIONS

    The investment objectives and the general investment policies and investment
techniques of the Fund are described in the Prospectus. The Fund has also
adopted certain investment restrictions limiting the following activities except
as specifically authorized:

    The Fund may not:

         1. Issue senior securities (including borrowing money for other than
    temporary purposes) except in conformity with the limits set forth in the
    1940 Act; or pledge its assets other than to secure such issuances or
    borrowings or in connection with permitted investment strategies;
    notwithstanding the foregoing, the Fund may borrow up to an additional 5% of
    its total assets for temporary purposes;

                                       4




<PAGE>


         2. Act as an underwriter of securities issued by other persons, except
    insofar as the Fund may be deemed an underwriter in connection with the
    disposition of securities;

         3. Purchase or sell real estate, mortgages on real estate or
    commodities, except that the Fund may invest in securities of companies that
    deal in real estate or are engaged in the real estate business, including
    REITs, and securities secured by real estate or interests therein and the
    Fund may hold and sell real estate or mortgages on real estate acquired
    through default, liquidation, or other distributions of an interest in real
    estate as a result of the Fund's ownership of such securities;

         4. Purchase or sell commodities or commodity futures contracts, except
    that the Fund may invest in financial futures contracts, options thereon and
    such similar instruments;

         5. Make loans to other persons except through the lending of securities
    held by it (but not to exceed a value of one-third of total assets), through
    the use of repurchase agreements, and by the purchase of debt securities,
    all in accordance with its investment policies;

         6. Purchase preferred stock and debt securities rated below investment
    grade and unrated securities of comparable quality, if, as a result, more
    than 20% of the Fund's total assets would then be invested in such
    securities;

         7. Acquire or retain securities of any investment company, except that
    the Fund may (a) acquire securities of investment companies up to the limits
    permitted by Section 12(d)(1) of the 1940 Act, or any exemption granted
    under the 1940 Act and (b) acquire securities of any investment company as
    part of a merger, consolidation or similar transaction;

         8. Invest in puts, calls, straddles, spreads or any combination
    thereof;

         9. Enter into short sales;

        10. Invest in the securities of a non-U.S. issuer;

        11. Invest in oil, gas or other mineral exploration programs,
    development programs or leases, except that the Fund may purchase securities
    of companies engaging in whole or in part in such activities;

        12. Pledge, mortgage or hypothecate its assets except in connection with
    permitted borrowings; or

        13. Purchase securities on margin, except short-term credits as are
    necessary for the purchase and sale of securities.


    The investment restrictions numbered 1 through 7 in this SAI have been
adopted as fundamental policies of the Fund. Under the 1940 Act, a fundamental
policy may not be changed without the approval of a 'majority of the
outstanding' Common Shares, the AMPS and any other outstanding shares of
preferred stock voting together as a single class, and the holders of a
'majority of the outstanding' preferred shares voting as a separate class. When
used with respect to particular shares of the Fund, a 'majority of the
outstanding' means (1) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(2) more than 50% of the shares, whichever is less. Investment restrictions
numbered 8 through 13 above are non-fundamental and may be changed at any time
by vote of a majority of the Board of Directors.





    Under the 1940 Act, the Fund is not permitted to issue preferred shares
unless immediately after the issuance, the Fund's asset coverage with respect to
such preferred shares is at least 200%. The Fund's asset coverage with respect
to preferred shares is measured as the ratio that the Fund's total assets, less
liabilities and indebtedness not represented by senior securities, bears to the
aggregate amount of senior securities representing indebtedness of the Fund plus
the aggregate of the liquidation value of the Fund's outstanding preferred
shares (such ratio, 'Preferred Shares Asset Coverage'). In addition, the Fund is
not permitted to declare any cash dividend or other distribution on its Common
Shares unless, at the time of such declaration, the Fund's Preferred Shares
Asset Coverage is at least 200%. The Fund intends, to the extent possible, to
purchase or redeem the AMPS and any other outstanding shares of preferred stock
from time to time to the


                                       5




<PAGE>



extent necessary in order to maintain a Preferred Shares Asset Coverage of at
least 200%. If the Fund has AMPS and any other outstanding shares of preferred
stock, two of the Fund's Directors will be elected by the holders of the AMPS
and any other outstanding shares of preferred stock, voting separately as a
class. The remaining Directors of the Fund will be elected by holders of Common
Shares, AMPS and any other outstanding shares of preferred stock voting together
as a single class. In the event the Fund failed to pay dividends on the AMPS and
any other outstanding shares of preferred stock for two years, holders of the
AMPS and any other outstanding shares of preferred stock, voting together as a
single class would be entitled to elect a majority of the Directors of the Fund.



    Under the 1940 Act, the Fund generally is not permitted to borrow unless
immediately after the borrowing, the value of the Fund's asset coverage related
to such borrowings is at least 300%. The Fund's asset coverage with respect to
indebtedness is the ratio that the Fund's total assets, less liabilities and
indebtedness not represented by senior securities, bears to the aggregate amount
of senior securities representing indebtedness of the Fund (such ratio,
'Indebtedness Asset Coverage'). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on its Common Shares unless, at
the time of such declaration, the Fund's Indebtedness Asset Coverage is at least
300% of such principal amount. If the Fund borrows, the Fund intends, to the
extent possible, to prepay all or a portion of the principal amount of the
borrowing to the extent necessary in order to maintain the required asset
coverage. Failure to maintain certain asset coverage requirements could result
in an event of default and entitle the debt holders to elect a majority of the
Board of Directors.


                                       6




<PAGE>


                             MANAGEMENT OF THE FUND


    The business and affairs of the Fund are managed under the direction of the
Board of Directors. The Directors approve all significant agreements between the
Fund and persons or companies furnishing services to it, including the Fund's
agreements with its Investment Manager, administrator, auction agent, custodian
and transfer agent. The management of the Fund's day-to-day operations is
delegated to its officers, the Investment Manager and the Fund's administrator,
subject always to the investment objectives and policies of the Fund and to the
general supervision of the Directors. As of November 8, 2004, the Directors and
officers as a group beneficially owned directly or indirectly less than 1% of
the outstanding shares of the Fund.


DIRECTORS AND OFFICERS


    Basic information about the identity and experience of each Director and
officer is set forth in the charts below. Each such director and officer is also
a director or officer of Cohen & Steers Select Utility Fund, Inc., Cohen &
Steers REIT and Utility Income Fund, Inc., Cohen & Steers Advantage Income
Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund, Inc., Cohen &
Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers Total Return
Realty Fund, Inc., which are closed-end investment companies advised by the
Investment Manager, and Cohen & Steers Realty Income Fund, Inc., Cohen & Steers
Institutional Realty Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen &
Steers Realty Focus Fund, Inc. and Cohen & Steers Utility Fund, Inc., which are
open-end investment companies advised by the Investment Manager.



<Table>
<Caption>
                                                                PRINCIPAL        NUMBER OF
                                                               OCCUPATION       FUNDS WITHIN
                                                               DURING PAST      FUND COMPLEX
                                                                 5 YEARS        OVERSEEN BY
                                                            (INCLUDING OTHER      DIRECTOR
                             POSITION HELD       TERM OF      DIRECTORSHIPS    (INCLUDING THE   LENGTH OF
  NAME, ADDRESS AND AGE        WITH FUND         OFFICE           HELD)            FUND)       TIME SERVED
  ---------------------        ---------         ------           -----            -----       -----------
<S>                        <C>                 <C>          <C>                <C>           <C>
INTERESTED DIRECTORS
Robert H. Steers ........  Director, Chairman     2006      Co-Chairman and         12       Since
757 Third Avenue           of the Board, and                Co-Chief                         Inception
New York, New York             Secretary                    Executive Officer
Age: 51                                                     of Cohen & Steers
                                                            Capital
                                                            Management, Inc.,
                                                            the Fund's
                                                            Investment
                                                            Manager.
Martin Cohen *, ** ......      Director,          2007      Co-Chairman and         12       Since
757 Third Avenue             President and                  Co-Chief                         Inception
New York, New York             Treasurer                    Executive Officer
Age: 55                                                     of Cohen & Steers
                                                            Capital
                                                            Management, Inc.,
                                                            the Fund's
                                                            Investment
                                                            Manager.

DISINTERESTED DIRECTORS
Bonnie Cohen ** .........       Director          2005      Consultant. Prior       12       Since
1824 Phelps Place, N.W.                                     thereto,                         Inception
Washington, D.C.                                            Undersecretary of
Age: 61                                                     State, United
                                                            States Department
                                                            of State.
                                                            Director of
                                                            Wellsword Real
                                                            Properties, Inc.
George Grossman .........       Director          2006      Attorney-at-law.        12       Since
17 Elm Place                                                                                 Inception
Rye, New York
Age: 50
</Table>


                                                  (table continued on next page)

                                       7




<PAGE>


(table continued from previous page)


<Table>
<Caption>
                                                                PRINCIPAL        NUMBER OF
                                                               OCCUPATION       FUNDS WITHIN
                                                               DURING PAST      FUND COMPLEX
                                                                 5 YEARS        OVERSEEN BY
                                                            (INCLUDING OTHER      DIRECTOR
                             POSITION HELD       TERM OF      DIRECTORSHIPS    (INCLUDING THE   LENGTH OF
  NAME, ADDRESS AND AGE        WITH FUND         OFFICE           HELD)            FUND)       TIME SERVED
  ---------------------        ---------         ------           -----            -----       -----------
<S>                        <C>                 <C>          <C>                <C>             <C>
Richard E. Kroon ........       Director          2005      Board member of         12         Since
328 Newman Springs Rd.                                      Finlay                             November
Red Bank, New Jersey                                        Enterprises, Inc.                  2004
Age: 62                                                     (fine jewelry
                                                            retailer).
                                                            Formerly Chairman
                                                            and Managing
                                                            Partner of the
                                                            Sprout Group
                                                            Capital Fund, a
                                                            division of
                                                            Donald, Lufkin &
                                                            Jenrette
                                                            Securities
                                                            Corporation, and
                                                            former Chairman
                                                            of the National
                                                            Venture Capital
                                                            Association.
Richard J. Norman .......       Director          2007      Private Investor.       12         Since
7520 Hackamore Drive                                        Prior thereto,                     Inception
Potomac, Maryland                                           Investment
Age: 61                                                     Representative of
                                                            Morgan Stanley
                                                            Dean Witter.
Frank K. Ross ...........       Director          2007      Board member of         12         Since March
10130 Darmuid Green                                         NCRIC Group, Inc.                  2004
Drive                                                       (insurance) and
Potomac, Maryland                                           Pepco Holdings,
Age: 61                                                     Inc. (electric
                                                            utility).
                                                            Formerly,
                                                            Midatlantic Area
                                                            Managing Partner
                                                            for Audit and
                                                            Risk Advisory
                                                            Services at KPMG
                                                            LLP and Managing
                                                            Partner of its
                                                            Washington, DC
                                                            Office.
</Table>


                                                  (table continued on next page)

                                       8




<PAGE>


(table continued from previous page)


<Table>
<Caption>
                                                                PRINCIPAL        NUMBER OF
                                                               OCCUPATION       FUNDS WITHIN
                                                               DURING PAST      FUND COMPLEX
                                                                 5 YEARS        OVERSEEN BY
                                                            (INCLUDING OTHER      DIRECTOR
                             POSITION HELD       TERM OF      DIRECTORSHIPS    (INCLUDING THE   LENGTH OF
  NAME, ADDRESS AND AGE        WITH FUND         OFFICE           HELD)            FUND)       TIME SERVED
  ---------------------        ---------         ------           -----            -----       -----------
<S>                        <C>                 <C>          <C>                <C>             <C>
Willard H. Smith                Director          2005      Board member of         12         Since
Jr.*'D' .................                                   Essex Property                     Inception
7231 Encelia Drive                                          Trust Inc.,
La Jolla, California                                        Highwoods
Age: 67                                                     Properties, Inc.,
                                                            and Realty Income
                                                            Corporation and
                                                            Crest Net Lease,
                                                            Inc. Managing
                                                            Director at
                                                            Merrill Lynch &
                                                            Co., Equity
                                                            Capital Markets
                                                            Division from
                                                            1983 to 1995.
C. Edward Ward, Jr. .....       Director          2005      Formerly head of        12         Since
788 Columbus Avenue, Apt.                                   closed-end fund                    November
7G                                                          listings for the                   2004
New York, New York                                          New York Stock
Age: 58                                                     Exchange.
</Table>


---------

   * These Directors have been designated as preferred stock Directors

  ** Martin Cohen and Bonnie Cohen are unrelated


 'D' Solely as a result of his ownership of securities of one of the
     underwriters, Mr. Smith is technically an 'interested person' of the Fund
     as defined in the 1940 Act until after completion of this offering of the
     AMPS. After the completion of this offering, he will be a non-interested
     Director.


    The officers of the Fund, their addresses, their ages, and their principal
occupations for at least the past five years are set forth below.


<Table>
<Caption>
                                    POSITION(S)
                                     HELD WITH
    NAME, ADDRESS AND AGE              FUND              PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------------  -------------------      --------------------------------------------
<S>                             <C>                      <C>
Joseph M. Harvey                Vice President           President of Cohen & Steers Capital
757 Third Avenue                                         Management, Inc., the Fund's Investment
New York, New York                                       Manager, since 2003. Prior thereto, he was
Age: 40                                                  Senior Vice President and Director of
                                                         Investment Research of the Fund's Investment
                                                         Manager.
Adam M. Derechin .............  Vice President and       Chief Operating Officer of Cohen & Steers
757 Third Avenue                Assistant Treasurer      Capital Management, Inc., the Fund's
New York, New York                                       Investment Manager, since August 2003. Prior
Age: 40                                                  thereto, he was a Senior Vice President of
                                                         the Fund's Investment Manager.
Lawrence B. Stoller ..........  Assistant Secretary      Senior Vice President and General Counsel of
757 Third Avenue                                         Cohen & Steers Capital Management, Inc., the
New York, New York                                       Fund's Investment Manager, since 1999. Prior
Age: 40                                                  to that, Associate General Counsel,
                                                         Neuberger Berman Management, Inc. (money
                                                         manager); and Assistant General Counsel, The
                                                         Dreyfus Corporation (money manager).
</Table>


                                                  (table continued on next page)

                                       9




<PAGE>


(table continued from previous page)


<Table>
<Caption>
                                    POSITION(S)
                                     HELD WITH
    NAME, ADDRESS AND AGE              FUND              PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------------  -------------------      --------------------------------------------
<S>                             <C>                      <C>
John E. McLean ...............  Chief Compliance         Vice President and Associate General Counsel
757 Third Avenue                Officer                  of Cohen & Steers Capital Management since
New York, NY                                             September 2003. Prior to that, Vice
Age: 33                                                  President, Law & Regulation,
                                                         J. & W. Seligman & Co. Incorporated (money
                                                         manager); and Associate, Battle Fowler LLP
                                                         (law firm).
</Table>


    The following table provides information concerning the dollar range of the
Fund's equity securities owned by each Director and the aggregate dollar range
of securities owned in the Cohen & Steers Fund Complex is set forth below.


<Table>
<Caption>
                                                                                   AGGREGATE DOLLAR
                                                                                   RANGE OF EQUITY
                                                            DOLLAR RANGE OF       SECURITIES IN THE
                                                          EQUITY SECURITIES IN   COHEN & STEERS FUND
                                                             THE FUND AS OF         COMPLEX AS OF
                                                                 , 2004                 , 2004
                                                                 ------                 ------
<S>                                                       <C>                    <C>
Robert H. Steers........................................     Over $100,000          Over $100,000
Martin Cohen............................................     Over $100,000          Over $100,000
Bonnie Cohen............................................   $10,001 - $50,000      $50,001 - $100,000
Richard E. Kroon........................................         none                    none
George Grossman.........................................   $10,001 - $50,000      $50,001 - $100,000
Richard J. Norman.......................................   $10,001 - $50,000        Over $100,000
Frank K. Ross...........................................   $10,001 - $50,000      $50,001 - $100,000
Willard H. Smith Jr.....................................         none             $10,001 - $50,000
C. Edward Ward, Jr......................................         none                    none
</Table>



    Conflicts of Interest. No Director who is not an 'interested person' of the
Fund as defined in the 1940 Act, and no immediate family members, owns any
securities issued by the Investment Manager, or any person or entity (other than
the Fund) directly or indirectly controlling, controlled by, or under common
control with the Investment Manager. Solely as a result of his ownership of
securities of one of the underwriters, Mr. Smith is technically an 'interested
person' of the Fund as defined in the 1940 Act until after completion of this
offering of the AMPS. After the completion of this offering, he will be a
non-interested Director.


BOARD'S ROLE IN FUND GOVERNANCE


    Committees. The Fund's Board of Directors has four standing committees of
the Board, the Audit Committee, the Nominating Committee, the Contract Review
Committee and the Governance Committee, each of which is composed of all of the
Directors who are not interested persons of the Fund, as defined in the 1940
Act. The members of the Committees are Ms. Cohen and Messrs. Grossman, Norman,
Kroon, Ross, Smith and Ward.



    The function of the Audit Committee is to assist the Board of Directors in
its oversight of the Fund's financial reporting process. The Audit Committee met
three times during 2003. The functions of the Nominating Committee are to
identify individuals qualified to become members of the Board of Directors in
the event that a position is vacated or created, to select the director nominees
for any future meeting of stockholders and to set any necessary standards or
qualifications for service on the Board of Directors. The Nominating Committee
will consider nominees properly recommended by the Fund's shareholders.
Shareholders who wish to recommend a nominee should send nominations that
include, among other things, biographical data and the qualifications of the
proposed nominee to the Fund's Secretary. The Nominating Committee did not meet
during the fiscal year ended December 31, 2003.



    The main functions of the Contract Review Committee are to make
recommendations to the Board of Directors after reviewing advisory and other
contracts that the Fund has with the


                                       10




<PAGE>



Investment Manager and to select third parties to provide evaluative reports and
other information regarding the services provided by the Investment Manager to
the Board. The Contract Review Committee was formed in 2004. The main function
of the Governance Committee is to assist the Board in the oversight of
appropriate and effective governance of the Fund. The Governance Committee will
oversee, among other things, the structure and composition of the Board
committees, the size of the Board and the compensation of independent directors
for service on the Board and any Board committee. The Governance Committee was
formed in 2004.



    Approval of Investment Management Agreement. The Board of Directors,
including a majority of the Directors who are not parties to the Fund's
Investment Management Agreement, or interested persons of any such party
('Disinterested Directors') has the responsibility under the 1940 Act to approve
the Fund's Investment Management Agreement for its initial term and annually
thereafter at a meeting called for the purpose of voting on such matter. The
Investment Management Agreement was approved for an initial two-year term by the
Fund's Directors, including a majority of the Disinterested Directors, at their
meetings held on September 21, 2001 and the continuation was approved at a
meeting held on December 2, 2003.



    In connection with the Board's consideration of the Investment Management
Agreement, the Board reviewed information reasonably necessary to evaluate the
terms of the Investment Management Agreement derived from a number of sources,
including materials provided by the Investment Manager and by the Directors'
independent counsel, and considered the following: (1) the level of the
management fees and expense ratio of the Fund as compared to competitive Funds
of a comparable size; (2) the nature and quality of the services to be rendered
by the Investment Manager; (3) benefits derived by the Investment Manager from
the relationship with the Fund, including not only the Investment Manager's
compensation for investment advisory services but also compensation paid to the
Investment Manager for administrative services; (4) the costs of providing
services to the Fund; and (5) the profitability of the Fund to the Investment
Manager. The Directors considered the fact that the Investment Manager agreed to
waive a portion of its investment management fee in the amount of .32% of the
Fund's average daily managed assets for the first five fiscal years of the
Fund's operations, and then declining amounts in years six through 10. The
Directors took note of the fact that the Fund's net investment management fee
compares favorably to the average investment management fee charged to
competitive funds of a comparable size. The Directors also noted that the
Investment Manager had agreed to pay from its own resources an additional
commission to the lead underwriter of the Fund's common stock offering at an
annual rate of .10% of the Fund's managed assets. They also considered the fact
that the Investment Manager agreed to pay all organizational expenses and
offering costs, other than the sales load, that exceeded $.03 per share in
connection with the Fund's common stock offering. The Directors then took into
consideration the benefits to be derived by the Investment Manager in connection
with the Investment Management Agreement, noting particularly the research and
related services, within the meaning of Section 28(e) of the Securities Exchange
Act of 1934, that the Investment Manager would be eligible to receive by
allocating the Fund's brokerage transactions.



    In reviewing the nature and quality of services to be provided by the
Investment Manager, the Directors noted that, in addition to the investment
advisory services to be provided to the Fund, the Investment Manager also
provides administrative services, oversight of fund accounting, marketing
services, assistance in meeting legal and regulatory requirements and other
services necessary for the operation of the Fund. In addition, the Directors,
based on their experience as directors of other investment companies managed by
the Investment Manager, also focused on the anticipated role of senior
management in the day-to-day operations of the Fund and on the quality of the
compliance and administrative staff at the Investment Manager. The Directors
also focused on appropriate performance measurements of the Investment Manager,
including the past performance of the Investment Manager with respect to this
Fund and other funds invested in the same or similar asset classes. Moreover,
the Directors noted the Investment Manager's ability to attract quality and
experienced personnel to manage the Fund and its continuing efforts to expand
its capabilities.


                                       11




<PAGE>



    In considering the fees and expenses of the Fund in comparison to the fees
and expenses of funds with similar characteristics, the Directors reviewed
information with respect to fees and expenses of other comparable funds within
this competitive universe.



    Based on the foregoing and such other matters as were deemed relevant, the
Directors, including a majority of the Disinterested Directors, who were advised
by separate independent legal counsel throughout the process, concluded that the
management fee rate was reasonable and fair and in the best interests of the
Fund and its shareholders in relation to the services to be rendered and fees
and expenses of competitive funds of a comparable size and approved the
continuation of the Investment Management Agreement, including the fees payable
thereunder. The Disinterested Directors were represented by independent counsel
in their deliberations.


                           COMPENSATION OF DIRECTORS


    Directors of the Fund who are not interested persons of the Fund are paid an
annual retainer of $4,500 and a fee of $500 for each regular meeting attended
and are reimbursed for the expenses of attendance at such meetings and, for the
fiscal year ended December 31, 2003, such fees and expenses paid by the Fund
totaled $42,312.


    The following table sets forth information regarding compensation of
Directors by the Fund and by the fund complex of which the Fund is a part for
the fiscal year ended December 31, 2003. Officers of the Fund and Directors who
are interested persons of the Fund do not receive any compensation from the Fund
or any other fund in the fund complex which is a U.S. registered investment
company. In the column headed 'Total Compensation to Directors by Fund Complex,'
the compensation paid to each Director represents the nine funds that each
Director served in the fund complex during 2003. The Directors do not receive
any pension or retirement benefits from the fund complex.

                               COMPENSATION TABLE
                      FISCAL YEAR ENDED DECEMBER 31, 2003*


<Table>
<Caption>
                                                                                  TOTAL
                                                               AGGREGATE      COMPENSATION
                                                              COMPENSATION       PAID TO
                                                                  FROM        DIRECTORS BY
                  NAME OF PERSON, POSITION                     REGISTRANT     FUND COMPLEX
                  ------------------------                     ----------     ------------
<S>                                                           <C>            <C>
Gregory C. Clark****, Director..............................     $7,250          $61,500
Bonnie Cohen**, Director....................................     $7,250          $61,500
Martin Cohen***, Director and President.....................     $    0          $     0
George Grossman**, Director.................................     $7,250          $61,500
Richard E. Kroon*,**, Director..............................     $    0          $     0
Richard J. Norman**, Director...............................     $7,250          $61,500
Frank K. Ross*,.............................................     $    0          $     0
Willard H. Smith Jr.***,'D', Director.......................     $7,250          $61,500
Robert H. Steers***, Director and Chairman..................     $    0          $     0
C. Edward Ward, Jr.*,**, Director...........................     $    0          $     0
</Table>


---------


   * Frank K. Ross was elected as a Director by the Fund's Board of Directors
     effective March 5, 2004. Each of Richard E. Kroon and C. Edward Ward, Jr.
     was elected as a Director by the Fund's Board of Directors effective
     November 3, 2004. Therefore, none of these individuals received any
     compensation during the fiscal year ended December 31, 2003.



  ** Member of the Audit Committee, Nominating Committee, Contract Review
     Committee and Governance Committee.


 *** 'Interested person,' as defined in the Act, of the Fund because of the
     affiliation with Cohen & Steers Capital Management, Inc., the Fund's
     investment manager.

**** Effective June 3, 2004, Mr. Clark resigned as a Director.


 'D' Solely as a result of his ownership of securities of one of the
     underwriters, Mr. Smith is technically an 'interested person' of the Fund
     as defined in the 1940 Act until after completion of this offering of the
     AMPS. After the completion of this offering, he will be a non-interested
     director, and will become a member of the Audit Committee at such time.


                                       12




<PAGE>


PRINCIPAL STOCKHOLDERS


    To the knowledge of the Fund, as of November 8, 2004, no current Director of
the Fund owned 1% or more of the outstanding Common Shares, and the officers and
Directors of the Fund owned, as a group, less than 1% of the Common Shares and
no AMPS.



    As of November 8, 2004, no person to the knowledge of the Fund, owned
beneficially more than 5% of the outstanding Common Shares. As of November 8,
2004, Cede & Co. c/o Depository Trust Company, Box 20, New York, New York was
the record owner of 99.68% of the outstanding Common Shares.


                     INVESTMENT ADVISORY AND OTHER SERVICES

THE INVESTMENT MANAGER


    Cohen & Steers Capital Management, Inc., with offices located at 757 Third
Avenue, New York, New York 10017, is the Investment Manager to the Fund. The
Investment Manager, a registered investment adviser, was formed in 1986 and is a
wholly owned subsidiary of Cohen & Steers, Inc., a publicly traded company whose
common stock is listed on the New York Stock Exchange under the symbol 'CNS.'
Its current clients include pension plans of leading corporations, endowment
funds and mutual funds, including the Fund, Cohen & Steers Select Utility Fund,
Inc., Cohen & Steers REIT and Utility Income Fund, Inc., Cohen & Steers
Advantage Income Realty Fund, Inc., Cohen & Steers Premium Income Realty Fund,
Inc., Cohen & Steers REIT and Preferred Income Fund, Inc. and Cohen & Steers
Total Return Realty Fund, Inc., which are closed-end investment companies, and
Cohen & Steers Realty Income Fund, Inc., Cohen & Steers Institutional Realty
Shares, Inc., Cohen & Steers Realty Shares, Inc., Cohen & Steers Realty Focus
Fund, Inc. and Cohen & Steers Utility Fund, Inc., which are open-end investment
companies. The Investment Manager is a wholly owned subsidiary of Cohen &
Steers, Inc., a publicly traded company whose common stock is listed on the New
York Stock Exchange under the symbol 'CNS.'


    Pursuant to the Investment Management Agreement, the Investment Manager
furnishes a continuous investment program for the Fund's portfolio, makes the
day-to-day investment decisions for the Fund, executes the purchase and sale
orders for the portfolio transactions of the Fund and generally manages the
Fund's investments in accordance with the stated policies of the Fund, subject
to the general supervision of the Board of Directors of the Fund.


    Under the Investment Management Agreement, the Fund pays the Investment
Manager a monthly management fee computed at the annual rate of .85% of the
average daily value of the managed assets (which equals the net asset value of
the Common Shares including the liquidation preference on the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS, plus the principal
amount of any borrowings used for leverage) of the Fund. The Investment Manager
has contractually agreed to waive its investment management fees in the amount
of .32% of average daily managed assets for the first five fiscal years of the
Fund's operations, .26% of average daily managed assets in year six, .20% of
average daily managed assets in year seven, .14% of average daily managed assets
in year eight, .08% of average daily managed assets in year nine and .02% of
average daily managed assets in year ten. For the fiscal years ended
December 31, 2002 and December 31, 2003, the Fund incurred management fees of
$5,597,395 and $7,499,290, respectively, and the Investment Manager waived
management fees of $2,107,254 and $2,823,262, respectively.


    The Investment Manager also provides the Fund with such personnel as the
Fund may from time to time request for the performance of clerical, accounting
and other office services, such as coordinating matters with the
sub-administrator, the transfer agent and the custodian. The personnel rendering
these services, who may act as officers of the Fund, may be employees of the
Investment Manager or its affiliates. These services are provided at no
additional cost to the Fund. The Fund does not pay any additional amounts for
services performed by officers of the Investment Manager or its affiliates.

                                       13




<PAGE>


ADMINISTRATIVE SERVICES

    Pursuant to an Administration Agreement, the Investment Manager also
performs certain administrative and accounting functions for the Fund, including
(i) providing office space, telephone, office equipment and supplies for the
Fund; (ii) paying compensation of the Fund's officers for services rendered as
such; (iii) authorizing expenditures and approving bills for payment on behalf
of the Fund; (iv) supervising preparation of the periodic updating of the Fund's
registration statement, including prospectus and statement of additional
information, for the purpose of filings with the Securities and Exchange
Commission and state securities administrators and monitoring and maintaining
the effectiveness of such filings, as appropriate; (v) supervising preparation
of periodic reports to the Fund's stockholders and filing of these reports with
the Securities and Exchange Commission, Forms N-SAR filed with the Securities
and Exchange Commission, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual stockholders; (vi) supervising the daily pricing of the Fund's
investment portfolio and the publication of the net asset value of the Fund's
shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to the Fund, including the
Custodian, Transfer Agent and printers; (viii) providing trading desk facilities
for the Fund; (ix) supervising compliance by the Fund with record-keeping
requirements under the 1940 Act and regulations thereunder, maintaining books
and records for the Fund (other than those maintained by the Custodian and
Transfer Agent) and preparing and filing of tax reports other than the Fund's
income tax returns; and (x) providing executive, clerical and secretarial help
needed to carry out these responsibilities. Under the Administration Agreement,
the Fund pays the Investment Manager an amount equal to, on an annual basis,
..02% of the Fund's managed assets.

    In accordance with the terms of the Administration Agreement and with the
approval of the Fund's Board of Directors, the Investment Manager has caused the
Fund to retain State Street Bank and Trust Company ('State Street Bank') as
sub-administrator under a fund accounting and administration agreement (the
'Sub-Administration Agreement'). Under the Sub-Administration Agreement, State
Street Bank has assumed responsibility for performing certain of the foregoing
administrative functions, including (i) determining the Fund's net asset value
and preparing these figures for publication; (ii) maintaining certain of the
Fund's books and records that are not maintained by the Investment Manager,
custodian or transfer agent; (iii) preparing financial information for the
Fund's income tax returns, proxy statements, stockholders reports, and
Securities and Exchange Commission's filings; and (iv) responding to stockholder
inquiries.


    Under the terms of the Sub-Administration Agreement, the Fund pays State
Street Bank a monthly sub-administration fee. The sub-administration fee paid by
the Fund to State Street Bank is computed on the basis of the managed assets
(which equals the net asset value of the Common Shares, including the
liquidation preference on the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS, plus the principal amount of any borrowings used
for leverage) in the Fund at an annual rate equal to .04% of the first $200
million in assets, .03% of the next $200 million, and .015% of assets in excess
of $400 million, with a minimum fee of $120,000. The aggregate fee paid by the
Fund and the other funds advised by the Investment Manager to State Street Bank
is computed by multiplying the total number of funds by each break point in the
above schedule in order to determine the aggregate break points to be used in
calculating the total fee paid by the Cohen & Steers family of funds (i.e., six
funds at $200 million or $1.2 billion at .04%, etc.). The Fund is then
responsible for its pro rata amount of the aggregate administration fee. For the
fiscal years ended December 31, 2002 and December 31, 2003, the Fund paid
$131,703 and $176,454, respectively, in administration fees to the Investment
Manager.


    The Investment Manager remains responsible for monitoring and overseeing the
performance by State Street Bank, and EquiServe Trust Company, NA as custodian
and transfer and disbursing agent, of their obligations to the Fund under their
respective agreements with the Fund, subject to the overall authority of the
Fund's Board of Directors.

                                       14




<PAGE>


CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR


    State Street Bank, which has its principal business office at 225 Franklin
Street, Boston, MA 02110, has been retained to act as custodian of the Fund's
investments and EquiServe Trust Company, NA, which has its principal business
office at 150 Royall Street, Canton, MA 02021, as the Fund's transfer and
dividend disbursing agent for the Fund's Common Shares. Neither State Street nor
EquiServe has any part in deciding the Fund's investment policies or which
securities are to be purchased or sold for the Fund's portfolio. The Depository
Trust Company ('DTC') will act as securities depository for the AMPS. The Bank
of New York, whose principal place of business is 101 Barclay Street, Floor 7W,
New York, New York 10286, will act as auction agent, transfer agent, dividend
paying agent and registrar for the AMPS.


CODE OF ETHICS

    The Fund and the Investment Manager have adopted codes of ethics in
compliance with Rule 17j-1 under the 1940 Act. The codes of ethics of the Fund
and the Investment Manager, among other things, prohibit management personnel
from investing in REITs and real estate securities, prohibit purchases in an
initial public offering and require pre-approval for investments in any Cohen &
Steers closed-end fund and in private placements. The Fund's Independent
Directors are prohibited from purchasing or selling any security if they knew or
reasonably should have known at the time of the transaction that, within the
most recent 15 days, the security is being or has been considered for purchase
or sale by the Fund, or is being purchased or sold by the Fund.

PRIVACY POLICY

    The Fund is committed to maintaining the privacy of its stockholders and to
safeguarding their nonpublic personal information. The following information is
provided to help you understand what personal information the Fund collects, how
we protect that information, and why in certain cases we may share this
information with others.

    The Fund does not receive any nonpublic personal information relating to the
stockholders who purchase shares through an intermediary that acts as the record
owner of the shares. In the case of stockholders who are record owners of the
Fund, we receive nonpublic personal information on account applications or other
forms. With respect to these stockholders, the Fund also has access to specific
information regarding their transactions in the Fund.

    The Fund does not disclose any nonpublic personal information about its
stockholders or former stockholders to anyone, except as permitted by law or as
is necessary to service stockholder accounts. The Fund restricts access to
nonpublic personal information about its stockholders to Cohen & Steers
employees with a legitimate business need for the information.

PROXY VOTING

    The Fund's Board of Directors has delegated to the Investment Manager the
responsibility for voting proxies on behalf of the Fund, and has determined that
proxies with respect to the Fund's portfolio companies shall be voted in
accordance with Cohen & Steers Capital Management, Inc.'s Statement of Policies
and Procedures Regarding the Voting of Securities (the 'Proxy Voting Policies
and Procedures'). The following is a summary of the Proxy Voting Policies and
Procedures.

    Voting rights are an important component of corporate governance. The
Investment Manager has three overall objectives in exercising voting rights:

        A. Responsibility. The Investment Manager shall seek to ensure that
    there is an effective means in place to hold companies accountable for their
    actions. While management must be accountable to its board, the board must
    be accountable to a company's stockholders. Although accountability can be
    promoted in a variety of ways, protecting stockholder voting rights may be
    among our most important tools.

                                       15




<PAGE>


        B. Rationalizing Management and Stockholder Concerns. The Investment
    Manager seeks to ensure that the interests of a company's management and
    board are aligned with those of the company's stockholders. In this respect,
    compensation must be structured to reward the creation of stockholder value.

        C. Stockholder Communication. Since companies are owned by their
    stockholders, the Investment Manager seeks to ensure that management
    effectively communicates with its owners about the company's business
    operations and financial performance. It is only with effective
    communication that stockholders will be able to assess the performance of
    management and to make informed decisions on when to buy, sell or hold a
    company's securities.

        In exercising voting rights, the Investment Manager shall conduct itself
    in accordance with the general principles set forth below.

        1. The ability to exercise a voting right with respect to a security is
           a valuable right and, therefore, must be viewed as part of the asset
           itself.

        2. In exercising voting rights, the Investment Manager shall engage in a
           careful evaluation of issues that may materially affect the rights of
           stockholders and the value of the security.

        3. Consistent with general fiduciary principles, the exercise of voting
           rights shall always be conducted with reasonable care, prudence and
           diligence.

        4. In exercising voting rights on behalf of clients, the Investment
           Manager conduct itself in the same manner as if it were the
           constructive owner of the securities.

        5. To the extent reasonably possible, the Investment Manager participate
           in each stockholder voting opportunity.

        6. Voting rights shall not automatically be exercised in favor of
           management-supported proposals.

        7. The Investment Manager, and its officers and employees, shall never
           accept any item of value in consideration of a favorable proxy voting
           decision.

    Set forth below are general guidelines that the Investment Manager shall
follow in exercising proxy voting rights:

        Prudence. In making a proxy voting decision, the Investment Manager
    shall give appropriate consideration to all relevant facts and
    circumstances, including the value of the securities to be voted and the
    likely effect any vote may have on that value. Since voting rights must be
    exercised on the basis of an informed judgment, investigation shall be a
    critical initial step.

        Third Party Views. While the Investment Manager may consider the views
    of third parties, it shall never base a proxy voting decision solely on the
    opinion of a third party. Rather, decisions shall be based on a reasonable
    and good faith determination as to how best to maximize stockholder value.

        Stockholder Value. Just as the decision whether to purchase or sell a
    security is a matter of judgment, determining whether a specific proxy
    resolution will increase the market value of a security is a matter of
    judgment as to which informed parties may differ. In determining how a proxy
    vote may affect the economic value of a security, the Investment Manager
    shall consider both short-term and long-term views about a company's
    business and prospects, especially in light of our projected holding period
    on the stock (e.g., the Investment Manager may discount long-term views on a
    short-term holding).

    Set forth below are guidelines as to how specific proxy voting issues shall
be analyzed and assessed. While these guidelines will provide a framework for
our decision making process, the mechanical application of these guidelines can
never address all proxy voting decisions. When new issues arise or old issues
present nuances not encountered before, the Investment Manager must be

                                       16




<PAGE>


guided by its reasonable judgment to vote in a manner that the Investment
Manager deems to be in the best interests of the Fund and its stockholders.

    STOCK-BASED COMPENSATION

    Approval of Plans or Plan Amendments. By their nature, compensation plans
must be evaluated on a case-by-case basis. As a general matter, the Investment
Manager always favors compensation plans that align the interests of management
and stockholders. The Investment Manager generally approves compensation plans
under the following conditions:

        10% Rule. The dilution effect of the newly authorized shares, plus the
    shares reserved for issuance in connection with all other stock related
    plans, generally should not exceed 10%.

        Exercise Price. The minimum exercise price of stock options should be at
    least equal to the market price of the stock on the date of grant.

        Plan Amendments. Compensation plans should not be materially amended
    without stockholder approval.

        Non-Employee Directors. Awards to non-employee directors should not be
    subject to management discretion, but rather should be made under
    non-discretionary grants specified by the terms of the plan.

        Repricing/Replacement of Underwater Options. Stock options generally
    should not be re-priced, and never should be re-priced without stockholder
    approval. In addition, companies should not issue new options, with a lower
    strike price, to make up for previously issued options that are
    substantially underwater. The Investment Manager will vote against the
    election of any slate of directors that, to its knowledge, has authorized a
    company to re-price or replace underwater options during the most recent
    year without stockholder approval.

        Reload/Evergreen Features. The Investment Manager will generally vote
    against plans that enable the issuance of reload options and that provide an
    automatic share replenishment ('evergreen') feature.

        Measures to Increase Executive Long-Term Stock Ownership. The Investment
    Manager supports measures to increase the long-term stock ownership by a
    company's executives. These include requiring senior executives to hold a
    minimum amount of stock in a company (often expressed as a percentage of
    annual compensation), requiring stock acquired through option exercise to be
    held for a certain minimum amount of time, and issuing restricted stock
    awards instead of options. In this respect, the Investment Manager supports
    the expensing of option grants because it removes the incentive of a company
    to issue options in lieu of restricted stock. The Investment Manager also
    supports employee stock purchase plans, although the Investment Manager
    generally believes the discounted purchase price should be at least 85% of
    the current market price.

        Vesting. Restricted stock awards normally should vest over at least a
    two-year period.

        Other stock awards. Stock awards other than stock options and restricted
    stock awards should be granted in lieu of salary or a cash bonus, and the
    number of shares awarded should be reasonable.

    CHANGE OF CONTROL ISSUES

    While the Investment Manager recognizes that a takeover attempt can be a
significant distraction for the board and management to deal with, the simple
fact is that the possibility of a corporate takeover keeps management focused on
maximizing stockholder value. As a result, the Investment Manager opposes
measures that are designed to prevent or obstruct corporate takeovers because
they can entrench current management. The following are the Investment Manager's
guidelines on change of control issues:

        Stockholder Rights Plans. The Investment Manager acknowledges that there
    are arguments for and against stockholder rights plans, also known as
    'poison pills.' Companies should put

                                       17




<PAGE>


    their case for rights plans to stockholders. The Investment Manager
    generally votes against any directors who, without stockholder approval, to
    our knowledge have instituted a new poison pill plan, extended an existing
    plan, or adopted a new plan upon the expiration of an existing plan during
    the past year.

        Golden Parachutes. The Investment Manager opposes the use of accelerated
    employment contracts that result in cash grants of greater than three times
    annual compensation (salary and bonus) in the event of termination of
    employment following a change in control of a company. In general, the
    guidelines call for voting against 'golden parachute' plans because they
    impede potential takeovers that stockholders should be free to consider. The
    Investment Manager generally withholds votes at the next stockholder meeting
    for directors who to its knowledge approved golden parachutes.

        Approval of Mergers. The Investment Manager votes against proposals that
    require a super-majority of stockholders to approve a merger or other
    significant business combination. The Investment Manager supports proposals
    that seek to lower super-majority voting requirements.

    ROUTINE ISSUES

    Director Nominees in a Non-Contested Election. The Investment Manager
generally votes in favor of management proposals on director nominees.

    Director Nominees in a Contested Election. By definition, this type of board
candidate or slate runs for the purpose of seeking a significant change in
corporate policy or control. Therefore, the economic impact of the vote in favor
of or in opposition to that director or slate must be analyzed using a higher
standard normally applied to changes in control. Criteria for evaluating
director nominees as a group or individually should include: performance;
compensation, corporate governance provisions and takeover activity; criminal
activity; attendance at meetings; investment in the company; interlocking
directorships; inside, outside and independent directors; whether the chairman
and CEO titles are held by the same person; number of other board seats; and
other experience. It is impossible to have a general policy regarding director
nominees in a contested election.

    Board Composition. The Investment Manager supports the election of a board
that consists of at least a majority of independent directors. The Investment
Manager generally withholds support for non-independent directors who serve on a
company's audit, compensation and/or nominating committees. The Investment
Manager also generally withholds support for director candidates who have not
attended a sufficient number of board or committee meetings to effectively
discharge their duties as directors.

    Classified Boards. Because a classified board structure prevents
stockholders from electing a full slate of directors at annual meetings, the
Investment Manager generally votes against classified boards. The Investment
Manager votes in favor of stockholder proposals to declassify a board of
directors unless a company's charter or governing corporate law allows
stockholders, by written consent, to remove a majority of directors at any time,
with or without cause.

    Barriers to Stockholder Action. The Investment Manager votes to support
proposals that lower the barriers to stockholder action. This includes the right
of stockholders to call a meeting and the right of stockholders to act by
written consent.

    Cumulative Voting. Having the ability to cumulate votes for the election of
directors -- that is, cast more than one vote for a director about whom they
feel strongly -- generally increases stockholders' rights to effect change in
the management of a corporation. The Investment Manager therefore generally
supports proposals to adopt cumulative voting.

    Ratification of Auditors. Votes generally are cast in favor of proposals to
ratify an independent auditor, unless there is a reason to believe the auditing
firm is no longer performing its required duties or there are exigent
circumstances requiring the Investment Manager to vote against the approval of
the recommended auditor. For example, the Investment Manager's general policy is
to

                                       18




<PAGE>


vote against an independent auditor that receives more than 50% of its total
fees from a company for non-audit services.

    STOCK RELATED ITEMS

    Increase Additional Common Stock. The Investment Manager's guidelines
generally call for approval of increases in authorized shares, provided that the
increase is not greater than three times the number of shares outstanding and
reserved for issuance (including shares reserved for stock-related plans and
securities convertible into common stock, but not shares reserved for any poison
pill plan).

    Votes generally are cast in favor of proposals to authorize additional
shares of stock except where the proposal:

    1. creates a blank check preferred stock; or

    2. establishes classes of stock with superior voting rights.

    Blank Check Preferred Stock. Votes generally are cast in opposition to
management proposals authorizing the creation of new classes of preferred stock
with unspecific voting, conversion, distribution and other rights, and
management proposals to increase the number of authorized blank check preferred
shares. The Investment Manager may vote in favor of this type of proposal when
it receives assurances to its reasonable satisfaction that (i) the preferred
stock was authorized by the board for the use of legitimate capital formation
purposes and not for anti-takeover purposes, and (ii) no preferred stock will be
issued with voting power that is disproportionate to the economic interests of
the preferred stock. These representations should be made either in the proxy
statement or in a separate letter from the company to the Investment Manager.

    Preemptive Rights. Votes are cast in favor of stockholder proposals
restoring limited preemptive rights.

    Dual Class Capitalizations. Because classes of common stock with unequal
voting rights limit the rights of certain stockholders, the Investment Manager
votes against adoption of a dual or multiple class capitalization structure.

    SOCIAL ISSUES

    The Investment Manager believes that it is the responsibility of the board
and management to run a company on a daily basis. With this in mind, in the
absence of unusual circumstances, the Investment Manager does not believe that
stockholders should be involved in determining how a company should address
broad social and policy issues. As a result, the Investment Manager generally
votes against these types of proposals, which are generally initiated by
stockholders, unless the Investment Manager believes the proposal has
significant economic implications.

    OTHER SITUATIONS

    No set of guidelines can anticipate all situations that may arise. The
Investment Manager's portfolio managers and analysts will be expected to analyze
proxy proposals in an effort to gauge the impact of a proposal on the financial
prospects of a company, and vote accordingly. These policies are intended to
provide guidelines for voting. They are not, however, hard and fast rules
because corporate governance issues are so varied.

    PROXY VOTING PROCEDURES

    The Investment Manager maintains a record of all voting decisions for the
period required by applicable laws. In each case in which the Investment Manager
votes contrary to the stated policies set forth in these guidelines, the record
shall indicate the reason for such a vote.

    The Investment Committee of the Investment Manager shall have responsibility
for voting proxies, under the supervision of the Director of Research. The
Director of Research's designee (the 'Designee') shall be responsible for
ensuring that the Investment Committee is aware of all

                                       19




<PAGE>


upcoming proxy voting opportunities. The Designee shall ensure that proxy votes
are properly recorded and that the requisite information regarding each proxy
voting opportunity is maintained. The Investment Manager's General Counsel shall
have overall responsibility for ensuring that the Investment Manager complies
with all proxy voting requirements and procedures.

    RECORDKEEPING

    The Designee shall be responsible for recording and maintaining the
following information with respect to each proxy voted by the Investment
Manager:

       Name of the company

       Ticker symbol

       CUSIP number

       Stockholder meeting date

       Brief identification of each matter voted upon

       Whether the matter was proposed by management or a stockholder

       Whether the Investment Manager voted on the matter

       If the Investment Manager voted, then how the Investment Manager voted

       Whether the Investment Manager voted with or against management

    The Investment Manager's General Counsel shall be responsible for
maintaining and updating the Policies and Procedures, and for maintaining any
records of written client requests for proxy voting information and documents
that were prepared by the Investment Manager and were deemed material to making
a voting decision or that memorialized the basis for the decision.

    The Investment Manager shall rely on the Securities and Exchange
Commission's EDGAR filing system with respect to the requirement to maintain
proxy materials regarding client securities.

    CONFLICTS OF INTEREST

    There may be situations in which the Investment Manager may face a conflict
between its interests and those of its clients or fund stockholders. Potential
conflicts are most likely to fall into three general categories:

      Business Relationships. This type of conflict would occur if the
      Investment Manager or an affiliate has a substantial business relationship
      with the company or a proponent of a proxy proposal relating to the
      company (such as an employee group) such that failure to vote in favor of
      management (or the proponent) could harm the relationship of the
      Investment Manager or its affiliate with the company or proponent. In the
      context of the Investment Manager, this could occur if an affiliate of the
      Investment Manager has a material business relationship with a company
      that Investment Manager has invested in on behalf of the Fund, and the
      Investment Manager is encouraged to vote in favor of management as an
      inducement to acquire or maintain the affiliate's relationship.

      Personal Relationships. The Investment Manager or an affiliate could have
      a personal relationship with other proponents of proxy proposals,
      participants in proxy contests, corporate directors or director nominees.

      Familial Relationships. The Investment Manager or an affiliate could have
      a familial relationship relating to a company (e.g., spouse or other
      relative who serves as a director or nominee of a public company).

    The next step is to identify if a conflict is material. A material matter is
one that is reasonably likely to be viewed as important by the average
stockholder. Materiality will be judged under a two-step approach:

      Financial Based Materiality. The Investment Manager presumes a conflict to
      be non-material unless it involves at least $500,000.

                                       20




<PAGE>


      Non-Financial Based Materiality. Non-financial based materiality would
      impact the members of the Investment Manager's Investment Committee, who
      are responsible for making proxy voting decisions.

    Finally, if a material conflict exists, the Investment Manager shall vote in
accordance with the advice of a proxy voting service.

    The Investment Manager's General Counsel shall have responsibility for
supervising and monitoring conflicts of interest in the proxy voting process
according to the following process:

        Identifying Conflicts. The Investment Manager is responsible for
    monitoring the relationships of the Investment Manager's affiliates for
    purposes of the Investment Manager's Inside Information Policy and
    Procedures. The General Counsel (or his designee) maintains a watch list and
    a restricted list. The Investment Manager's Investment Committee is unaware
    of the content of the watch list and therefore it is only those companies on
    the restricted list, which is made known to everyone at the Investment
    Manager, for which potential concerns might arise. When a company is placed
    on the restricted list, the general counsel (or his designee) shall promptly
    inquire of the Designee as to whether there is a pending proxy voting
    opportunity with respect to that company, and continue to inquire on a
    weekly basis until such time as the company is no longer included on the
    restricted list. When there is a proxy voting opportunity with respect to a
    company that has been placed on the restricted list, the general counsel
    shall inform the Investment Committee that no proxy vote is to be submitted
    for that company until the general counsel completes the conflicts analysis.

    For purposes of monitoring personal or familial relationships, the general
counsel (or his designee) shall receive on at least an annual basis from each
member of the Investment Manager's Investment Committee written disclosure of
any personal or familial relationships with public company directors that could
raise potential conflict of interest concerns. Investment Committee members also
shall agree in writing to advise if (i) there are material changes to any
previously furnished information, (ii) a person with whom a personal or familial
relationship exists is subsequently nominated as a director or (iii) a personal
or familial relationship exists with any proponent of a proxy proposal or a
participant in a proxy contest.

    Identifying Materiality. The General Counsel (or his designee) shall be
responsible for determining whether a conflict is material. He shall evaluate
financial based materiality in terms of both actual and potential fees to be
received. Non-financial based items impacting a member of the Investment
Committee shall be presumed to be material.

    Communication with Investment Committee; Voting of Proxy. If the General
Counsel determines that the relationship between the Investment Manager's
affiliate and a company is financially material, he shall communicate that
information to the members of the Investment Manager's Investment Committee and
instruct them, and the Designee, that the Investment Manager will vote its proxy
based on the advice of a consulting firm engaged by the Investment Manager. Any
personal or familial relationship, or any other business relationship, that
exists between a company and any member of the Investment Committee shall be
presumed to be material, in which case the Investment Manager again will vote
its proxy based on the advice of a consulting firm engaged by the Investment
Manager. The fact that a member of the Investment Committee personally owns
securities issued by a company will not disqualify the Investment Manager from
voting common stock issued by that company, since the member's personal and
professional interests will be aligned.

    In cases in which the Investment Manager will vote its proxy based on the
advice of a consulting firm, the general counsel (or his designee) shall be
responsible for ensuring that the Designee votes proxies in this manner. The
General Counsel will maintain a written record of each instance when a conflict
arises and how the conflict is resolved (e.g., whether the conflict is judged to
be material, the basis on which the materiality decision is made and how the
proxy is voted).


    The Fund is required to file Form N-PX, with its complete proxy voting
record for the 12 months ended June 30th, no later than August 31st of each
year. The Fund's Form N-PX filing for the twelve months ended June 30, 2004 is
available (i) without charge, upon request, by calling the


                                       21




<PAGE>



Fund toll-free at (800) 437-9912 and (ii) on the Securities and Exchange
Commission's website (http://www.sec.gov).


                      PORTFOLIO TRANSACTIONS AND BROKERAGE

    Subject to the supervision of the Directors, decisions to buy and sell
securities for the Fund and negotiation of its brokerage commission rates are
made by the Investment Manager. Transactions on U.S. stock exchanges involve the
payment by the Fund of negotiated brokerage commissions. There is generally no
stated commission in the case of securities traded in the over-the-counter
market but the price paid by the Fund usually includes an undisclosed dealer
commission or mark-up. In certain instances, the Fund may make purchases of
underwritten issues at prices which include underwriting fees.

    In selecting a broker to execute each particular transaction, the Investment
Manager will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Fund on a
continuing basis. Accordingly, the cost of the brokerage commissions to the Fund
in any transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the portfolio execution
services offered. Subject to such policies and procedures as the Directors may
determine, the Investment Manager shall not be deemed to have acted unlawfully
or to have breached any duty solely by reason of its having caused the Fund to
pay a broker that provides research services to the Investment Manager an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, if the Investment Manager determines in good faith that such amount
of commission was reasonable in relation to the value of the research service
provided by such broker viewed in terms of either that particular transaction or
the Investment Manager's ongoing responsibilities with respect to the Fund.
Research and investment information is provided by these and other brokers at no
cost to the Investment Manager and is available for the benefit of other
accounts advised by the Investment Manager and its affiliates, and not all of
the information will be used in connection with the Fund. While this information
may be useful in varying degrees and may tend to reduce the Investment Manager's
expenses, it is not possible to estimate its value and in the opinion of the
Investment Manager it does not reduce the Investment Manager's expenses in a
determinable amount. The extent to which the Investment Manager makes use of
statistical, research and other services furnished by brokers is considered by
the Investment Manager in the allocation of brokerage business but there is no
formula by which such business is allocated. The Investment Manager does so in
accordance with its judgment of the best interests of the Fund and its
stockholders. The Investment Manager may also take into account payments made by
brokers effecting transactions for the Fund to other persons on behalf of the
Fund for services provided to it for which it would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Investment Manager may consider sales of shares of
the Fund as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Fund.

                        DETERMINATION OF NET ASSET VALUE


    The Fund determines the net asset value of its Common Shares daily, as of
the close of trading on the New York Stock Exchange (currently 4:00 p.m. New
York time). Net asset value is computed by dividing the value of all assets of
the Fund (including accrued interest and dividends), less all liabilities
(including accrued expenses, the liquidation preference of the AMPS and the
Series T, Series W, Series TH, Series F and Series M28 AMPS, and dividends
declared but unpaid), by the total number of Common Shares outstanding. Any swap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have a positive or negative value for purposes of calculating
net asset value. Any cap transaction that the Fund enters into may, depending on
the applicable interest rate environment, have no value or a positive value. In


                                       22




<PAGE>



addition, accrued payments to the Fund under such transactions will be assets of
the Fund and accrued payments by the Fund will be liabilities of the Fund.


    For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Directors shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the National Association of
Securities Dealers Automated Quotations, Inc. ('NASDAQ') National List are
valued in a like manner. Portfolio securities traded on more than one securities
exchange are valued at the last sale price on the business day as of which such
value is being determined as reflected on the tape at the close of the exchange
representing the principal market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the Investment
Manager to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the official closing price as reported
by NASDAQ or, in the case of securities not quoted by NASDAQ, the National
Quotation Bureau or such other comparable source as the directors deem
appropriate to reflect their fair market value. However, certain fixed-income
securities may be valued on the basis of prices provided by a pricing service
when such prices are believed by the Board of Directors to reflect the fair
market value of such securities. The prices provided by a pricing service take
into account institutional size trading in similar groups of securities and any
developments related to specific securities. Where securities are traded on more
than one exchange and also over-the-counter, the securities will generally be
valued using the quotations the Board of Directors believes reflect most closely
the value of such securities.

    Any securities for which market quotations are not readily available shall
be valued in accordance with procedures approved by the Board of Directors.


            ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR AMPS


GENERAL


    Securities Depository. The Depository Trust Company ('DTC') will act as the
Securities Depository with respect to the AMPS. One certificate for all of the
AMPS will be registered in the name of Cede & Co., as nominee of the Securities
Depository. Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of shares
of the AMPS contained in the Articles Supplementary. The Fund will also issue
stop-transfer instructions to the transfer agent for the AMPS. Prior to the
commencement of the right of holders of the AMPS (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) to elect a majority of the Fund's
Directors, as described under 'Description of the AMPS -- Voting Rights' in the
Prospectus, Cede & Co. will be the holder of record of the AMPS and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.



    DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of the AMPS, whether for its
own account or as a nominee for another person.


CONCERNING THE AUCTION AGENT

    The auction agent will act as agent for the Fund in connection with
Auctions. In the absence of willful misconduct or gross negligence on its part,
the auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the auction agency agreement between the Fund and the auction agent and will

                                       23




<PAGE>


not be liable for any error of judgment made in good faith unless the auction
agent was grossly negligent in ascertaining the pertinent facts.


    The auction agent may conclusively rely upon, as evidence of the identities
of the holders of the AMPS, the auction agent's registry of holders, and the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under 'The
Auction-Secondary Market Trading and Transfers of the AMPS' in the Prospectus
and notices from the Fund. The auction agent is not required to accept any such
notice for an auction unless it is received by the auction agent by 3:00 p.m.,
New York City time, on the business day preceding such Auction.


    The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.

BROKER-DEALERS


    The auction agent after each auction for the AMPS will pay to each
Broker-Dealer, from funds provided by the Trust, a service charge at the annual
rate of 1/4 of 1% in the case of any auction immediately preceding the dividend
period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealer in the case of any auction immediately preceding a dividend period
of one year or longer, of the purchase price of the AMPS placed by such Broker-
Dealer at such auction. For the purposes of the preceding sentence, the AMPS
will be placed by a Broker-Dealer if such shares were (a) the subject of hold
orders deemed to have been submitted to the auction agent by the Broker-Dealer
and were acquired by such Broker-Dealer for its customers who are beneficial
owners or (b) the subject of an order submitted by such Broker-Dealer that is
(i) a submitted bid of an existing holder that resulted in the existing holder
continuing to hold such shares as a result of the auction or (ii) a submitted
bid of a potential bidder that resulted in the potential holder purchasing such
shares as a result of the auction or (iii) a valid hold order.


    The Fund may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.

    The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Trust notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.

                           S&P AND MOODY'S GUIDELINES

    The descriptions of the S&P and Moody's Guidelines contained in this SAI do
not purport to be complete and are subject to and qualified in their entireties
by reference to the Articles Supplementary. A copy of the Articles Supplementary
is filed as an exhibit to the registration statement of which the Prospectus and
this SAI are a part and may be inspected, and copies thereof may be obtained, as
described under 'Further Information' in the Prospectus.


    The composition of the Fund's portfolio reflects guidelines (referred to
herein as the 'Rating Agency Guidelines') established by S&P and Moody's in
connection with the Fund's receipt of a rating of 'AAA' and 'Aaa' from S&P and
Moody's, respectively, for the AMPS. These Rating Agency Guidelines relate,
among other things, to industry and credit quality characteristics of issuers
and diversification requirements and specify various Discount Factors for
different types of


                                       24




<PAGE>



securities (with the level of discount greater as the rating of a security
becomes lower). Under the Rating Agency Guidelines, certain types of securities
in which the Fund may otherwise invest consistent with its investment strategy
are not eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio. Such instruments include, for example, private placements
(other than Rule 144A Securities) and other securities not within the investment
guidelines. Accordingly, although the Fund reserves the right to invest in such
securities to the extent set forth herein, they have not and it is anticipated
that they will not constitute a significant portion of the Fund's portfolio.



    The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the AMPS (and the Series T,
Series W, Series TH, Series F and Series M28 AMPS) plus specified liabilities,
payment obligations and other amounts, as of periodic Valuation Dates. The
Rating Agency Guidelines also require the Fund to maintain asset coverage for
the AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS)
on a non-discounted basis of at least 200% as of the end of each month, and the
1940 Act requires this asset coverage as a condition to paying dividends or
other distributions on Common Shares. S&P and Moody's have agreed that the
auditors must certify once per year the asset coverage test on a date randomly
selected by the auditor. The effect of compliance with the Rating Agency
Guidelines may be to cause the Fund to invest in higher quality assets and/or to
maintain relatively substantial balances of highly liquid assets or to restrict
the Fund's ability to make certain investments that would otherwise be deemed
potentially desirable by the Investment Manager, including private placements of
other than Rule 144A Securities (as defined herein). The Rating Agency
Guidelines are subject to change from time to time with the consent of the
relevant rating agency and would not apply if the Fund in the future elected not
to use investment leverage consisting of senior securities rated by one or more
rating agencies, although other similar arrangements might apply with respect to
other senior securities that the Fund may issue.


    The Fund intends to maintain, at specified times, a Discounted Value for its
portfolio at least equal to the amount specified by each rating agency (the
'Preferred Shares Basic Maintenance Amount'). S&P and Moody's have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable Rating Agency's
Guidelines, all or a portion of such holding's value will not be included in the
calculation of Discounted Value (as defined by such rating agency).

    The Rating Agency Guidelines do not impose any limitations on the percentage
of Fund assets that may be invested in holdings not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. The amount of
such assets included in the portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the assets included in the
portfolio which are eligible for inclusion in the Discounted Value of the
portfolio under the Rating Agency Guidelines.

    As described by S&P, a preferred stock rating of AAA indicates strong asset
protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful. As described by Moody's, an
issue of preferred stock which is rated 'Aaa' is considered to be top-quality
preferred stock with good asset protection and the least risk of dividend
impairment within the universe of preferred stocks.


    Ratings are not recommendations to purchase, hold or sell AMPS, inasmuch as
the rating does not comment as to market price or suitability for a particular
investor. The rating is based on current information furnished to S&P and
Moody's by the Fund and obtained by S&P and Moody's from other sources. The
rating may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information.


                                       25




<PAGE>


S&P GUIDELINES

    Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the Discounted Value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
Discounted Value) of the Fund's eligible assets at such time.


    The Preferred Shares Basic Maintenance Amount includes the sum of
(1) $25,000 times the number of AMPS (and the Series T, Series W, Series TH,
Series F and Series M28 AMPS) then outstanding and (2) certain accrued and
projected payment obligations of the Fund. Upon any failure to maintain the
required Discounted Value, the Fund would seek to alter the composition of its
portfolio to reestablish required asset coverage within the specified ten
Business Day cure period, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities. To the
extent any such failure is not cured in a timely manner, the holders of the AMPS
will acquire certain rights. See 'Description of AMPS -- Asset Maintenance.'
'Business Day,' as used in the Prospectus and this SAI, means each Monday,
Tuesday, Wednesday, Thursday and Friday that is a day on which the New York
Stock Exchange is open for trading and that is not a day on which banks in New
York City are authorized or required by law or executive order to close.


    Under S&P guidelines, for purposes of determining the Discounted Value of
any S&P Eligible Asset, the percentage determined as follows:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
Minimum Number Of:
    Issuers(1)......................................     44        40        44        30
    Real Estate Industry/Property Sectors(2)........     10         8         7         7

Percent of Assets in:
    Largest Real Estate Industry/Property Sector....     17%       25%       30%       30%
    2nd Largest Real Estate Industry/Property
      Sector........................................     15%       20%       25%       25%
    3rd Largest Real Estate Industry/Property
      Sector........................................     12%       15%       15%       15%
    4th Largest Real Estate Industry/Property
      Sector........................................     12%       12%       12%       12%

S&P Discount Factor:
    common stock....................................    190%      208%      223%      231%
    preferred stock(3)..............................    157%      167%      174%      178%
</Table>

---------

(1) Three issuers may each constitute 6% of assets and four issuers may each
    constitute 5% of assets.

(2) As defined by the National Association of Real Estate Investment Trusts
    ('NAREIT').

(3) Applies to preferred stock of real estate companies, subject to
    diversification guidelines whereby at least 34% of the preferred assets are
    rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
    Moody's equivalent) or greater; and the balance of the preferred assets is
    rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
    common stock will apply to preferred stock which is not in compliance with
    the diversification standard.

                                       26




<PAGE>


    (b) Debt Securities:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
Bond Rating(1):
    A...............................................    116%      117%      119%      118%
    A-..............................................    117%      119%      120%      120%
    BBB+............................................    119%      121%      122%      122%
    BBB.............................................    121%      122%      124%      124%
    BBB-............................................    122%      124%      126%      126%
    BB+.............................................    127%      130%      133%      132%
    BB..............................................    133%      137%      141%      139%
    BB-.............................................    139%      144%      149%      147%
    B+..............................................    152%      159%      166%      164%
    B...............................................    163%      172%      182%      179%
    B-..............................................    176%      188%      202%      197%
    CCC+............................................    198%      212%      230%      224%
    CCC.............................................    236%      262%      295%      284%
</Table>

---------

(1) The S&P Discount Factors for debt securities shall also be applied to any
    interest rate swap or cap, in which case the rating of the counterparty
    shall determine the appropriate rating category.

(2) If a security is unrated by S&P but is rated by Moody's, the conversion
    chart under S&P OC Test Rating chart will apply.

S&P's Diversification Standard Levels 1 through 4 correspond to the portfolio's
diversification and impact the level of asset coverage needed to qualify for a
particular rating from S&P. The diversification of the Fund is measured by the
number of issuers and REIT sub-sectors within the Fund's portfolio. A high
number of issuers and sub-sectors corresponds to a more diversified Fund. The
more diversified the Fund is, the lower the asset coverage needed to qualify for
a particular S&P rating. The Fund must fall within Level 4, at a minimum, to
qualify for the AAA rating and, accordingly, must have a minimum number of
issuers and property sub-sectors in its portfolio.

    (c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:

<Table>
<S>                                                           <C>
52-week Treasury Bills*.....................................  102%
Two-Year Treasury Notes.....................................  104%
Three-Year Treasury Notes...................................  108%
Five-Year Treasury Notes....................................  109%
10-Year Treasury Notes......................................  115%
30-Year Treasury Bonds......................................  126%
</Table>

---------

* Treasury Bills with maturities of less than 52 weeks will be discounted at the
  appropriate Short-Term Money Market Instrument levels. Treasury Bills that
  mature the next day are considered cash equivalents and are valued at 100%.

    Treasury Strips: Treasury interest-only Strips will apply the discount
factor for the Treasury category set forth above following the maturity of the
Treasury Strip, e.g., a Treasury interest-only Strip with a maturity of seven
years will apply the discount factor for the U.S. Treasury securities with a
10-year maturity. Treasury principal-only Strips will apply the discount factor
that is two categories greater than its maturity, e.g., a Treasury
principal-only Strip with a maturity of seven years will apply the discount
factor for U.S. Treasury securities with a 30-year maturity.

    (d) Cash and Cash Equivalents.

    The S&P Discount Factor applied to Cash and Cash Equivalents will be (A)
100%, and (B) 102% for those portfolio securities which mature in 181 to 360
calendar days.

    Under current S&P guidelines, the following are considered to be S&P
Eligible Assets:

        (a) Common Stock, Preferred Stock and any debt securities of REITs and
    Real Estate Companies;

                                       27




<PAGE>



        (b) Interest rate swaps entered into according to International Swap
    Dealers Association ('ISDA') standards if (i) the counterparty to the swap
    transaction has a short-term rating of not less than A-1 or, if the
    counterparty does not have a short-term rating, the counterparty's senior
    unsecured long-term debt rating is A+ or higher and (ii) the original
    aggregate notional amount of the interest rate swap transaction or
    transactions is not to be greater than the liquidation preference of the
    AMPS (and the Series T, Series W, Series TH, Series F and Series M28 AMPS)
    originally issued. The interest rate swap transaction will be marked-to-
    market daily;


        (c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);

        (d) Short-Term Money Market Instruments so long as (A) such securities
    are issued by an institution, which, at the time of investment, is a
    permitted bank (including commercial paper issued by a corporation which
    complies with the applicable assumptions that follow) ('permitted bank'
    means any bank, domestic or foreign, whose commercial paper is rated
    A-1+) provided, however, that Short-Term Money Market Instruments with
    maturities of 30 days of less, invested in an institution rated A-1 may
    comprise up to 20% of eligible portfolio assets; and

        (e) Cash, which is any immediately available funds in U.S. dollars or
    any currency other than U.S. dollars which is a freely convertible currency
    and Cash Equivalents, which means investments (other than Cash) that are one
    or more of the following obligations or Securities: (i) U.S. Government
    Securities; (ii) certificates of deposit of, banker's acceptances issued by
    or money market accounts in any depository institution or trust company
    incorporated under the laws of the United States of America or any state
    thereof and subject to supervision and examination by Federal and/or state
    banking authorities, so long as the deposits offered by such depository
    institution or trust company at the time of such investments are rated and
    have a rating of at least 'P-1' by Moody's and 'A-1+' by S&P (or, in the
    case of the principal depository institution in a holding company system
    whose deposits are not so rated, the long term debt obligations of such
    holding company are rated and such rating is at least 'A-1' by Moody's and
    'A+' by S&P); (iii) commercial paper issued by any depository institution or
    trust company incorporated under the laws of the United States of America or
    any state thereof and subject to supervision and examination by Federal
    and/or state banking authorities, or any corporation incorporated under the
    laws of the United States of America or any state thereof, so long as the
    commercial paper of such issuer is rated and has at the time of such
    investment a short term rating of at least 'P-1' by Moody's and 'A-1+' by
    S&P on its commercial paper; (iv) securities bearing interest or sold at a
    discount issued by any corporation incorporated under the laws of the United
    States of America or any state thereof the obligations of which at the time
    of such investment are rated and that have a credit rating of at least 'P-1'
    by Moody's and 'A-1+' by S&P either at the time of such investment or the
    making of a contractual commitment providing for such investment;
    (v) shares of any money market fund organized under the laws of a
    jurisdiction other than the United States, so long as such money market fund
    is rated and has at the time of such investment a short-term rating of at
    least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and ownership of such
    investments will not cause the issuer to become engaged in a trade or
    business within the United States for U.S. Federal income tax purposes or
    subject the issuer to tax on a net income basis; and (vi) unleveraged
    overnight repurchase obligations on customary terms with respect to
    investments described in clauses (i) through (iv) above entered into a
    depository institution, trust company or corporation that has a short-term
    rating of at least 'A-1+' by S&P; provided, that (i) in no event shall Cash
    Equivalents include any obligation that provides for payment of interest
    alone; (ii) Cash Equivalents referred to in clauses (ii) and (iii) above
    shall mature within 183 days of issuance; (iii) if either Moody's or S&P
    changes its rating system, then any ratings included in this definition
    shall be deemed to be an equivalent rating in a successor rating category of
    Moody's or S&P, as the case may be; (iv) if either Moody's or S&P is not in
    the business of rating securities, then any ratings included in this
    definition shall be deemed to be an equivalent rating from another Rating
    Agency; (v) Cash Equivalents (other than U.S. Government Securities or money
    market funds maintained by the Custodian)

                                       28




<PAGE>


    shall not include any such investment of more than $100 million in any
    single issuer; and (vi) in no event shall Cash Equivalents include any
    obligation that is not denominated in Dollars, any synthetic securities, any
    Securities with ratings containing an 'r' subscript, any IOs or any POs
    (other than commercial paper with a maturity within 183 days of issuance).

MOODY'S GUIDELINES

    For purposes of calculating the Discounted Value of the Fund's portfolio
under current Moody's guidelines, the fair market value of portfolio securities
eligible for consideration under such guidelines ('Moody's Eligible Assets')
must be discounted by certain discount factors set forth below ('Moody's
Discount Factors'). The Discounted Value of a portfolio security under Moody's
guidelines is the Market Value thereof, determined as specified by Moody's,
divided by the Moody's Discount Factor. The Moody's Discount Factor with respect
to securities other than those described below will be the percentage provided
in writing by Moody's.

    The following Discount Factors apply to portfolio holdings as described
below, subject to diversification, issuer size and other requirements, in order
to constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                              DISCOUNT FACTOR(1)(2)(3)
                                                              ------------------------
<S>                                                           <C>
Common Stock of REITs.......................................            154%
Preferred Stock of REITs
    with Senior Implied Moody's (or S&P) rating:............            154%
    without Senior Implied Moody's (or S&P) rating:.........            208%
Preferred Stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P) rating:............            208%
    without Senior Implied Moody's (or S&P) rating:.........            250%
</Table>

---------

(1) A Discount Factor of 250% will be applied to those assets in a single
    Moody's Real Estate Industry/Property Sector Classification which exceed 30%
    of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
    Assets.

(2) A Discount Factor of 250% will be applied if dividends on such securities
    have not been paid consistently (either quarterly or annually) over the
    previous three years, or for such shorter time period that such securities
    have been outstanding.

(3) A Discount Factor of 250% will be applied if the market capitalization
    (including common stock and preferred stock) of an issuer is below $500
    million.

    (b) Debt Securities of REITs and Other Real Estate Companies:

<Table>
<Caption>
                TERMS OF
              MATURITY OF
             NON-INVESTMENT
              GRADE BONDS                 Aaa     Aa     A     Baa     Ba     B     NR(1)
              -----------                 ---     --     -     ---     --     -     -----
<S>                                       <C>    <C>    <C>    <C>    <C>    <C>    <C>
1 year or less                            109%   112%   115%   118%   137%   150%   250%
2 years or less (but longer than 1 year)  115%   118%   122%   125%   146%   160%   250%
3 years or less (but longer than 2
  years)                                  120%   123%   127%   131%   153%   168%   250%
4 years or less (but longer than 3
  years)                                  126%   129%   133%   138%   161%   176%   250%
5 years or less (but longer than 4
  years)                                  132%   135%   139%   144%   168%   185%   250%
7 years or less (but longer than 5
  years)                                  139%   143%   147%   152%   179%   197%   250%
10 years or less (but longer than 7
  years)                                  145%   150%   155%   160%   189%   208%   250%
15 years or less (but longer than 10
  years)                                  150%   155%   160%   165%   196%   216%   250%
20 years or less (but longer than 15
  years)                                  150%   155%   160%   165%   196%   228%   250%
30 years or less (but longer than 20
  years)                                  150%   155%   160%   165%   196%   229%   250%
Greater than 30 years                     165%   173%   181%   189%   205%   240%   250%
</Table>

---------


(1) Unless conclusions regarding liquidity risk as well as estimates of both the
    probability and severity of default for the corporation's or municipal
    issuer's assets can be derived from other sources as well as combined with a
    number of sources as presented by the Fund to Moody's, securities rated
    below B by Moody's and unrated securities, which are securities rated by
    neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
    Assets. If a corporate or

                                               (footnote continued on next page)

                                       29




<PAGE>


(footnote continued from previous page)


    municipal debt security is unrated by Moody's, S&P or Fitch, the Fund will
    use the percentage set forth under 'Below B and Unrated' in the Corporate or
    Municipal Debt Tables. Ratings assigned by S&P or Fitch are generally
    accepted by Moody's at face value. However, adjustments to face value may be
    made to particular categories of credits for which the S&P and/or Fitch
    rating does not seem to approximate a Moody's rating equivalent. Split rated
    securities assigned by S&P and Fitch will be accepted at the lower of the
    two ratings.


    (c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):

<Table>
<Caption>
                                                 U.S. TREASURY SECURITIES   U.S. TREASURY STRIPS
REMAINING TERM TO MATURITY                           DISCOUNT FACTOR          DISCOUNT FACTOR
--------------------------                           ---------------          ---------------
<S>                                              <C>                        <C>
1 year or less                                             107%                     107%
2 years or less (but longer than 1 year)                   113%                     115%
3 years or less (but longer than 2 years)                  118%                     121%
4 years or less (but longer than 3 years)                  123%                     128%
5 years or less (but longer than 4 years)                  128%                     135%
7 years or less (but longer than 5 years)                  135%                     147%
10 years or less (but longer than 7 years)                 141%                     163%
15 years or less (but longer than 10 years)                146%                     191%
20 years or less (but longer than 15 years)                154%                     218%
30 years or less (but longer than 20 years)                154%                     244%
</Table>

    (d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.

    Under current Moody's guidelines, the following are considered to be Moody's
Eligible Assets:

           (a) Common Stock, Preferred Stock and any debt security of REITs and
       Other Real Estate Companies. (i) Common stock of REITs and preferred
       stock and any debt security of REITs and Other Real Estate Companies: (A)
       which comprise at least 7 of the 14 Moody's Real Estate Industry/Property
       Sector Classifications ('Moody's Sector Classifications') listed below
       and of which no more than 35% may constitute a single such
       classification; (B) which in the aggregate constitute at least 40
       separate issues of common stock, preferred stock, and debt securities,
       issued by at least 30 issuers; (C) issued by a single issuer which in the
       aggregate constitute no more than 7.0% of the Market Value of Moody's
       Eligible Assets, and (D) issued by a single issuer which, with respect to
       50% of the Market Value of Moody's Eligible Assets, constitute in the
       aggregate no more than 5% of Market Value of Moody's Eligible Assets; and

           (ii) Unrated debt securities issued by an issuer which: (A) has not
       filed for bankruptcy within the past three years; (B) is current on all
       principal and interest on its fixed income obligations; (C) is current on
       all preferred stock dividends; (D) possesses a current, unqualified
       auditor's report without qualified, explanatory language and (E) in the
       aggregate do not exceed 10% of the discounted Moody's Eligible Assets;


           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if (i) the counterparty to the
       swap transaction has a short-term rating of not less than P-1 by Moody's
       or A-1 by S&P or, if the counterparty does not have a short-term rating,
       the counterparty's senior unsecured long-term debt rating is A3 or higher
       by Moody's or A+ or higher by S&P; (ii) the original aggregate notional
       amount of the interest rate swap transaction or transactions is not to be
       greater than the liquidation preference of the AMPS (and the Series T,
       Series W, Series TH,


                                       30




<PAGE>



       Series F and Series M28 AMPS) originally issued; (iii) the interest rate
       swap transaction will be marked-to-market daily; (iv) an interest rate
       swap that is in-the-money is discounted at the counterparty's corporate
       debt rating for the maturity of the swap for purposes of calculating
       Moody's Eligible Assets; and (v) an interest rate swap that is out-
       of-the money includes that negative mark-to-market amount as indebtedness
       for purposes of calculating the Preferred Shares Basic Maintenance
       amount;


           (c) U.S. Treasury Securities and Treasury Strips (as defined by
       Moody's);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are rated at least P-1, (B) in the case of demand deposits,
       time deposits and overnight funds, the supporting entity is rated at
       least A2, or (C) in all other cases, the supporting entity (1) is rated
       A2 and the security matures within one month, (2) is rated A1 and the
       security matures within three months or (3) is rated at least Aa3 and the
       security matures within six months; provided, however, that for purposes
       of this definition, such instruments (other than commercial paper rated
       by S&P and not rated by Moody's) need not meet any otherwise applicable
       Moody's rating criteria; and


           (e) Cash (including, for this purpose, interest and dividends due on
       assets rated (A) Baa3 or higher by Moody's if the payment date is within
       five Business Days of the Valuation Date, (B) A2 or higher if the payment
       date is within thirty days of the Valuation Date, and (C) A1 or higher if
       the payment date is within 49 days of the relevant valuation date) and
       receivables for Moody's Eligible Assets sold if the receivable is due
       within five Business Days of the Valuation Date, and if the trades which
       generated such receivables are (A) settled through clearing house firms
       with respect to which the Fund has received prior written authorization
       from Moody's or (B) (1) with counterparties having a Moody's long-term
       debt rating of at least Baa3 or (2) with counterparties having a Moody's
       Short-Term Money Market Instrument rating of at least P-1.


    See the Articles Supplementary of the Fund for further detail on the above
Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.


    The foregoing Rating Agency Guidelines are subject to change from time to
time. The Fund may, but it is not required to, adopt any such change. Nationally
recognized rating agencies other than S&P and Moody's may also from time to time
rate the AMPS; any nationally recognized rating agency providing a rating for
the AMPS may, at any time, change or withdraw any such rating.


                             U.S. FEDERAL TAXATION

    The following is only a summary of certain U.S. federal income tax
considerations generally affecting the Fund and its stockholders. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its
stockholders, and the following discussion is not intended as a substitute for
careful tax planning. Stockholders should consult with their own tax advisers
regarding the specific federal, state, local, foreign and other tax consequences
of investing in the Fund.

TAXATION OF THE FUND


    The Fund has elected to be taxed as, and intends to qualify annually as, a
regulated investment company under Subchapter M of the Code. As a regulated
investment company, the Fund generally is not subject to U.S. federal income tax
on the portion of its investment company taxable income (as that term is defined
in the Code, but determined without regard to any 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 it distributes to stockholders, provided that it
distributes at least 90% of the sum of its investment company taxable income and
any net tax-exempt interest income for the taxable year (the 'Distribution
Requirement'), and satisfies certain other requirements of the Code that are
described below. The Fund intends to make sufficient


                                       31




<PAGE>



distributions of its investment company taxable income each taxable year to meet
the Distribution Requirement.


    In addition to satisfying the Distribution Requirement and an asset
diversification requirement discussed below, a regulated investment company must
derive at least 90% of its gross income for each taxable year from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies.


    In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of any such issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of any such
issuer), and no more than 25% of the value of its total assets may be invested
in the securities (other than U.S. Government securities and securities of other
regulated investment companies) of any one issuer, or of two or more issuers
which the Fund controls and which are engaged in the same or similar or related
trades or businesses. The American Jobs Creation Act of 2004 (the 'Act'), which
the President recently signed into law, provides that for taxable years of a
regulated investment company beginning after October 22, 2004, net income
derived from an interest in a 'qualified publicly traded partnership,' as
defined in the Code, will be treated as qualifying income for purposes of the
90% gross income requirement described above. In addition, for the purposes of
the diversification requirements described above, the outstanding voting
securities of any issuer includes the equity securities of a qualified publicly
traded partnership, and no more than 25% of the value of a regulated investment
company's total assets may be invested in the securities of one or more
qualified publicly traded partnerships. The Act also provides that the separate
treatment for publicly traded partnerships under the passive loss rules of the
Code applies to a regulated investment company holding an interest in a
qualified publicly traded partnership, with respect to items attributable to
such interest.



    Upon any failure to meet the asset coverage requirements of the 1940 Act,
the Fund will be required (i) to suspend distributions to holders of Common
Shares, and (ii) under certain circumstances to partially redeem the AMPS in
order to maintain or restore the requisite asset coverage, either of which could
prevent the Fund from making distributions required to qualify as a regulated
investment company for U.S. federal income tax purposes and to avoid the excise
taxes discussed below. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
AMPS might restore asset coverage. If asset coverage were restored, the Fund
would again be able to pay dividends and depending on the circumstances, could
requalify or avoid disqualification as a regulated investment company and avoid
the excise taxes discussed below.


    If for any taxable year the Fund does not qualify as a regulated investment
company or satisfy the Distribution Requirement, all of its taxable income
(including its net capital gain) will be subject to U.S. federal income tax at
regular corporate rates without any deduction for distributions to stockholders,
and such distributions will be taxable as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. Such distributions
generally will be eligible (i) for the dividends received deduction in the case
of corporate stockholders and (ii) for treatment as qualified dividend income in
the case of individual stockholders.

EXCISE TAX ON REGULATED INVESTMENT COMPANIES

    A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in a calendar year an amount equal to the sum of (1)
98% of its ordinary taxable income for the calendar year, (2) 98% of its capital
gain net income (i.e., capital gains in excess of capital losses) for the
one-year period ended on October 31 of such calendar year, and (3) any

                                       32




<PAGE>


ordinary taxable income and capital gain net income for previous years that was
not distributed or taxed to the regulated investment company during those years.
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by the Fund in October, November or December with a
record date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxed to stockholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received. To prevent the application of the excise
tax, the Fund intends to make its distributions in accordance with the calendar
year distribution requirement.

DISTRIBUTIONS


    Based in part on the lack of any present intention on the part of the Fund
to redeem or purchase the AMPS at any time in the future, the Fund believes that
under present law the AMPS will constitute stock of the Fund and distributions
with respect to the AMPS (other than distributions in redemption of the AMPS
that are treated as exchanges of stock under Section 302(b) of the Code) thus
will constitute dividends to the extent of the Fund's current or accumulated
earnings and profits as calculated for U.S. federal income tax purposes. Such
dividends generally will be taxable as ordinary income to holders (other than
distributions of qualified dividend income and capital gain dividends, as
described below). If a portion of the Fund's income consists of qualifying
dividends paid by U.S. corporations (other than REITs), a portion of the
dividends paid by the Fund to corporate stockholders, if properly designated,
may qualify for the dividends received deduction. In addition, for taxable years
beginning on or before December 31, 2008, distributions of investment income
designated by the Fund as derived from qualified dividend income will be taxed
in the hands of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met by both the Fund and
the stockholder. The Fund does not expect a significant portion of Fund
distributions to be eligible for the dividends received deduction or derived
from qualified dividend income. The foregoing discussion relies in part on a
published ruling of the IRS stating that certain preferred stock similar in
many material respects to the AMPS represents equity. The following discussion
assumes such treatment will apply. It is possible, however, that the IRS might
take a contrary position asserting, for example, that the AMPS constitute debt
of the Fund. If this position were upheld, the discussion of the treatment of
distributions above would not apply. Instead, distributions by the Fund to
holders of AMPS would constitute interest, whether or not such distributions
exceeded the earnings and profits of the Fund, would be included in full in
the income of the recipient, would be taxed as ordinary income and none of
the distributions would be treated as capital gain dividends or as qualified
dividend income.


    The Fund may either retain or distribute to stockholders its net capital
gain for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it generally will be taxable to individual stockholders at long-term
capital gains rates regardless of the length of time the stockholders have held
their shares. Conversely, if the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the applicable corporate tax rate. In such event, it is expected
that the Fund also will elect to treat such gain as having been distributed to
stockholders. As a result, each stockholder will be required to report his or
her pro rata share of such gain on his or her tax return as long-term capital
gain, will be entitled to claim a tax credit for his or her pro rata share of
tax paid by the Fund on the gain, and will increase the tax basis for his or her
shares by an amount equal to the deemed distribution less the tax credit.

    Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
taxable years beginning on or before December 31, 2008.

    Distributions by the Fund in excess of the Fund's current and accumulated
earnings and profits will be treated as a return of capital to the extent of
(and in reduction of) the stockholder's

                                       33




<PAGE>


tax basis in his or her shares; any such return of capital distributions in
excess of the stockholder's tax basis will be treated as gain from the sale of
his or her shares, as discussed below.

    Distributions by the Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund. If the NAV at the time a stockholder purchases
shares of the Fund reflects undistributed income or gain, distributions of such
amounts will be taxable to the stockholder in the manner described above, even
though such distributions economically constitute a return of capital to the
stockholder.


    The IRS currently requires that a regulated investment company that has two
or more classes of stock allocate to each such class proportionate amounts of
each type of its income (such as ordinary income, capital gains, dividends
qualifying for the dividends received deduction, qualified dividend income,
interest-related dividends and short-term capital gain dividends) based upon the
percentage of total dividends paid out of current or accumulated earnings and
profits to each class for the tax year. Accordingly, the Fund intends each year
to allocate capital gain dividends, dividends qualifying for the dividends
received deduction, dividends derived from qualified dividend income,
interest-related dividends and short-term capital gain dividends, if any,
between its Common Shares, the AMPS and the Series T, Series W, Series TH,
Series F and Series M28 AMPS in proportion to the total dividends paid out of
current or accumulated earnings and profits to each class with respect to such
tax year. Distributions in excess of the Fund's current and accumulated earnings
and profits, if any, however, will not be allocated proportionately among the
Common Shares, the AMPS and the Series T, Series W, Series TH, Series F and
Series M28 AMPS. Since the Fund's current and accumulated earnings and profits
will first be used to pay dividends on the AMPS (and the Series T, Series W,
Series TH, Series F and Series M28 AMPS) distributions in excess of such
earnings and profits, if any, will be made disproportionately to holders of
Common Shares.


SALE OF SHARES


    A stockholder generally will recognize gain or loss on the sale or exchange
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale and the stockholder's adjusted tax basis in the shares. In general,
any such gain or loss will be considered capital gain or loss if the shares are
held as capital assets, and gain or loss will be long-term or short-term,
depending upon the stockholder's holding period for the shares. Generally, a
stockholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. However, any capital loss arising from the
sale of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
stockholder (or amounts credited to the stockholder as undistributed capital
gains) with respect to such shares. Also, any loss realized on a sale or
exchange of shares will be disallowed to the extent the shares disposed of are
replaced with other substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the shares are disposed of. In
such case, the tax basis of the acquired shares will be adjusted to reflect the
disallowed loss. The ability to otherwise deduct capital losses may be subject
to other limitations under the Code.


NATURE OF FUND'S INVESTMENTS


    Certain of the Fund's investment practices are subject to special and
complex U.S. federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur, (vi) adversely alter the characterization of
certain complex financial transactions and (vii) produce income that will not
qualify as good income under the 90% annual gross income test described above.
The Fund will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these provisions.


                                       34




<PAGE>


ORIGINAL ISSUE DISCOUNT SECURITIES

    Investments by the Fund in zero coupon or other discount securities will
result in income to the Fund equal to a portion of the excess of the face value
of the securities over their issue price (the original issue discount') each
year that the securities are held, even though the Fund receives no cash
interest payments. This income is included in determining the amount of income
which the Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to borrow money or dispose of other
securities to be able to make distributions to its stockholders.

INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS

    The Fund may invest in REITs that hold residual interests in real estate
mortgage investment conduits ('REMICs'). Under Treasury regulations that have
not yet been issued, but may apply retroactively, a portion of the Fund's income
from a REIT that is attributable to the REIT's residual interest in a REMIC
(referred to in the Code as an 'excess inclusion') will be subject to U.S.
federal income tax in all events. These regulations are also expected to provide
that excess inclusion income of a regulated investment company, such as the
Fund, will be allocated to stockholders of the regulated investment company in
proportion to the dividends received by such stockholders, with the same
consequences as if the stockholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to stockholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign stockholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
'disqualified organization' (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest U.S. federal income tax rate imposed on corporations.
The Investment Manager does not intend on behalf of the Fund to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.

BACKUP WITHHOLDING


    If a stockholder fails to furnish a correct taxpayer identification number,
or fails to make required certifications or has been notified by the IRS that
they are subject to 'backup withholding,' the stockholder may be subject to a
'backup withholding' tax at a current rate of 28% with respect to (1) taxable
dividends and (2) the proceeds of any sales or repurchases of AMPS. An
individual's taxpayer identification number is generally his or her social
security number. Corporate stockholders and other stockholders specified in the
Code or the Treasury regulations promulgated thereunder are exempt from backup
withholding. Backup withholding is not an additional tax and any amounts
withheld will be allowed as a refund or a credit against a taxpayer's U.S.
federal income tax liability if the appropriate information is provided to the
IRS.


FOREIGN STOCKHOLDERS

    U.S. taxation of a stockholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ('foreign stockholder') as defined in the Code, depends
on whether the income of the Fund is 'effectively connected' with a U.S. trade
or business carried on by the stockholder.


    Income Not Effectively Connected. If the income from the Fund is not
'effectively connected' with a U.S. trade or business carried on by the foreign
stockholder, distributions of investment company taxable income, including any
dividends designated as qualified dividend income, will generally be subject to
a U.S. tax of 30% (or lower treaty rate, except in the case of any excess


                                       35




<PAGE>



inclusion income allocated to the stockholder (see 'U.S. Federal
Taxation -- Investments in Real Estate Investment Trusts' above)), which tax is
generally withheld from such distributions. Under the Act, a new exemption is
created under which U.S. source withholding taxes are no longer imposed on
dividends paid by regulated investment companies to the extent the dividends are
designated as 'interest-related dividends' or 'short-term capital gain
dividends.' Under this exemption, interest-related dividends and short-term
capital gain dividends generally represent distributions of interest or
short-term capital gains that would not have been subject to U.S. withholding
tax at the source if they had been received directly by a foreign person, and
that satisfy certain other requirements. The exemption applies to dividends with
respect to taxable years of regulated investment companies beginning after
December 31, 2004 and before January 1, 2008.



    Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will generally not be subject to U.S.
federal withholding tax at the rate of 30% (or lower treaty rate) unless the
foreign stockholder is a nonresident alien individual and is physically present
in the United States for more than 182 days during the taxable year and meets
certain other requirements. However, this 30% tax on capital gains of
nonresident alien individuals who are physically present in the United States
for more than the 182 day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes; in
that case, he or she would generally be subject to U.S. federal income tax on
his or her worldwide income at the graduated rates applicable to U.S. citizens,
rather than the 30% U.S. federal withholding tax. In the case of a foreign
stockholder who is a nonresident alien individual, the Fund may be required to
backup withhold U.S. federal income tax on distributions of net capital gain
unless the foreign stockholder certifies his or her non-U.S. status under
penalties of perjury or otherwise establishes an exemption. See 'U.S. Federal
Taxation -- Backup Withholding' above. Under the Act, distributions attributable
to gains from U.S. real property interests (including certain U.S. real property
holding corporations which may include certain 'non-domestically controlled'
REITs and certain REIT capital gain dividends) will generally cause the foreign
stockholder to be treated as recognizing such gain as income effectively
connected to a trade or business within the United States and subject to the
rules described under 'U.S. Federal Taxation -- Foreign Stockholders -- Income
Effectively Connected' below. Also, such gain may be subject to a 30% branch
profits tax in the hands of a foreign stockholder that is a corporation. Such
distributions may be subject to U.S. withholding tax and may give rise to an
obligation on the part of the foreign stockholder to file a U.S. federal
income tax return. This provision generally would apply to distributions with
respect to taxable years of regulated investment companies beginning after
December 31, 2004 and before January 1, 2008. Any gain that a foreign
stockholder realizes upon the sale or exchange of such stockholder's shares
of the Fund will ordinarily be exempt from U.S. federal withholding tax unless
(i) in the case of a stockholder that is a nonresident alien individual, the
gain is U.S. source income and such stockholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements, or (ii) except, as provided for under the Act as described
below at any time during the shorter of the period during which the foreign
stockholder held such shares of the Fund and the five year period ending on
the date of the disposition of those shares, the Fund was a 'U.S. real property
holding corporation' and the foreign stockholder actually or constructively
held more than 5% of the shares of the same class, in which event described in
(iii), the gain would be taxed in the same manner as for a U.S. stockholder as
discussed above and a 10% U.S. federal withholding tax generally would be
imposed on the amount realized on the disposition of such shares and credited
against the foreign stockholder's U.S. federal income tax liability on such
disposition. However, pursuant to the Act, beginning after December 31, 2004,
through December 31, 2007, (ii) above will not apply if at all times during
the testing period described, the value of the stock of the regulated
investment company is owned 50% or more by U.S. persons. A corporation
is a 'U.S. real property holding corporation' if the fair market value of its
U.S. real property interests equals or exceeds 50% of the fair market value of
such interests plus its interests in real property located outside the United
States plus any other assets used or held for use in a business. In the case of
the Fund, U.S. real property interests include interests in stock in U.S. real
property holding corporations (other than stock of a REIT controlled by U.S.
persons and holdings of 5% or less


                                       36




<PAGE>



in the stock of publicly traded U.S. real property holding corporations) and
certain participating debt securities.


    Income Effectively Connected. If the income from the Fund is 'effectively
connected' with a U.S. trade or business carried on by a foreign stockholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by the Fund which are designated as
undistributed capital gains and any gains realized upon the sale or exchange of
shares of the Fund will generally be subject to U.S. federal income tax at the
graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate stockholders may also be subject to the branch
profits tax imposed by the Code.

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

TAX SHELTER REPORTING REGULATIONS


    Under Treasury regulations, if a stockholder recognizes a loss with respect
to shares of $2 million or more for an individual stockholder or $10 million or
more for a corporate stockholder in any single taxable year (or a greater loss
over a combination of years), the stockholder must file with the IRS a
disclosure statement on Form 8886. Direct stockholders of portfolio securities
are in many cases excepted from this reporting requirement, but under current
guidance, stockholders of a regulated investment company are not excepted.
Future guidance may extend the current exception from this reporting requirement
to stockholders of most or all regulated investment companies. In addition,
recently enacted legislation imposes significant penalties for failure to comply
with these requriements. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer's
treatment of the loss is proper. Stockholders should consult their advisors to
determine the applicability of these regulations in light of their individual
circumstances.


EFFECT OF FUTURE LEGISLATION; OTHER TAX CONSIDERATIONS

    The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the Treasury regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions and considerations discussed herein.


    Accordingly, foreign stockholders that would not have been subject to U.S.
withholding tax if they earned interest income or short-term capital gains
directly may, under the Act, also not be subject to U.S. withholding tax if they
receive distributions from a regulated investment company attributable to such
amounts. For the affect the Act has upon the tax imposed on foreign stockholders
selling shares, see 'U.S. Federal Taxation -- Foreign Stockholders.'
Stockholders should consult their own tax advisers to determine the effect of
the Act in light of their individual circumstances.


    Income received by the Fund from foreign sources may be subject to
withholding and other taxes imposed by foreign jurisdictions, absent treaty
relief. Distributions to stockholders also may be subject to state, local and
foreign taxes, depending upon each stockholder's particular situation.
Stockholders are urged to consult their tax advisers as to the particular
consequences to them of an investment in the Fund.

                       PERFORMANCE DATA AND INDEX RETURNS

    From time to time, the Fund may quote the Fund's total return, aggregate
total return or yield in advertisements or in reports and other communications
to stockholders. The Fund's performance will vary depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank

                                       37




<PAGE>


deposits or other investments that pay a fixed yield for a stated period of
time. Investors comparing the Fund's performance with that of other investment
companies should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.

AVERAGE ANNUAL TOTAL RETURN

    The Fund's 'average annual total return' figures described in the Prospectus
are computed according to a formula prescribed by the SEC. The formula can be
expressed as follows:

                                  P(1 + T)'pp'n = ERV

<Table>
<S>     <C>  <C>  <C>
Where:    P  =    a hypothetical initial payment of $1,000
          T  =    average annual total return
          n  =    number of years
        ERV  =    Ending Redeemable Value of a hypothetical $1,000 investment
                  made at the beginning of a 1-, 5-, or 10-year period at the
                  end of a 1-, 5-, or 10-year period (or fractional portion
                  thereof), assuming reinvestment of all dividends and
                  distributions.
</Table>

YIELD

    Quotations of yield for the Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ('net investment income') and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

                                     a-b
                                   ------
                               2[( cd + 1)'pp'6 - 1]

<Table>
<S>     <C>  <C>  <C>
Where:    a  =    dividends and interest earned during the period,
          b  =    expenses accrued for the period (net of reimbursements),
          c  =    the average daily number of shares outstanding during the
                  period that were entitled to receive dividends, and
          d  =    the maximum offering price per share on the last day of the
                  period.
</Table>

    In reports or other communications to stockholders of the Fund or in
advertising materials, the Fund may compare its performance with that of (i)
other investment companies listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average, Dow Jones Utility Index, the National
Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index, the
Salomon Brothers Broad Investment Grade Bond Index (BIG), Morgan Stanley Capital
International Europe Australia Far East (MSCI EAFE) Index, the NASDAQ Composite
Index, and other relevant indices and industry publications. The Fund may also
compare the historical volatility of its portfolio to the volatility of such
indices during the same time periods. (Volatility is a generally accepted
barometer of the market risk associated with a portfolio of securities and is
generally measured in comparison to the stock market as a whole -- the
beta -- or in absolute terms -- the standard deviation.)

                                    EXPERTS

    Simpson Thacher & Bartlett LLP serves as counsel to the Fund, and is located
at 425 Lexington Avenue, New York, New York 10017-3909. PricewaterhouseCoopers
LLP have been appointed as independent registered public accountants for the
Fund. The audited financial statements for the year ended December 31, 2003
included in this statement of additional information have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent registered
public accountants, given on the authority of said firm as experts in auditing
and accounting.

                                       38







<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
Cohen & Steers Quality Income Realty Fund, Inc.


    In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Cohen & Steers Quality Income
Realty Fund, Inc. (the 'Fund') at December 31, 2003, the results of its
operations for the year then ended, and the changes in its net assets and the
financial highlights for the year then ended and the period February 28, 2002
(commencement of operations) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.


    As explained in Note 1, the Fund has revised amounts previously reported as
net investment income to reflect the reclassification of distributions received
in excess of income from underlying investments. Also as explained in Note 1, as
a result of a recent FASB Emerging Issues Task Force consensus which requires
that periodic payments under interest rate swap transactions be reported as a
component of realized and unrealized gains/losses in the Fund's statement of
operations, the Fund has reclassified amounts previously reported as interest
expense on interest rate swap transactions. These reclassifications had no
effect on net assets or the net increase in net assets resulting from
operations.


PricewaterhouseCoopers LLP
New York, New York
February 17, 2004


                                       39




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                            SCHEDULE OF INVESTMENTS
                          DECEMBER 31, 2003 (AUDITED)

<Table>
<Caption>
                                                                                          DIVIDEND
                                                            NUMBER         VALUE           YIELD
                                                          OF SHARES       (NOTE 1)     (UNAUDITED)(a)
                                                          ---------       --------     --------------
<S>                                             <C>       <C>          <C>              <C>
Equities                                       148.01%(b)
  Common Stock                                 115.40%
    Diversified                                 16.56%
        Colonial Properties Trust......................      582,300   $   23,059,080       6.72%
        Crescent Real Estate Equities Co...............    1,396,200       23,916,906       8.76
        iStar Financial................................      400,500       15,579,450       6.81
        Newcastle Investment Corp......................      678,528       18,388,109       7.38
        Vornado Realty Trust...........................      687,443       37,637,504       5.19
                                                                       --------------
                                                                          118,581,049
                                                                       --------------
    Health Care                                 17.82%
        Health Care Property Investors.................      595,200       30,236,160       6.54
        Health Care REIT...............................      969,625       34,906,500       6.50
        Nationwide Health Properties...................    1,205,300       23,563,615       7.57
        Ventas.........................................    1,766,500       38,863,000       4.86
                                                                       --------------
                                                                          127,569,275
                                                                       --------------
    Hotel                                        2.00%
        Hospitality Properties Trust...................      346,400       14,299,392       6.98
                                                                       --------------
    Industrial                                   4.39%
        First Industrial Realty Trust..................      614,500       20,739,375       8.12
        Keystone Property Trust........................      484,900       10,711,441       5.98
                                                                       --------------
                                                                           31,450,816
                                                                       --------------
    Office                                      32.51%
        Arden Realty...................................      826,800       25,085,112       6.66
        Brandywine Realty Trust........................    1,140,900       30,541,893       6.57
        CarrAmerica Realty Corp........................    1,010,600       30,095,668       6.72
        Equity Office Properties Trust.................    1,314,400       37,657,560       6.98
        Highwoods Properties...........................      670,400       17,028,160       6.69
        Mack-Cali Realty Corp..........................    1,073,800       44,691,556       6.05
        Maguire Properties.............................      604,800       14,696,640       6.58
        Prentiss Properties Trust......................    1,000,200       32,996,598       6.79
                                                                       --------------
                                                                          232,793,187
                                                                       --------------
</Table>

---------

(a) Dividend yield is computed by dividing the security's current annual
    dividend rate by the last sale price on the principal exchange or
    market, on which such security trades. The dividend yield has not
    been audited.

(b) Percentages indicated are based on the net assets of the Fund.

                See accompanying notes to financial statements.

                                       40




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                          DECEMBER 31, 2003 (AUDITED)

<Table>
<Caption>
                                                                                          DIVIDEND
                                                            NUMBER         VALUE           YIELD
                                                          OF SHARES       (NOTE 1)       (UNAUDITED)
                                                          ---------       --------       -----------
<S>                                             <C>       <C>          <C>              <C>
    Office/Industrial                            8.69%
        Kilroy Realty Corp.............................      142,600   $    4,670,150       6.05
        Liberty Property Trust.........................    1,065,200       41,436,280       6.22
        Reckson Associates Realty Corp.................      663,800       16,130,340       6.99
                                                                       --------------
                                                                           62,236,770
                                                                       --------------
    Residential -- Apartment                    14.44%
        AMLI Residential Properties Trust..............       77,000        2,063,600       7.16
        Apartment Investment & Management Co...........      114,500        3,950,250       6.96
        Archstone-Smith Trust..........................      754,100       21,099,718       6.11
        AvalonBay Communities..........................      307,200       14,684,160       5.86
        Camden Property Trust..........................      366,600       16,240,380       5.73
        Gables Residential Trust.......................      586,900       20,388,906       6.94
        Home Properties................................      361,600       14,605,024       6.14
        Mid-America Apartment Communities..............      309,400       10,389,652       6.97
                                                                       --------------
                                                                          103,421,690
                                                                       --------------
    Self Storage                                 0.45%
      Sovran Self Storage..............................       87,300        3,243,195       6.49
                                                                       --------------
    Shopping Center                             18.54%
      Community Center                           6.70%
        Cedar Shopping Centers.........................      200,000        2,484,000       7.25
        Heritage Property Investment Trust.............      449,100       12,776,895       7.38
        Kramont Realty Trust...........................    1,293,300       23,408,730       7.18
        New Plan Excel Realty Trust....................       65,800        1,623,286       6.69
        Urstadt Biddle Properties -- Class A...........      544,000        7,697,600       5.94
                                                                       --------------
                                                                           47,990,511
                                                                       --------------
      Regional Mall                             11.84%
        CBL & Associates Properties....................       50,000        2,825,000       5.13
        Glimcher Realty Trust..........................      605,200       13,544,376       8.58
        Macerich Co....................................      807,857       35,949,637       5.48
        Mills Corp.....................................      737,400       32,445,600       5.14
                                                                       --------------
                                                                           84,764,613
                                                                       --------------
        Total Shopping Center..........................                   132,755,124
                                                                       --------------
            Total Common Stock (Identified cost --
              $661,283,955)............................                   826,350,498
                                                                       --------------
</Table>

                See accompanying notes to financial statements.

                                       41




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                          DECEMBER 31, 2003 (AUDITED)

<Table>
<Caption>
                                                                                          DIVIDEND
                                                            NUMBER         VALUE           YIELD
                                                          OF SHARES       (NOTE 1)      (UNAUDITED)
                                                          ---------       --------      -----------
<S>                                             <C>       <C>          <C>              <C>
  Preferred Stock                               32.61%
    Diversified                                  7.06%
        Colonial Properties Trust, 8.125%, Series D....       64,900   $    1,762,684       7.47%
        Crescent Real Estate Equities Co., 6.75%,
          Series A (Convertible)(a)....................    1,826,000       42,710,140       7.23
        iStar Financial, 7.80%, Series F...............       94,600        2,473,790       7.46
        iStar Financial, 7.65%, Series G...............       80,000        2,020,000       7.56
        Newcastle Investment Corp., 9.75%, Series B....       56,000        1,558,480       8.77
                                                                       --------------
                                                                           50,525,094
                                                                       --------------
    Health Care                                  0.29%
        LTC Properties, 8.50%, Series E................       65,600        2,057,872       6.79
                                                                       --------------
    Hotel                                        6.90%
        FelCor Lodging Trust, 9.00%, Series B..........      652,500       16,351,650       8.98
        Host Marriott Corp., 10.00%, Series A..........        7,000          187,180       9.35
        Host Marriott Corp., 10.00%, Series B..........       14,100          380,700       9.26
        Host Marriott Corp., 10.00%, Series C..........       30,700          837,189       9.17
        Innkeepers USA Trust, 8.625%, Series A.........       68,200        1,712,502       8.60
        Innkeepers USA Trust, 8.00%, Series C..........       56,000        1,416,800       7.91
        LaSalle Hotel Properties, 10.25%, Series A.....    1,000,000       28,550,000       8.97
                                                                       --------------
                                                                           49,436,021
                                                                       --------------
    Industrial                                   0.28%
        Keystone Property Trust, 9.125%, Series D......       75,000        2,036,250       8.40
                                                                       --------------
    Office                                       2.33%
        HRPT Properties Trust, 8.75%, Series B.........      120,000        3,342,000       7.86
        Highwoods Properties, 8.625%, Series A.........       13,195       13,359,938       8.52
                                                                       --------------
                                                                           16,701,938
                                                                       --------------
    Office/Industrial                            0.09%
        PS Business Parks, 9.25%, Series A.............       10,800          274,968       9.07
        PS Business Parks, 8.75%, Series F.............        4,100          110,126       8.15
        ProLogis, 8.54%, Series C......................        4,000          233,500       7.31
                                                                       --------------
                                                                              618,594
                                                                       --------------
</Table>

---------

(a) 410,000 shares segregated as collateral for the interest rate swap
  transactions.

                See accompanying notes to financial statements.

                                       42



<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                          DECEMBER 31, 2003 (AUDITED)

<Table>
<Caption>
                                                                                          DIVIDEND
                                                            NUMBER         VALUE           YIELD
                                                          OF SHARES       (NOTE 1)      (UNAUDITED)
                                                          ---------       --------      -----------
<S>                                             <C>       <C>          <C>              <C>
     Residential -- Apartment                    4.88%
        Apartment Investment & Management Co., 8.75%,
          Series D.....................................        5,530   $      139,634       8.67%
        Apartment Investment & Management Co., 10.10%,
          Series R.....................................      950,000       25,811,500       9.20
        Home Properties, 9.00%, Series F...............      196,000        5,399,800       8.17
        Mid-America Apartment Communities, 8.30%,
          Series H.....................................      138,100        3,607,172       7.96
                                                                       --------------
                                                                           34,958,106
                                                                       --------------
    Shopping Center                             10.78%
      Community Center                           5.52%
        Commercial Net Lease Realty, 9.00%, Series A...       25,000          685,000       8.21
        Developers Diversified Realty Corp., 8.60%,
          Series F.....................................    1,039,400       27,751,980       8.05
        Federal Realty Investment Trust, 8.50%,
          Series B.....................................      310,300        8,533,250       7.75
        Urstadt Biddle Properties, 8.50%, Series C.....       24,000        2,526,000       8.08
                                                                       --------------
                                                                           39,496,230
                                                                       --------------
      Outlet Center                              0.11%
        Chelsea Property Group, 8.375%, Series A.......       14,000          772,625       7.59
                                                                       --------------
      Regional Mall                              5.15%
        CBL & Associates Properties, 8.75%,
          Series B(b)..................................      430,000       23,564,000       7.99
        Glimcher Realty Trust, 8.75%, Series F.........       40,000        1,059,200       8.27
        Mills Corp., 9.00%, Series B...................       55,300        1,522,962       8.17
        Mills Corp., 9.00%, Series C...................      159,600        4,412,142       8.14
        Mills Corp., 8.75%, Series E...................       84,000        2,276,400       8.08
        Simon Property Group, 8.75%, Series F..........       30,000          819,000       8.02
        Taubman Centers, 8.30%, Series A...............      127,600        3,243,591       8.18
                                                                       --------------
                                                                           36,897,295
                                                                       --------------
        Total Shopping Center..........................                    77,166,150
                                                                       --------------
            Total Preferred Stock (Identified cost --
              $209,248,013)............................                   233,500,025
                                                                       --------------
            Total Equities (Identified
              cost -- $870,531,968)....................                 1,059,850,523
                                                                       --------------
</Table>

---------

(b) 158,000 shares segregated as collateral for the interest rate swap
  transactions.

                See accompanying notes to financial statements.

                                       43




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                          DECEMBER 31, 2003 (AUDITED)


<Table>
<Caption>
                                                                                         DIVIDEND
                                                          PRINCIPAL        VALUE           YIELD
                                                            AMOUNT        (NOTE 1)      (UNAUDITED)
                                                            ------        --------      -----------
<S>                                             <C>       <C>          <C>              <C>
Commercial Paper                                 0.92%
        UBS Financial, 0.75%, due 01/02/04 (Identified
          cost -- $6,605,862)..........................   $6,606,000        6,605,862
                                                                       --------------
Total Investments (Identified cost -- $877,137,830)
  ............................................ 148.93%                  1,066,456,385
Liabilities in Excess of Other Assets  ....... (1.45)%                    (10,372,698)
Liquidation Value of Taxable Auction Market Preferred
  Shares: Series T, Series W, Series TH and Series F
  (Equivalent to $25,000 per share based on 2,800
  shares outstanding for Series T, Series W,
  Series TH, and Series F) .................. (39.10)%                   (280,000,000)
Liquidation Value of Auction Market Preferred Shares:
  Series M28, (Equivalent to $25,000 per share based on
  2,400 shares outstanding) .................. (8.38)%                    (60,000,000)
Net Assets -- Applicable to Common Shares (Equivalent
  to $18.43 per share based on 38,856,074 shares of
  capital stock outstanding) .................. 100.00%                $  716,083,687
                                                                       --------------
                                                                       --------------
</Table>


                See accompanying notes to financial statements.

                                       44




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                      STATEMENT OF ASSETS AND LIABILITIES
                          DECEMBER 31, 2003 (AUDITED)

<Table>
<S>                                                           <C>
Assets:
    Investments in securities, at value (Identified
      cost -- $877,137,830) (Note 1)........................  $1,066,456,385
    Cash....................................................              63
    Dividends receivable....................................       6,906,282
    Receivable for investment securities sold...............         294,738
    Unrealized appreciation on interest rate swap
      transactions (Notes 1 and 6)..........................         128,059
    Other assets............................................          40,126
                                                              --------------
        Total Assets........................................   1,073,825,653
                                                              --------------
Liabilities:
    Unrealized depreciation on interest rate swap
      transactions (Notes 1 and 6)..........................      14,681,022
    Payable for investment securities purchased.............       1,400,000
    Payable for dividends declared on common shares.........         772,846
    Payable to investment manager...........................         468,125
    Payable for dividends declared on preferred shares......         206,900
    Other liabilities.......................................         213,073
                                                              --------------
        Total Liabilities...................................      17,741,966
                                                              --------------
Liquidation Value of Preferred Shares:
    Taxable auction market preferred shares, Series T
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series W
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series TH
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series F
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Auction market preferred shares, Series M28 ($25,000
      liquidation value, $0.001 par value, 2,400 shares
      issued and outstanding) (Notes 1 and 5)...............      60,000,000
                                                              --------------
                                                                 340,000,000
                                                              --------------
Total Net Assets Applicable to Common Shares................  $  716,083,687
                                                              --------------
                                                              --------------
Total Net Assets Applicable to Common Shares consist of:
    Common stock ($0.001 par value, 38,856,074 shares issued
      and outstanding) (Notes 1 and 5)......................  $  541,197,061
    Undistributed net investment income.....................         543,697
    Accumulated net realized loss on investments............        (422,663)
    Net unrealized appreciation/(depreciation) on
      investments and interest rate swap transactions.......     174,765,592
                                                              --------------
                                                              $  716,083,687
                                                              --------------
                                                              --------------
Net Asset Value Per Common Share:
    ($716,083,687[div]38,856,074 shares outstanding)........  $        18.43
                                                              --------------
                                                              --------------
Market Price Per Common Share...............................  $        17.85
                                                              --------------
                                                              --------------
Market Price Discount to Net Asset Value per Common Share...           (3.15)%
                                                              --------------
                                                              --------------
</Table>

                See accompanying notes to financial statements.

                                       45




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                            STATEMENT OF OPERATIONS
               FOR THE YEAR ENDED DECEMBER 31, 2003(a) (AUDITED)

<Table>
<S>                                                           <C>
Investment Income (Note 1):
    Dividend income.........................................  $ 46,451,092
    Interest income.........................................       126,415
                                                              ------------
        Total Income........................................    46,577,507
                                                              ------------
Expenses:
    Investment management fees (Note 2).....................     7,499,290
    Preferred remarketing fees..............................       744,384
    Administration fees (Note 2)............................       340,661
    Reports to shareholders.................................       212,620
    Professional fees.......................................       101,814
    Custodian fees and expenses.............................        86,286
    Directors' fees and expenses (Note 2)...................        42,312
    Transfer agent fees and expenses........................        22,338
    Miscellaneous...........................................       141,796
                                                              ------------
        Total Expenses......................................     9,191,501
    Reduction of Expenses (Note 2)..........................    (2,823,262)
                                                              ------------
        Net Expenses........................................     6,368,239
                                                              ------------
Net Investment Income.......................................    40,209,268
                                                              ------------
Net Realized and Unrealized Gain/(Loss) on Investments
  (Note 1):
    Net realized gain on investments........................    16,665,842
    Net realized loss on interest rate swap transactions....    (8,126,956)
    Net change in unrealized appreciation on investments....   207,953,973
    Net change in unrealized depreciation on interest rate
      swap transactions.....................................     4,360,791
                                                              ------------
        Net realized and unrealized gain/(loss) on
          investments.......................................   220,853,650
                                                              ------------
Net Increase Resulting from Operations......................   261,062,918
                                                              ------------
Less Dividends and Distributions to Preferred Shareholders
  from:
    Net investment income...................................    (3,743,228)
                                                              ------------
Net Increase in Net Assets from Operations Applicable to
  Common Shares.............................................  $257,319,690
                                                              ------------
                                                              ------------
</Table>

---------
(a) See Note 1.

                See accompanying notes to financial statements.

                                       46




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
         STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES
                                   (AUDITED)

<Table>
<Caption>
                                                                                  FOR THE PERIOD
                                                               FOR THE          FEBRUARY 28, 2002(a)
                                                              YEAR ENDED             THROUGH
                                                         DECEMBER 31, 2003(b)   DECEMBER 31, 2002(b)
                                                         --------------------   --------------------
<S>                                                       <C>                  <C>
Change in Net Assets Applicable to Common Shares:
    From Operations:
        Net investment income...........................     $ 40,209,268          $ 32,953,127
        Net realized gain on investments and interest
          rate swap transactions........................        8,538,886            (1,286,027)
        Net change in unrealized
          appreciation/(depreciation) on investments and
          interest rate swap transactions...............      212,314,764           (37,549,172)
                                                             ------------          ------------
            Net increase/(decrease) in net assets
              resulting from operations.................      261,062,918            (5,882,072)
                                                             ------------          ------------
    Less Dividends and Distributions to Preferred
      Shareholders from:
        Net investment income...........................       (2,449,183)           (3,509,955)
        Net realized gain on investments................       (1,294,045)             (434,405)
                                                             ------------          ------------
            Total dividends and distributions to
              preferred shareholders....................       (3,743,228)           (3,944,360)
                                                             ------------          ------------
        Net increase/(decrease) in net assets from
          operations applicable to common shares........      257,319,690            (9,826,432)
                                                             ------------          ------------
    Less Dividends and Distributions to Common
      Shareholders from:
        Net investment income...........................      (29,555,562)          (24,413,662)
        Net realized gain on investments................      (15,615,873)           (3,021,534)
        Tax return of capital...........................      (10,118,665)           (8,942,086)
                                                             ------------          ------------
            Total dividends and distributions to common
              shareholders..............................      (55,290,100)          (36,377,282)
                                                             ------------          ------------
    Capital Stock Transactions (Note 5):
        Increase in net assets from common share
          transactions..................................               --           557,997,269
        Increase in net assets from shares issued to
          common shareholders for reinvestment of
          dividends.....................................        3,038,014             3,417,272
        Decrease in net assets from underwriting
          commissions and offering expenses from
          issuance of preferred shares..................         (935,773)           (3,360,947)
                                                             ------------          ------------
            Net increase in net assets from capital
              stock transactions........................        2,102,241           558,053,594
                                                             ------------          ------------
            Total increase in net assets applicable to
              common shares.............................      204,131,831           511,849,880
    Net Assets Applicable to Common Shares:
        Beginning of period.............................      511,951,856               101,976
                                                             ------------          ------------
        End of period...................................     $716,083,687          $511,951,856
                                                             ------------          ------------
                                                             ------------          ------------
</Table>

---------
(a) Commencement of operations.
(b) See Note 1.

                See accompanying notes to financial statements.

                                       47




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                              FINANCIAL HIGHLIGHTS


    The following table includes selected data for a common share outstanding
throughout the period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.



<Table>
<Caption>
                                                                                      FOR THE PERIOD
                                                                FOR THE            FEBRUARY 28, 2002(a)
                                                               YEAR ENDED               THROUGH
                                                           DECEMBER 31, 2003(b)    DECEMBER 31, 2002(b)
PER SHARE OPERATING PERFORMANCE:                           ------------------    ---------------------
<S>                                                         <C>                  <C>
Net asset value per common share, beginning of period.....        $13.25               $14.57
                                                                  ------               ------
Income from investment operations:
     Net investment income................................          1.04(c)              0.78
     Net realized and unrealized gain/(loss) on
  investments.............................................          5.69                (0.90)
                                                                  ------               ------
        Total income from investment operations...........          6.73                (0.12)
                                                                  ------               ------
Less dividends and distributions to preferred shareholders
  from:
     Net investment income................................         (0.07)               (0.09)
     Net realized gain on investments.....................         (0.03)               (0.01)
                                                                  ------               ------
        Total dividends and distributions to preferred
          shareholders....................................         (0.10)               (0.10)
                                                                  ------               ------
        Total from investment operations applicable to
          common shares...................................          6.63                (0.22)
                                                                  ------               ------
Less: Offering and organization costs charged to paid-in
       capital -- common shares...........................            --                (0.03)
     Offering and organization costs charged to paid-in
       capital -- preferred shares........................         (0.02)               (0.09)
     Dilutive effect of common share offering.............            --                (0.03)
                                                                  ------               ------
        Total offering and organization costs.............         (0.02)               (0.15)
                                                                  ------               ------
Less dividends and distributions to common shareholders
  from:
     Net investment income................................         (0.76)               (0.64)
     Net realized gain on investments.....................         (0.41)               (0.08)
     Tax return of capital................................         (0.26)               (0.23)
                                                                  ------               ------
        Total dividends and distributions to common
          shareholders....................................         (1.43)               (0.95)
                                                                  ------               ------
Net increase/(decrease) in net asset value per common
  share...................................................          5.18                (1.32)
                                                                  ------               ------
Net asset value, per common share, end of period..........        $18.43               $13.25
                                                                  ------               ------
                                                                  ------               ------
Market value, per common share, end of period.............        $17.85               $13.05
                                                                  ------               ------
                                                                  ------               ------
Net asset value total return(d)...........................         52.61%              - 2.73%(e)
                                                                  ------               ------
                                                                  ------               ------
Market value return(d)....................................         50.07%              - 6.95%(e)
                                                                  ------               ------
                                                                  ------               ------
</Table>



---------
(a) Commencement of operations.


(b) See Note 1.


(c) Calculation based on average shares outstanding.


(d) Total market value return is computed based upon the New York Stock Exchange
    market price of the fund's shares and excludes the effects of brokerage
    commissions. Dividends and distributions, if any, are assumed for purposes
    of this calculation, to be reinvested at prices obtained under the fund's
    dividend reinvestment plan. Net asset value total return measures the
    changes in value over the period indicated, taking into account dividends
    as reinvested.


(e) Not annualized.



                See accompanying notes to financial statements.


                                       48




<PAGE>


                      FINANCIAL HIGHLIGHTS -- (CONTINUED)


<Table>
<Caption>
                                                                                   FOR THE PERIOD
                                                                FOR THE          FEBRUARY 28, 2002(f)
                                                               YEAR ENDED             THROUGH
                                                           DECEMBER 31, 2003(h)  DECEMBER 31, 2002(h)
RATIOS/SUPPLEMENTAL DATA:                                  --------------------  --------------------
<S>                                                         <C>                  <C>
Net assets applicable to common shares, end of period (in
  millions)...............................................       $  716.1             $  512.0
                                                                 --------             --------
                                                                 --------             --------
Ratio of expenses to average daily net assets applicable
  to common shares (before expense reduction)(l)..........           1.57%                1.52%(i)
                                                                 --------             --------
                                                                 --------             --------
Ratio of expenses to average daily net assets applicable
  to common shares (net of expense reduction)(l)..........           1.09%                1.05%(i)
                                                                 --------             --------
                                                                 --------             --------
Ratio of net investment income to average daily net assets
  applicable to common shares (before expense
  reduction)(l)...........................................           6.39%                6.82%(i)
                                                                 --------             --------
                                                                 --------             --------
Ratio of net investment income to average daily net assets
  applicable to common shares (net of expense
  reduction)(l)...........................................           6.88%                7.29%(i)
                                                                 --------             --------
                                                                 --------             --------
Ratio of expenses to average daily managed assets (before
  expense reduction)(g,l).................................           1.04%                1.04%(i)
                                                                 --------             --------
                                                                 --------             --------
Ratio of expenses to average daily managed assets (net of
  expense reduction)(g,l).................................           0.72%                0.72%(i)
                                                                 --------             --------
                                                                 --------             --------
Portfolio turnover rate...................................          20.51%               12.37%(j)
                                                                 --------             --------
                                                                 --------             --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)...............       $340,000             $280,000
                                                                 --------             --------
                                                                 --------             --------
Total shares outstanding (in 000's).......................             14                   11
                                                                 --------             --------
                                                                 --------             --------
Asset coverage per share..................................       $ 77,653             $ 70,710
                                                                 --------             --------
                                                                 --------             --------
Liquidation preference per share..........................       $ 25,000             $ 25,000
                                                                 --------             --------
                                                                 --------             --------
Average market value per share(k).........................       $ 25,000             $ 25,000
                                                                 --------             --------
                                                                 --------             --------
</Table>



---------
(f) Commencement of operations.


(g) Average daily managed assets represent the net assets applicable to common
    shares plus the liquidation preference of preferred shares.


(h) See Note 1.


(i) Annualized.


(j) Not annualized.


(k) Based on weekly prices.


(l) Ratios do not reflect the effects of dividend payments to preferred
    shareholders.



                See accompanying notes to financial statements.


                                       49




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                    NOTES TO FINANCIAL STATEMENTS (AUDITED)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

    Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a non-diversified,
closed-end management investment company. The fund had no operations until
February 15, 2002 when it sold 7,000 shares of common stock for $100,275 to
Cohen & Steers Capital Management, Inc. (the investment manager). In addition,
on February 27, 2002, the investment manager made a capital contribution of
$1,701 to the fund. Investment operations commenced on February 28, 2002.

    The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.

    Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.

    Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.

    Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.

    Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of taxable auction market preferred shares. The interest rate swaps are
intended to reduce or eliminate the risk that an increase in short-term interest
rates could have on the performance of the fund's common shares as a result of
the floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay the other party to the interest rate swap (which is known as the
counterparty) a fixed rate payment in exchange for the counterparty agreeing to
pay the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the taxable auction market preferred shares.
The payment obligation is based on the notional amount of the swap. Depending on
the state of interest rates in general, the use of interest rate swaps could
enhance or harm the overall performance of the common shares. The market value
of interest rate

                                       50




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

swaps is based on pricing models that consider the time value of money,
volatility, the current market and contractual prices of the underlying
financial instrument.

    Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.

    Revision of Financial Information: As a result of a recent FASB Emerging
Issues Task Force consensus, which requires that periodic payments under
interest rate swap transactions be reported as a component of realized and
unrealized gains/losses in the fund's Statement of Operations, the fund has
reclassified amounts previously reported as interest expense on interest rate
swap transactions, thereby revising certain amounts in the Statement of Changes
in Net Assets and the Financial Highlights. For the year ended December 31, 2003
net investment income was increased by $8,204,532 ($0.21 per share), and net
realized loss on interest rate swap transactions and net change in unrealized
depreciation on interest rate swap transactions were increased by $8,126,956 and
$77,576, respectively (a total of $0.21 per share). For the period ended
December 31, 2002, net investment income was increased by $5,029,510 ($0.13 per
share), and net realized loss on interest rate swap transactions and net change
in unrealized depreciation on interest rate swap transactions were increased by
$4,563,379 and $466,131, respectively (a total of $0.13 per share).

    Additionally, the ratio of net investment income to average daily net assets
applicable to common shares (before expense reduction and net of expense
reduction) increased 1.40% and 1.11% for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively; the ratio of expenses to
average daily net assets applicable to common shares (before expense reduction
and net of expense reduction) decreased 1.40% and 1.11% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively; and the
ratio of expenses to average daily managed assets (before expense reduction
and net of expense reduction) decreased 0.93% and 0.75% for the year ended
December 31, 2003 and the period ended December 31, 2002, respectively. The
reclassifications had no effect on net assets or the net increase in net assets
from operations applicable to common shares.

    Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as necessary once the
issuers provide information about the actual composition of the distributions.

    Revision of Financial Information: Due to the nature of commercial real
estate and the REIT structure, which generally is not subject to corporate tax,
REIT dividends can be characterized as a combination of net income, capital
gains (from asset dispositions) and return of capital (which generally relates
to property depreciation). To date, it has been the fund's policy to distribute
to its shareholders all dividends received, regardless of dividend
characterization, from the securities it holds in the year that such dividends
were received. The fund has reclassified a portion of its net investment income
as an increase to net realized gain on investments and as an increase to
unrealized appreciation/(depreciation) on investments for the current year and
for prior periods. These reclassifications are being done to recognize the
return of capital and realized gains that

                                       51




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

have been reported by the securities held in the portfolio of investments. These
changes for the year ended December 31, 2002 are reflected in the Statement of
Changes in Net Assets as follows:

<Table>
<Caption>
                                                    PREVIOUSLY         AS
                                                     REPORTED       REVISED
                                                     --------       -------
<S>                                                <C>            <C>
Net investment income............................  $ 42,419,421   $ 32,953,127
Net realized gains on investments and interest
  rate swap transactions.........................    (2,358,962)    (1,286,027)
Net change in unrealized
  appreciation/(depreciation) on investments and
  interest rate swap transactions................   (45,942,531)   (37,549,172)
                                                   ------------   ------------
    Net increase/(decrease) in net assets
      resulting from operations..................  $ (5,882,072)  $ (5,882,072)
                                                   ------------   ------------
                                                   ------------   ------------
</Table>

    On the Financial Highlights, the net investment income per share figures
have been reduced and the net realized gain/(loss) on investments per share have
been correspondingly increased. In addition, the ratios of net investment income
have been reduced. These reclassifications do not change the actual dividends
that were received by the fund, nor do they alter any taxpayer records, as such
adjustments have historically been captured in the fund's tax reporting to its
shareholders.

    The reclassifications for the Financial Highlights are as follows:

<Table>
<Caption>
                                                       DECREASE IN
                                                      RATIOS OF NET
                                    INCREASE IN         INVESTMENT
                                    NET REALIZED        INCOME TO
                                        AND           AVERAGE DAILY
                                     UNREALIZED         NET ASSETS
                DECREASE IN NET     GAIN/(LOSS)      (BEFORE EXPENSE
                  INVESTMENT             ON           REDUCTION AND
 YEAR ENDED         INCOME          INVESTMENTS       NET OF EXPENSE
DECEMBER 31,       PER SHARE         PER SHARE          REDUCTION)
------------       ---------         ---------          ----------
<S>            <C>                 <C>              <C>
    2002             $0.35             $0.35               3.20%
</Table>

    These reclassifications had no effect on net assets or the net increase in
net assets resulting from operations or cash received from the underlying
investments.

    Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components of the dividends from the fund's portfolio investments.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.

    Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.

    Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.

    Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for Series
M28 and Series W preferred shares are declared and recorded for the subsequent
28 day period on the auction date. In most instances, dividends are payable
every 28 days, on the first business day following the end of the dividend
period.

                                       52




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

    Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.

NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
WITH AFFILIATES

    Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated polices of the fund, subject to
the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.

    For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the year ended December 31,
2003, the fund incurred investment management fees of $7,499,290.

    The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the year ended
December 31, 2003, the investment manager waived management fees of $2,823,262.

    Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the year ended December 31, 2003, the fund incurred $176,454 in
administration fees.

    Director's Fees: Certain directors and officers of the fund are also
directors, officers and/or employees of the investment manager. None of the
directors and officers so affiliated received compensation for their services.
For the year ended December 31, 2003, fees and related expenses accrued for
nonaffiliated directors totaled $42,312.

NOTE 3. PURCHASES AND SALES OF SECURITIES

    Purchases and sales of securities, excluding short-term investments for the
year ended December 31, 2003, totaled $237,550,482 and $179,574,976,
respectively.

NOTE 4. INCOME TAXES

    The fund had a return of capital of $10,118,665 ($0.26 per common share) for
year ended December 31, 2003 which has been deducted from paid-in capital.
Short-term capital gains are reflected in the financial statements as realized
gains on investments but are typically treated as ordinary income for tax
purposes.

                                       53




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

    For the year ended December 31, 2003 the dividends and distributions to
shareholders are characterized for tax purposes as follows:

<Table>
<Caption>
                                                                FOR THE YEAR ENDED
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                2003          2002
                                                                ----          ----
<S>                                                          <C>           <C>
Preferred shareholders:
    Ordinary income........................................  $ 2,449,183   $ 3,509,955
    Long-term capital gains................................    1,294,045       434,405
                                                             -----------   -----------
        Total dividends and distributions to preferred
          shareholders.....................................  $ 3,743,228   $ 3,944,360
                                                             -----------   -----------
                                                             -----------   -----------
Common shareholders:
    Ordinary income........................................  $29,555,562   $24,413,662
    Long-term capital gains................................   15,615,873     3,021,534
    Tax return of capital..................................   10,118,665     8,942,086
                                                             -----------   -----------
        Total dividends and distributions to common
          shareholders.....................................  $55,290,100   $36,377,282
                                                             -----------   -----------
                                                             -----------   -----------
</Table>

    At December 31, 2003 the cost of investments and net unrealized appreciation
for federal income tax purposes were as follows:

<Table>
<S>                                                           <C>
Aggregate cost..............................................  $877,016,796
                                                              ------------
                                                              ------------
Gross unrealized appreciation...............................  $192,448,512
Gross unrealized depreciation...............................    (3,008,923)
                                                              ------------
Net unrealized appreciation on investments..................   189,439,589
Net unrealized depreciation on interest rate swap
  transactions..............................................   (14,552,963)
                                                              ------------
Net unrealized depreciation.................................  $174,886,626
                                                              ------------
                                                              ------------
</Table>

    Net investment income and net realized gains differ for financial statement
and tax purposes primarily due to differing treatments of interest rate swap
payments and wash sales on Portfolio Securities. To the extent such differences
are permanent in nature, such amounts are reclassified within the capital
accounts. During the year ended December 31, 2003 the fund decreased
undistributed net investment income by $7,660,825 and increased accumulated net
realized gain on investments by $7,660,825.

    The components of distributable earnings on a tax basis consist of
undistributed ordinary income of $0 and undistributed captial gains of $0.

NOTE 5. CAPITAL STOCK

    The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.

    During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.

    On February 28, 2002, the fund completed the initial public offering of
34,000,000 shares of common stock. Proceeds paid to the fund amounted to
$494,292,000 after deduction of underwriting commissions and offering expenses
of $15,708,000.

    On March 8, 2002, the fund completed a subsequent offering of 2,000,000
shares of common stock. Proceeds paid to the fund amounted to $29,076,000 after
deduction of underwriting commissions and offering expenses of $924,000.

                                       54




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

    On March 21, 2002, the fund's underwriters exercised an option to purchase
an additional 1,700,000 shares. Proceeds paid to the fund amounted to
$24,714,600 after deduction of underwriting commissions and offering expenses of
$785,400.

    On April 8, 2002, the fund's underwriters exercised an option to purchase an
additional 681,983 shares. Proceeds paid to the fund amounted to $9,914,669
after deduction of underwriting commissions and offering expenses of $315,076.

    During the period February 28, 2002 (commencement of operations) through
December 31, 2002, the fund issued 247,339 shares of common stock for the
reinvestment of dividends.

    On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.

    On April 4, 2002, the fund issued 2,800 taxable auction market preferred
shares, Series T (par value $0.001), 2,800 taxable auction market preferred
shares, Series W (par value $0.001), 2,800 taxable auction market preferred
shares, Series TH (par value $0.001), and 2,800 taxable auction market preferred
shares, Series F (par value $0.001) (together referred to as preferred shares).
Proceeds paid to the fund amounted to $276,639,053 after deduction of
underwriting commissions and offering expenses of $3,360,947. These issues have
received a 'AAA/Aaa' rating from Standard & Poor's and Moody's.

    Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares will be subject to a mandatory redemption
at the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon to the date fixed for redemption. To the extent
permitted under the 1940 Act and Maryland Law, the fund at its option may
without consent of the holders of preferred shares, redeem preferred shares
having a dividend period of one year or less, in whole, or in part, on the
business day after the last day of such dividend period upon not less than 15
calendar days and not more than 40 calendar days prior to notice. The optional
redemption price is $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon to the date fixed for redemption.

    The fund's common shares and preferred shares have equal voting rights of
one vote per share and vote together as a single class. In addition, the
affirmative vote of the holders a majority, as defined in the 1940 Act, of the
outstanding preferred shares shall be required to (1) approve any plan of
reorganization that would adversely affect the taxable auction market preferred
shares and (2) approve any matter that materially and adversely affects the
rights, preferences, or powers of that series.

NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS

    The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet Global Markets, and Royal Bank of Canada.
Under the agreements the

                                       55




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
             NOTES TO FINANCIAL STATEMENTS (AUDITED) -- (CONTINUED)

fund receives a floating rate of interest and pays a respective fixed rate of
interest on the nominal value of the swaps. Details of the swaps at December 31,
2003 are as follows:

<Table>
<Caption>
                                                                                                  UNREALIZED
                                 NOTIONAL                 FLOATING RATE(a)                       APPRECIATION/
         COUNTERPARTY             AMOUNT      FIXED RATE  (RESET MONTHLY)    TERMINATION DATE   (DEPRECIATION)
         ------------             ------      ----------  ----------------   ----------------   --------------
<S>                             <C>           <C>          <C>               <C>                <C>
Merrill Lynch Derivative
  Products                      $46,000,000    4.5600%         1.1700%          April 5, 2005    $ (1,812,882)
Merrill Lynch Derivative
  Products                      $46,000,000    5.2100%         1.1700%          April 5, 2007      (3,517,438)
Merrill Lynch Derivative
  Products                      $46,000,000    5.5800%         1.1700%          April 6, 2009      (4,425,903)
UBS AG                          $24,000,000    4.4500%         1.1620%         April 15, 2005        (900,935)
UBS AG                          $24,000,000    5.1200%         1.1620%         April 15, 2007      (1,731,909)
UBS AG                          $24,000,000    5.4950%         1.1620%         April 15, 2009      (2,151,539)
Fleet Global Markets            $14,000,000    3.2125%         1.1700%       October 22, 2008         128,059
Royal Bank of Canada            $14,000,000    3.6800%         1.1488%       October 22, 2008        (140,416)
                                                                                                 ------------
                                                                                                 $(14,552,963)
                                                                                                 ------------
                                                                                                 ------------
</Table>

-------------------
(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
    at December 31, 2003.

                                       56




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                            SCHEDULE OF INVESTMENTS
                           JUNE 30, 2004 (UNAUDITED)

<Table>
<Caption>
                                                         NUMBER         VALUE          DIVIDEND
                                                        OF SHARES      (NOTE 1)        YIELD(a)
                                                        ---------   --------------   ------------
<S>                                                     <C>         <C>              <C>
Equities                                      147.54%(b)
  Common Stock                                116.69%
    Diversified                                13.76%
        Colonial Properties Trust.....................    582,300   $   22,436,019       6.96%
        Crescent Real Estate Equities Co..............  1,396,200       22,506,744       9.31
        iStar Financial...............................    400,500       16,020,000       6.98
        Vornado Realty Trust..........................    663,443       37,889,230       4.97
                                                                    --------------
                                                                        98,851,993
                                                                    --------------
    Health Care                                17.59%
        Health Care Property Investors................  1,190,400       28,617,216       6.95
        Health Care REIT..............................    969,625       31,512,812       7.38
        LTC Properties................................    131,200        2,177,920       6.63
        Nationwide Health Properties..................  1,205,300       22,780,170       7.83
        Ventas........................................  1,766,500       41,247,775       5.57
                                                                    --------------
                                                                       126,335,893
                                                                    --------------
    Hotel                                       2.29%
        Hospitality Properties Trust..................    389,200       16,463,160       6.81
                                                                    --------------
    Industrial                                  3.15%
        First Industrial Realty Trust.................    614,500       22,662,760       7.43
                                                                    --------------
    Mortgage                                    2.83%
        Newcastle Investment Corp.....................    678,528       20,321,914       8.01
                                                                    --------------
    Office                                     33.62%
        Arden Realty..................................    826,800       24,316,188       6.87
        Brandywine Realty Trust.......................  1,140,900       31,021,071       6.47
        CarrAmerica Realty Corp.......................  1,010,600       30,550,438       6.62
        Equity Office Properties Trust................  1,314,400       35,751,680       7.35
        Highwoods Properties..........................    670,400       15,754,400       7.23
        HRPT Properties Trust.........................    635,400        6,360,354       7.99
        Kilroy Realty Corp. ..........................    142,600        4,862,660       5.81
        Mack-Cali Realty Corp. .......................  1,073,800       44,433,844       6.09
        Maguire Properties............................    604,800       14,980,896       6.46
        Prentiss Properties Trust.....................  1,000,200       33,526,704       6.68
                                                                    --------------
                                                                       241,558,235
                                                                    --------------
</Table>

-------------------
(a) Dividend yield is computed by dividing the security's current annual
    dividend rate by the last sale price on the principal exchange or market,
    on which such security trades.

(b) Percentages indicated are based on the net assets of the Fund.

                See accompanying notes to financial statements.

                                       57




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                           JUNE 30, 2004 (UNAUDITED)

<Table>
<Caption>
                                                         NUMBER         VALUE          DIVIDEND
                                                        OF SHARES      (NOTE 1)         YIELD
                                                        ---------   --------------   ------------
<S>                                                     <C>         <C>              <C>
    Office/Industrial                           9.00%
        Liberty Property Trust........................  1,065,200   $   42,831,692       6.02%
        Reckson Associates Realty Corp. ..............    794,100       21,805,986       6.18
                                                                    --------------
                                                                        64,637,678
                                                                    --------------
    Residential                                15.21%
      Apartment                                14.69%
        AMLI Residential Properties Trust.............     77,000        2,259,180       6.54
        Archstone-Smith Trust.........................    754,100       22,117,753       5.86
        AvalonBay Communities.........................    307,200       17,362,944       4.95
        Camden Property Trust.........................    366,600       16,790,280       5.55
        Gables Residential Trust......................    586,900       19,942,862       7.09
        Home Properties...............................    361,600       14,095,168       6.36
        Mid-America Apartment Communities.............    309,400       11,723,166       6.18
        Town & Country Trust..........................     50,000        1,262,000       6.81
                                                                    --------------
                                                                       105,553,353
                                                                    --------------
      Manufactured Home                         0.52%
        Affordable Residential Communities............    225,200        3,738,320       7.53
                                                                    --------------
        Total Residential.............................                 109,291,673
                                                                    --------------
    Self Storage                                0.46%
        Sovran Self Storage...........................     87,300        3,333,114       6.31
                                                                    --------------
    Shopping Center                            18.78%
      Community Center                          6.74%
        Cedar Shopping Centers........................    200,000        2,298,000       7.83
        Heritage Property Investment Trust............    449,100       12,152,646       7.76
        Kramont Realty Trust..........................  1,293,300       20,692,800       8.13
        New Plan Excel Realty Trust...................    222,700        5,202,272       7.06
        Urstadt Biddle Properties -- Class A..........    544,000        8,056,640       5.81
                                                                    --------------
                                                                        48,402,358
                                                                    --------------
</Table>

                See accompanying notes to financial statements.

                                       58




<PAGE>



                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                           JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
                                                         NUMBER         VALUE          DIVIDEND
                                                        OF SHARES      (NOTE 1)         YIELD
                                                        ---------   --------------   ------------
      Regional Mall                            12.04%
<S>                                                     <C>         <C>              <C>
        Glimcher Realty Trust.........................    605,200   $   13,387,024       8.69%
        Macerich Co...................................    807,857       38,672,115       5.10
        Mills Corp....................................    737,400       34,436,580       5.10
                                                                    --------------
                                                                        86,495,719
                                                                    --------------
        Total Shopping Center.........................                 134,898,077
                                                                    --------------
            Total Common Stock
              (Identified cost -- $660,580,498).......                 838,354,497
                                                                    --------------
  Preferred Stock                              30.85%
    Diversified                                 5.90%
        Colonial Properties Trust, 8.125%, Series D...     64,900        1,663,387       7.93
        Crescent Real Estate Equities Co., 6.75%,
          Series A (Convertible)(a)...................  1,826,000       36,483,480       8.45
        iStar Financial, 7.80%, Series F..............     94,600        2,242,020       8.23
        iStar Financial, 7.65%, Series G..............     80,000        1,938,000       7.90
                                                                    --------------
                                                                        42,326,887
                                                                    --------------
    Health Care                                 0.14%
        Omega Healthcare Investors, 8.375%,
          Series D....................................     40,000        1,004,000       8.34
                                                                    --------------
    Hotel                                       6.41%
        FelCor Lodging Trust, 9.00%, Series B.........    652,500       16,312,500       9.00
        Host Marriott Corp., 10.00%, Series A.........      7,000          178,850       9.77
        Host Marriott Corp., 10.00%, Series B.........     14,100          363,921       9.69
        Host Marriott Corp., 10.00%, Series C.........     30,700          807,410       9.51
        Host Marriott Corp., 8.875%, Series E.........     10,000          254,500       8.72
        Innkeepers USA Trust, 8.00%, Series C.........     56,000        1,349,600       8.30
        LaSalle Hotel Properties, 10.25%, Series A....  1,000,000       26,775,000       9.57
                                                                    --------------
                                                                        46,041,781
                                                                    --------------
    Industrial                                   0.23%
        Keystone Property Trust, 9.125%, Series D.....     64,400        1,667,960       8.81
                                                                    --------------
    Mortgage                                     0.21%
        Newcastle Investment Corp., 9.75%, Series B...     56,000        1,534,400       8.90
                                                                    --------------

</Table>
-----------
(a) 410,000 shares segregated as collateral for the interest rate swap
    transactions.

              See accompanying notes to financial statements.

                                       59




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                           JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
                                                         NUMBER         VALUE          DIVIDEND
                                                        OF SHARES      (NOTE 1)         YIELD
                                                        ---------   --------------   ------------
    Office                                      2.64%
<S>                                                     <C>         <C>              <C>
        HRPT Properties Trust, 8.75%, Series B........    120,000   $    3,156,000       8.32%
        Highwoods Properties, 8.625%, Series A........     13,195       13,227,988       8.60
        Maguire Properties, 7.625%, Series A..........    106,600        2,574,390       7.89
                                                                    --------------
                                                                        18,958,378
                                                                    --------------
    Office/Industrial                           0.05%
        PS Business Parks, 8.75%, Series F............      4,100          107,830       8.32
        ProLogis, 8.54%, Series C.....................      4,000          225,500       7.57
                                                                    --------------
                                                                           333,330
                                                                    --------------
    Residential -- Apartment                    4.74%
        Apartment Investment & Management Co.,
          8.75%, Series D.............................      5,530          138,858       8.71
        Apartment Investment & Management Co.,
          10.10%, Series R............................    950,000       25,042,000       9.48
        Home Properties, 9.00%, Series F..............    196,000        5,424,300       8.23
        Mid-America Apartment Communities, 8.30%,
          Series H....................................    138,100        3,473,215       8.25
                                                                    --------------
                                                                        34,078,373
                                                                    --------------
    Shopping Center                            10.53%
      Community Center                          5.25%
        Developers Diversified Realty Corp., 8.60%,
          Series F....................................  1,039,400       26,868,490       8.33
        Federal Realty Investment Trust, 8.50%,
          Series B....................................    310,300        8,207,435       8.03
        Urstadt Biddle Properties, 8.50%, Series C....     24,000        2,628,000       7.76
                                                                    --------------
                                                                        37,703,925
                                                                    --------------
      Free Standing                             0.09%
        Commercial Net Lease Realty, 9.00%,
          Series A....................................     25,000          658,000       8.55
                                                                    --------------
      Outlet Center                             0.11%
        Chelsea Property Group, 8.375%, Series A......     14,000          793,625       7.39
                                                                    --------------
</Table>

                See accompanying notes to financial statements.

                                       60




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                     SCHEDULE OF INVESTMENTS -- (CONTINUED)
                           JUNE 30, 2004 (UNAUDITED)
<Table>
<Caption>
                                                         NUMBER         VALUE          DIVIDEND
                                                        OF SHARES      (NOTE 1)         YIELD
                                                        ---------   --------------   ------------
      Regional Mall                             5.08%
<S>                                                     <C>         <C>              <C>
        CBL & Associates Properties, 8.75%,
          Series B....................................    430,000   $   22,704,000       8.29%
        Glimcher Realty Trust, 8.75%, Series F........     40,000        1,012,000       8.65
        Glimcher Realty Trust, 8.125%, Series G.......     40,000          950,000       8.55
        Mills Corp., 9.00%, Series B..................     55,300        1,473,192       8.45
        Mills Corp., 9.00%, Series C..................    159,600        4,233,390       8.52
        Mills Corp., 8.75%, Series E..................     84,000        2,201,640       8.35
        Simon Property Group, 8.75%, Series F.........     30,000          786,000       8.35
        Taubman Centers, 8.30%, Series A..............    127,600        3,170,860       8.35
                                                                    --------------
                                                                        36,531,082
                                                                    --------------
        Total Shopping Center.........................                  75,686,632
                                                                    --------------
            Total Preferred Stock
              (Identified cost -- $210,286,023).......                 221,631,741
                                                                    --------------
            Total Equities
              (Identified cost -- $870,866,521).......               1,059,986,238
                                                                    --------------
</Table>

<Table>
<Caption>
                                                          PRINCIPAL
                                                            AMOUNT
                                                          ----------
<S>                                           <C>         <C>          <C>
Commercial Paper                                 0.40%
        State Street Corp., 1.10%, due 07/01/04
          (Identified cost -- $2,851,000)..............   $2,851,000       2,851,000
                                                                       -------------
Total Investments (Identified cost --
  $873,717,521).............................   147.94%                 1,062,837,238
Liabilities In Excess of Other Assets.......    (0.61)%                   (4,388,460)
Liquidation Value of Taxable Auction Market
  Preferred Shares: Series T, Series W,
  Series TH, and Series F (Equivalent to
  $25,000 per share based on 2,800 shares
  outstanding for Series T, Series W,
  Series TH and Series F)...................   (38.98)%                 (280,000,000)
Liquidation Value of Auction Market
  Preferred Shares: Series M28 (Equivalent
  to $25,000 per share based on 2,400
  shares outstanding).......................    (8.35)%                  (60,000,000)
                                                ------                 -------------
Net Assets Applicable to Common Shares
  (Equivalent to $18.49 per share based on
  38,856,074 shares of capital stock
  outstanding)..............................   100.00%                 $ 718,448,778
                                               ------                  -------------
                                               ------                  -------------
</Table>

                See accompanying notes to financial statements.

                                       61




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                      STATEMENT OF ASSETS AND LIABILITIES
                           JUNE 30, 2004 (UNAUDITED)

<Table>
<S>                                                           <C>
Assets:
    Investments in securities, at value (Identified
      cost -- $873,717,521) (Note 1)........................  $1,062,837,238
    Cash....................................................             330
    Dividends receivable....................................       5,495,603
    Unrealized appreciation on interest rate swap
      transactions (Notes 1 and 6)..........................         568,264
    Other assets............................................          65,760
                                                              --------------
        Total Assets........................................   1,068,967,195
                                                              --------------
Liabilities:
    Unrealized depreciation on interest rate swap
      transactions (Notes 1 and 6)..........................       9,089,970
    Payable to investment manager...........................         453,833
    Payable for dividends declared on common shares.........         337,192
    Payable for investment securities purchased.............         293,878
    Payable for dividends declared on preferred shares......         212,552
    Payable to administrator................................          30,607
    Other liabilities.......................................         100,385
                                                              --------------
        Total Liabilities...................................      10,518,417
                                                              --------------
Liquidation Value of Preferred Shares:
    Taxable auction market preferred shares, Series T
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series W
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series TH
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Taxable auction market preferred shares, Series F
      ($25,000 liquidation value, $0.001 par value, 2,800
      shares issued and outstanding) (Notes 1 and 5)........      70,000,000
    Auction market preferred shares, Series M28 ($25,000
      liquidation value, $0.001 par value, 2,400 shares
      issued and outstanding) (Notes 1 and 5)...............      60,000,000
                                                              --------------
                                                                 340,000,000
                                                              --------------
Total Net Assets Applicable to Common Shares................  $  718,448,778
                                                              --------------
                                                              --------------
Total Net Assets Applicable to Common Shares consist of:
    Common stock ($0.001 par value, 38,856,074 shares issued
      and outstanding) (Notes 1 and 5)......................  $  541,318,970
    Distributions in excess of net investment income........      (6,197,802)
    Accumulated net realized gain on investments............       2,729,599
    Net unrealized appreciation on investments and interest
      rate swap transactions................................     180,598,011
                                                              --------------
                                                              $  718,448,778
                                                              --------------
                                                              --------------
Net Asset Value per Common Share:
  ($718,448,778[div]38,856,074 shares outstanding)..........  $        18.49
                                                              --------------
                                                              --------------
Market Price per Common Share...............................  $        16.70
                                                              --------------
                                                              --------------
Market Price Premium/(Discount) to Net Asset Value per
  Common Share..............................................           (9.68)%
                                                              --------------
                                                              --------------
</Table>

                See accompanying notes to financial statements.

                                       62




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                            STATEMENT OF OPERATIONS
               FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)

<Table>
<S>                                                           <C>
Investment Income (Note 1):
    Dividend income.........................................  $25,279,246
    Interest income.........................................       25,030
                                                              -----------
        Total Income........................................   25,304,276
                                                              -----------
Expenses:
    Investment management fees (Note 2).....................    4,486,517
    Preferred remarketing fees..............................      423,078
    Administration fees (Note 2)............................      189,490
    Reports to shareholders.................................      168,000
    Professional fees.......................................       73,980
    Custodian fees and expenses.............................       46,675
    Directors' fees and expenses (Note 2)...................       20,976
    Transfer agent fees and expenses........................       10,817
    Miscellaneous...........................................       62,094
                                                              -----------
        Total Expenses......................................    5,481,627
    Reduction of Expenses (Note 2)..........................   (1,689,042)
                                                              -----------
        Net Expenses........................................    3,792,585
                                                              -----------
Net Investment Income.......................................   21,511,691
                                                              -----------
Net Realized and Unrealized Gain/(Loss) on Investments
  (Note 1):
    Net realized gain on investments........................    7,667,289
    Net realized loss on interest rate swap transactions....   (4,515,027)
    Net change in unrealized appreciation on investments....     (198,838)
    Net change in unrealized depreciation on interest rate
      swap transactions.....................................    6,031,257
                                                              -----------
        Net realized and unrealized gain/(loss) on
          investments.......................................    8,984,681
                                                              -----------
Net Increase Resulting from Operations......................   30,496,372
Less Dividends and Distributions to Preferred Shareholders
  from:
    Net investment income...................................   (2,025,340)
                                                              -----------
Net Increase in Net Assets from Operations Applicable to
  Common Shares.............................................  $28,471,032
                                                              -----------
                                                              -----------
</Table>

                See accompanying notes to financial statements.

                                       63




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
   STATEMENT OF CHANGES IN NET ASSETS APPLICABLE TO COMMON SHARES (UNAUDITED)

<Table>
<Caption>
                                                                  FOR THE             FOR THE
                                                              SIX MONTHS ENDED      YEAR ENDED
                                                               JUNE 30, 2004     DECEMBER 31, 2003
                                                              ----------------   -----------------
<S>                                                           <C>                <C>
Change in Net Assets Applicable to Common Shares:
    From Operations:
        Net investment income...............................    $ 21,511,691       $ 40,209,268
        Net realized gain on investments and interest rate
          swap transactions.................................       3,152,262          8,538,886
        Net change in unrealized appreciation/(depreciation)
          on investments and interest rate swap
          transactions......................................       5,832,419        212,314,764
                                                                ------------       ------------
            Net increase in net assets resulting from
              operations....................................      30,496,372        261,062,918
                                                                ------------       ------------
    Less Dividends and Distributions to Preferred
      Shareholders from:
        Net investment income...............................      (2,025,340)        (2,449,183)
        Net realized gain on investments....................              --         (1,294,045)
                                                                ------------       ------------
            Total dividends and distributions to preferred
              shareholders..................................      (2,025,340)        (3,743,228)
                                                                ------------       ------------
            Net increase in net assets from operations
              applicable to common shares...................      28,471,032        257,319,690
                                                                ------------       ------------
    Less Dividends and Distributions to Common Shareholders
      from:
        Net investment income...............................     (26,227,850)       (29,555,562)
        Net realized gain on investments....................              --        (15,615,873)
        Tax return of capital...............................              --        (10,118,665)
                                                                ------------       ------------
            Total dividends and distributions to common
              shareholders..................................     (26,227,850)       (55,290,100)
                                                                ------------       ------------
    Capital Stock Transactions (Note 5):
        Increase in net assets from shares issued to common
          shareholders for reinvestment of dividends........              --          3,038,014
        Increase in net assets from preferred offering cost
          adjustment........................................         121,909                 --
        Decrease in net assets from underwriting commissions
          and offering expenses from issuance of preferred
          shares............................................              --           (935,773)
                                                                ------------       ------------
            Net increase in net assets from capital stock
              transactions..................................         121,909          2,102,241
                                                                ------------       ------------
            Total increase in net assets applicable to
              common shares.................................       2,365,091        204,131,831
    Net Assets Applicable to Common Shares:
        Beginning of period.................................     716,083,687        511,951,856
                                                                ------------       ------------
        End of period(a)....................................    $718,448,778       $716,083,687
                                                                ------------       ------------
                                                                ------------       ------------
</Table>

---------
(a) Includes distributions in excess of net investment income of $6,197,802 at
    June 30, 2004 and undistributed net investment income of $543,697 at
    December 31, 2003.

                See accompanying notes to financial statements.

                                       64







<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                        FINANCIAL HIGHLIGHTS (UNAUDITED)

    The following table includes selected data for a common share outstanding
throughout each period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.

<Table>
<Caption>
                                                                                         FOR THE PERIOD
                                                    FOR THE             FOR THE        FEBRUARY 28, 2002(a)
                                                SIX MONTHS ENDED      YEAR ENDED            THROUGH
                                                 JUNE 30, 2004     DECEMBER 31, 2003   DECEMBER 31, 2002
PER SHARE OPERATING PERFORMANCE:                ----------------   -----------------   ------------------
<S>                                             <C>                <C>                 <C>
Net asset value per common share, beginning of
 period.......................................       $18.43             $13.25               $14.57
                                                     ------             ------               ------
Income from investment operations:
   Net investment income......................         0.55(b)            1.04(b)              0.78
   Net realized and unrealized gain/(loss) on
     investments and interest rate swap
     transactions.............................         0.24               5.69                (0.90)
                                                     ------             ------               ------
       Total income from investment
         operations...........................         0.79               6.73                (0.12)
                                                     ------             ------               ------
Less dividends and distributions to preferred
 shareholders from:
   Net investment income......................        (0.05)             (0.07)               (0.09)
   Net realized gain on investments...........           --              (0.03)               (0.01)
                                                     ------             ------               ------
       Total dividends and distributions to
         preferred shareholders...............        (0.05)             (0.10)               (0.10)
                                                     ------             ------               ------
       Total from investment operations
         applicable to common shares..........         0.74               6.63                (0.22)
                                                     ------             ------               ------
 Less: Offering and organization costs charged
       to paid-in capital -- common shares....           --                 --                (0.03)
     Offering and organization costs charged
       to paid-in capital -- preferred
       shares.................................           --              (0.02)               (0.09)
     Preferred Offering Cost Adjustment.......           --(c)              --                   --
     Dilutive effect of common share
       offering...............................           --                 --                (0.03)
                                                     ------             ------               ------
       Total offering and organization
         costs................................           --              (0.02)               (0.15)
                                                     ------             ------               ------
Less dividends and distributions to common
 shareholders from:
   Net investment income......................        (0.68)             (0.76)               (0.64)
   Net realized gain on investments...........           --              (0.41)               (0.08)
   Tax return of capital......................           --              (0.26)               (0.23)
                                                     ------             ------               ------
       Total dividends and distributions to
         common shareholders..................        (0.68)             (1.43)               (0.95)
                                                     ------             ------               ------
Net increase/(decrease) in net asset value per
 common share.................................         0.06               5.18                (1.32)
                                                     ------             ------               ------
Net asset value, per common share, end of
 period.......................................       $18.49             $18.43               $13.25
                                                     ------             ------               ------
                                                     ------             ------               ------
Market value, per common share, end of
 period.......................................       $16.70             $17.85               $13.05
                                                     ------             ------               ------
                                                     ------             ------               ------
Net asset value total return(d)...............         4.26%(e)          52.61%               -2.73%(e)
                                                     ------             ------               ------
                                                     ------             ------               ------
Market value return(d)........................       -2.77%(e)           50.07%               -6.95%(e)
                                                     ------             ------               ------
                                                     ------             ------               ------
</Table>

---------
(a) Commencement of operations.

(b) Calculation based on average shares outstanding.

(c) Less than $.005 per share. See Note 5.


(d) Total market value return is computed based upon the New York Stock Exchange
    market price of the Fund's shares and excludes the effects of brokerage
    commissions. Dividends and distributions, if any, are assumed for purposes
    of this calculation, to be reinvested at prices obtained under the Fund's
    dividend reinvestment plan. Net asset value total return measures the
    changes in value over the period indicated, taking into account dividends as
    reinvested.


(e) Not annualized.

                See accompanying notes to financial statements.

                                       65




<PAGE>


                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                FINANCIAL HIGHLIGHTS (UNAUDITED) -- (CONTINUED)

<Table>
<Caption>
                                                                                         FOR THE PERIOD
                                                    FOR THE             FOR THE        FEBRUARY 28, 2002(f)
                                                SIX MONTHS ENDED      YEAR ENDED            THROUGH
                                                 JUNE 30, 2004     DECEMBER 31, 2003   DECEMBER 31, 2002
RATIOS/SUPPLEMENTAL DATA:                       ----------------   -----------------   ------------------
<S>                                             <C>                <C>                 <C>
Net assets applicable to common shares, end of
 period (in millions).........................      $  718.4           $  716.1             $  512.0
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of expenses to average daily net assets
 applicable to common shares (before expense
 reduction)(k)................................          1.53%(h)           1.57%                1.52%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of expenses to average daily net assets
 applicable to common shares (net of expense
 reduction)(k)................................          1.06%(h)           1.09%                1.05%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of net investment income to average
 daily net assets applicable to common shares
 (before expense reduction)(k)................          5.53%(h)           6.39%                6.82%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of net investment income to average
 daily net assets applicable to common shares
 (net of expense reduction)(k)................          6.00%(h)           6.88%                7.29%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of expenses to average daily managed
 assets (before expense reduction)(g,k).......          1.04%(h)           1.04%                1.04%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Ratio of expenses to average daily managed
 assets (net of expense reduction)(g,k).......          0.72%(h)           0.72%                0.72%(h)
                                                    --------           --------             --------
                                                    --------           --------             --------
Portfolio turnover rate.......................          2.05%(i)          20.51%               12.37%(i)
                                                    --------           --------             --------
                                                    --------           --------             --------
PREFERRED SHARES:
Liquidation value, end of period (in 000's)...      $340,000           $340,000             $280,000
                                                    --------           --------             --------
                                                    --------           --------             --------
Total shares outstanding (in 000's)...........            14                 14                   11
                                                    --------           --------             --------
                                                    --------           --------             --------
Asset coverage per share......................      $ 77,827           $ 77,653             $ 70,710
                                                    --------           --------             --------
                                                    --------           --------             --------
Liquidation preference per share..............      $ 25,000           $ 25,000             $ 25,000
                                                    --------           --------             --------
                                                    --------           --------             --------
Average market value per share(j).............      $ 25,000           $ 25,000             $ 25,000
                                                    --------           --------             --------
                                                    --------           --------             --------
</Table>

---------
(f) Commencement of operations.

(g) Average daily managed assets represent the net assets applicable to common
    shares plus the liquidation preference of preferred shares.

(h) Annualized.

(i) Not annualized.

(j) Based on weekly prices.

(k) Ratios do not reflect the effects of dividend payments to preferred
    shareholders.

                See accompanying notes to financial statements.

                                       66







<PAGE>


NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

    Cohen & Steers Quality Income Realty Fund, Inc. (the fund) was incorporated
under the laws of the State of Maryland on August 22, 2001 and is registered
under the Investment Company Act of 1940, as amended, as a nondiversified,
closed-end management investment company.

    The following is a summary of significant accounting policies consistently
followed by the fund in the preparation of its financial statements. The
policies are in conformity with accounting principles generally accepted in the
United States of America. The preparation of the financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from those estimates.

    Portfolio Valuation: Investments in securities that are listed on the New
York Stock Exchange are valued, except as indicated below, at the last sale
price reflected at the close of the New York Stock Exchange on the business day
as of which such value is being determined. If there has been no sale on such
day, the securities are valued at the mean of the closing bid and asked prices
for the day. If no bid or asked prices are quoted on such day, then the security
is valued by such method as the board of directors shall determine in good faith
to reflect its fair market value.

    Securities not listed on the New York Stock Exchange but listed on other
domestic or foreign securities exchanges or admitted to trading on the National
Association of Securities Dealers Automated Quotations, Inc. (Nasdaq) national
market system are valued in a similar manner. Securities traded on more than one
securities exchange are valued at the last sale price on the business day as of
which such value is being determined as reflected on the tape at the close of
the exchange representing the principal market for such securities.

    Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
manager to be over-the-counter, but excluding securities admitted to trading on
the Nasdaq national list, are valued at the official closing prices as reported
by Nasdaq, the National Quotations Bureau or such other comparable sources as
the board of directors deems appropriate to reflect their fair market value.
However, certain fixed-income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed by the board of
directors to reflect the fair market value of such securities. Where securities
are traded on more than one exchange and also over-the-counter, the securities
will generally be valued using the quotations the board of directors believes
reflect most closely the value of such securities.

    Short-term debt securities, which have a maturity of 60 days or less, are
valued at amortized cost which approximates value.

    Interest Rate Swaps: The fund uses interest rate swaps in connection with
the sale of auction market preferred shares. The interest rate swaps are
intended to reduce or eliminate the risk that an increase in short-term interest
rates could have on the performance of the fund's common shares as a result of
the floating rate nature of leverage. In an interest rate swap, the fund agrees
to pay the other party to the interest rate swap (which is known as the
counterparty) a fixed rate payment in exchange for the counterparty agreeing to
pay the fund a variable rate payment that is intended to approximate the fund's
variable rate payment obligation on the auction market preferred shares. The
payment obligation is based on the notional amount of the swap. Depending on the
state of interest rates in general, the use of interest rate swaps could enhance
or harm the overall performance of the common shares. The market value of
interest rate swaps is based on pricing models that consider the time value of
money, volatility, the current market and contractual prices of the underlying
financial instrument. Unrealized gains are reported as an asset and unrealized
losses are reported as a liability on the Statement of Assets and Liabilities.
The change in value of swaps, including the periodic amounts of interest to be
paid or received on swaps, is reported as unrealized gains or losses in the
Statement of Operations. A realized gain or loss is

                                       67




<PAGE>


recorded upon payment or receipt of a periodic payment or termination of swap
agreements. Swap agreements involve, to varying degrees, elements of market and
counterparty risk, and exposure to loss in excess of the related amounts
reflected in the Statement of Assets and Liabilities.

    Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realized gains and losses on investments sold are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date. The fund
records distributions received in excess of income from underlying investments
as a reduction of cost of investments and/or realized gain. Such amounts are
based on estimates if actual amounts are not available, and actual amounts of
income, realized gain and return of capital may differ from the estimated
amounts. The fund adjusts the estimated amounts of the components of
distributions (and consequently its net investment income) as an increase to
unrealized appreciation/(depreciation) on investments as necessary once the
issuers provide information about the actual composition of the distributions.

    Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid to common shareholders monthly. Dividends to
shareholders are recorded on the ex-dividend date. A portion of the fund's
dividend may consist of amounts in excess of net investment income derived from
nontaxable components of the dividends from the fund's portfolio investments.
Net realized capital gains, unless offset by any available capital loss
carryforward, are distributed to shareholders annually.

    Dividends from net investment income and capital gain distributions are
determined in accordance with U.S. federal income tax regulations which may
differ from generally accepted accounting principles.

    Series T, Series TH, and Series F preferred shares pay dividends based on a
variable interest rate set at auctions, normally held every seven days.
Dividends for Series T, Series TH, and Series F preferred shares are declared
and recorded for the subsequent seven day period on the auction date. In most
instances, dividends are payable every seven days, on the first business day
following the end of the dividend period.

    Series M28 and Series W preferred shares pay dividends based on a variable
interest rate set at auctions, normally held every 28 days. Dividends for
Series M28 and Series W preferred shares are declared and recorded for the
subsequent 28 day period on the auction date. In most instances, dividends are
payable every 28 days, on the first business day following the end of the
dividend period.

    Federal Income Taxes: It is the policy of the fund to qualify as a regulated
investment company, if such qualification is in the best interest of the
shareholders, by complying with the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies, and by distributing
substantially all of its taxable earnings to its shareholders. Accordingly, no
provision for federal income or excise tax is necessary.

NOTE 2. INVESTMENT MANAGEMENT FEES, ADMINISTRATION FEES AND OTHER TRANSACTIONS
        WITH AFFILIATES

    Investment Management Fees: Cohen & Steers Capital Management, Inc. (the
investment manager) serves as the investment manager to the fund, pursuant to an
investment management agreement (the management agreement). The investment
manager furnishes a continuous investment program for the fund's portfolio,
makes the day-to-day investment decisions for the fund and generally manages the
fund's investments in accordance with the stated policies of the fund, subject
to the general supervision of the board of directors of the fund. The investment
manager also performs certain administrative services for the fund.

    For the services under the management agreement, the fund pays the
investment manager a monthly management fee, computed daily and payable monthly
at an annual rate of 0.85% of the fund's average daily managed asset value.
Managed asset value is the net asset value of the common shares plus the
liquidation preference of the preferred shares. For the six months ended
June 30, 2004, the fund incurred investment management fees of $4,486,517.

                                       68




<PAGE>


    The investment manager has contractually agreed to waive investment
management fees in the amount of 0.32% of average daily managed asset value for
the first five fiscal years of the fund's operations, 0.26% of average daily
managed asset value in year six, 0.20% of average daily managed asset value in
year seven, 0.14% of average daily managed asset value in year eight, 0.08% of
average daily managed asset value in year nine and 0.02% of average daily
managed asset value in year 10. As long as this waiver continues, it may lower
the fund's expenses and increase its total return. For the six months ended
June 30, 2004, the investment manager waived management fees of $1,689,042.

    Administration Fees: Pursuant to an administration agreement, the investment
manager also performs certain administrative and accounting functions for the
fund and receives a fee of 0.02% of the fund's average daily managed asset
value. For the six months ended June 30, 2004, the fund incurred $105,565 in
administration fees.

    Director's Fees: Certain directors and officers of the fund are also
directors, officers and/or employees of the investment manager. None of the
directors and officers so affiliated received compensation for their services.
For he six months ended June 30, 2004, fees and related expenses accrued for
nonaffiliated directors totaled $20,976.

NOTE 3. PURCHASES AND SALES OF SECURITIES

    Purchases and sales of securities, excluding short-term investments for the
six months ended June 30, 2004, totaled $24,246,705 and $21,808,617,
respectively.

NOTE 4. INCOME TAXES

    At June 30, 2004 the cost of investments and net unrealized appreciation for
federal income tax purposes were as follows:

<Table>
<S>                                                           <C>
Aggregate cost..............................................  $873,717,521
                                                              ------------
                                                              ------------
Gross unrealized appreciation...............................  $191,074,571
Gross unrealized depreciation...............................    (1,954,854)
                                                              ------------
Net unrealized appreciation on investments..................   189,119,717
Net unrealized depreciation on interest rate swap
  transactions..............................................    (8,521,706)
                                                              ------------
Net unrealized appreciation.................................  $180,598,011
                                                              ------------
                                                              ------------
</Table>

NOTE 5. CAPITAL STOCK

    The fund is authorized to issue 100 million shares of common stock at a par
value of $0.001 per share.

    During the six months ended June 30, 2004, the fund issued no shares of
common stock for the reinvestment of dividends. An adjustment of $121,909
related to preferred offering costs was credited to common stock during the six
months ended June 30, 2004.

    On September 15, 2003, the fund issued 2,400 auction market preferred
shares, Series M28 (par value $0.001). Proceeds paid to the fund amounted to
$59,064,267 after deduction of underwriting commissions and offering expenses of
$935,733. This issue has received a 'AAA/Aaa' rating from Standard & Poor's and
Moody's.

    During the year ended December 31, 2003, the fund issued 219,752 shares of
common stock for the reinvestment of dividends.

    Preferred shares are senior to the fund's common shares and will rank on a
parity with shares of any other series of preferred shares, and with shares of
any other series of preferred stock of the fund, as to the payment of dividends
and the distribution of assets upon liquidation. If the fund does not timely
cure a failure to (1) maintain a discounted value of its portfolio equal to the
preferred shares basic maintenance amount, (2) maintain the 1940 Act preferred
shares asset coverage, or (3) file a required certificate related to asset
coverage on time, the preferred shares

                                       69




<PAGE>


will be subject to a mandatory redemption at the redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. To the extent permitted under the 1940 Act and
Maryland Law, the fund at its option may without consent of the holders of
preferred shares, redeem preferred shares having a dividend period of one year
or less, In whole, or in part, on the business day after the last day of such
dividend period upon not less than 15 calendar days and not more than 40
calendar days prior to notice. The optional redemption price is $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption. The fund's common shares and preferred shares have
equal voting rights of one vote per share and vote together as a single class.
In addition, the affirmative vote of the holders a majority, as defined in the
1940 Act, of the outstanding preferred shares shall be required to (1) approve
any plan of reorganization that would adversely affect the taxable auction
market preferred shares and (2) approve any matter that materially and adversely
affects the rights, preferences, or powers of that series.

NOTE 6. INVESTMENTS IN INTEREST RATE SWAPS

    The fund has entered into interest rate swap agreements with Merrill Lynch
Derivative Products, UBS AG, Fleet National Bank, and Royal Bank of Canada.
Under the agreements the fund receives a floating rate of interest and pays a
respective fixed rate of interest on the nominal value of the swaps. Details of
the swaps at June 30, 2004 are as follows:

<Table>
<Caption>
                                                                                                   UNREALIZED
                              NOTIONAL                    FLOATING RATE(a)                        APPRECIATION/
       COUNTERPARTY            AMOUNT      FIXED RATE     (RESET MONTHLY)      TERMINATION DATE   DEPRECIATION
       ------------            ------      ----------     ---------------      ----------------   ------------
<S>                          <C>           <C>          <C>                    <C>                <C>
Merrill Lynch Derivative
  Products                   $46,000,000    4.5600%            1.150%             April 5, 2005   $   (948,638)
Merrill Lynch Derivative
  Products                   $46,000,000    5.2100%            1.150%             April 5, 2007     (2,225,784)
Merrill Lynch Derivative
  Products                   $46,000,000    5.5800%            1.150%             April 5, 2009     (2,944,853)
UBS AG                       $24,000,000    4.4500%            1.238%            April 15, 2005       (468,907)
UBS AG                       $24,000,000    5.1200%            1.238%            April 15, 2007     (1,082,982)
UBS AG                       $24,000,000    5.4950%            1.238%            April 15, 2009     (1,418,806)
Fleet National Bank          $14,000,000    3.2125%            1.113%           October 2, 2008        400,087
Royal Bank of Canada         $14,000,000    3.6800%            1.280%          October 22, 2008        168,177
                                                                                                  ------------
                                                                                                  $ (8,521,706)
                                                                                                  ------------
                                                                                                  ------------
</Table>

---------

(a) Based on LIBOR (London Interbank Offered Rate). Represents rates in effect
    at June 30, 2004.

                                       70







<PAGE>



                                                                      APPENDIX A

                             RATINGS OF INVESTMENTS

    Description of certain ratings assigned by S&P and Moody's:

S&P

LONG-TERM

    'AAA' -- An obligation rated 'AAA' has the highest rating assigned by S&P.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.

    'AA' -- An obligation rated 'AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.

    'A' -- An obligation rated 'A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.

    'BBB' -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.

    'BB', 'B', 'CCC', 'CC', and 'C'-- Obligations rated 'BB', 'B', 'CCC', 'CC',
and 'C' are regarded as having significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C' the highest. While such
obligations will likely have some quality and protective characteristics, these
may be outweighed by large uncertainties or major exposures to adverse
conditions.

    'BB' -- An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.

    'B' -- An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

    'CCC' -- An obligation rated 'CCC' is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.

    'CC' -- An obligation rated 'CC' is currently highly vulnerable to
nonpayment.

    'C' -- A subordinated debt or preferred stock obligation rated 'C' is
currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a
situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.

    'D' -- An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.

    'r' -- The symbol 'r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or

                                      A-1




<PAGE>


commodities; obligations exposed to severe prepayment risk -- such as
interest-only or principal-only mortgage securities; and obligations with
unusually risky interest terms, such as inverse floaters.

    'N.R.' -- The designation 'N.R.' indicates that no rating has been
requested, that there is insufficient information on which to base a rating, or
that S&P does not rate a particular obligation as a matter of policy.

    Note: The ratings from 'AA' to 'CCC' may be modified by the addition of a
plus (+) or minus (-) sign designation to show relative standing within the
major rating categories.

SHORT-TERM

    'A-1' -- A short-term obligation rated 'A-1' is rated in the highest
category by S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are given a plus
sign (+) designation. This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.

    'A-2' -- A short-term obligation rated 'A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.

    'A-3' -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.

    'B' -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet is
financial commitment on the obligation.

    'C' -- A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.

    'D' -- A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The 'D' rating also
will be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.

MOODY'S

LONG-TERM

    'Aaa' -- Bonds rated 'Aaa' are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as 'gilt
edged.' Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

    'Aa' -- Bonds rated 'Aa' are judged to be of high quality by all standards.
Together with the 'Aaa' group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the 'Aaa'
securities.

    'A' -- Bonds rated 'A' possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.

                                      A-2




<PAGE>


    'Baa' -- Bonds rated 'Baa' are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

    'Ba' -- Bonds rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

    'B' -- Bonds rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

    'Caa' -- Bonds rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

    'Ca' -- Bonds rated 'Ca' represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

    'C' -- Bonds rated 'C' are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

    Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from 'Aa' through 'Caa'. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.

PREFERRED STOCK

    Because of the fundamental differences between preferred stocks and bonds,
Moody's employs a variation of our familiar bond rating symbols in the quality
ranking of preferred stock.

    These symbols, presented below, are designed to avoid comparison with bond
quality in absolute terms. It should always be borne in mind that preferred
stock occupies a junior position to bonds within a particular capital structure
and that these securities are rated within the universe of preferred stocks.

    'aaa' -- An issue rated 'aaa' is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.

    'aa' -- An issue rated 'aa' is considered a high-grade preferred stock. This
rating indicates that there is a reasonable assurance the earnings and asset
protection will remain relatively well maintained in the foreseeable future.

    'a' -- An issue rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the 'aaa'
and 'aa' classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.

    'baa' -- An issue rated 'baa' is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present, but may be questionable over any great
length of time.

    'ba' -- An issue rated 'ba' is considered to have speculative elements. Its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.

    'b' -- An issue rated 'b' generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.

                                      A-3




<PAGE>



    'caa' -- An issue rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.

    'ca' -- An issue rated 'ca' is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.

    'c' -- This is the lowest-rated class of preferred or preference stock.
Issues so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.

    Note: As in the case of bond ratings, Moody's applies to preferred stock
ratings the numerical modifiers 1, 2, and 3 in rating classifications 'aa'
through 'b'. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

PRIME RATING SYSTEM (SHORT-TERM)

    Issuers rated Prime-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

        Leading market positions in well-established industries.

        High rates of return on funds employed.

        Conservative capitalization structure with moderate reliance on debt and
    ample asset protection.

        Broad margins in earnings coverage of fixed financial charges and high
    internal cash generation.

        Well-established access to a range of financial markets and assured
    sources of alternate liquidity.

    Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

    Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.

    Issuers rated Not Prime do not fall within any of the Prime rating
categories.

                                      A-4




<PAGE>






                                                                      APPENDIX B

                             ARTICLES SUPPLEMENTARY

                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
            Articles Supplementary Creating And Fixing The Rights of
               Series M7 Taxable Auction Market Preferred Shares

    Cohen & Steers Quality Income Realty Fund, Inc., a Maryland corporation
having its principal office in the City of Baltimore in the State of Maryland
(the 'Corporation'), certifies to the State Department of Assessments and
Taxation of Maryland that:

    First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Articles of Incorporation, as amended
and supplemented (which as hereafter amended, restated and supplemented from
time to time, is together with these Articles Supplementary, the 'Charter'), and
the Maryland General Corporation Law (the 'MGCL'), the Board of Directors has
duly classified out of the Corporation's authorized and unissued common stock,
and authorized the creation and issuance of, 3,760 shares of the Corporation's
Taxable Auction Market Preferred Shares ('AMPS') (par value $.001 per share) and
has further classified all of such shares as 'Series M7 AMPS,' liquidation
preference $25,000 per share (herein referred to as the 'Series').

    Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's By-laws, the Board of Directors of the
Corporation has appointed a pricing committee (the 'Pricing Committee') and has
authorized such Pricing Committee to fix the terms of the Series, as set forth
herein.

    Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the Series
are as follows:

                                  DESIGNATION

    Series M7 AMPS: A series of AMPS, par value $.001 per share, liquidation
preference $25,000 per share, is hereby designated 'Series M7 Taxable Auction
Market Preferred Shares'. Each share of the Series may be issued on a date to be
determined by the Board of Directors of the Corporation or pursuant to their
delegated authority; have an initial dividend rate per annum, initial Dividend
Period and an initial Dividend Payment Date as will be determined in advance of
the issuance thereof by the Board of Directors of the Corporation or pursuant to
their delegated authority; and have such other preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law, or as
are set forth in Part I and Part II of these Articles Supplementary. The Series
will constitute a separate series of AMPS of the Corporation.

    Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth will be as set forth in the Articles Supplementary with respect to the
additional shares.

    As used in Part I and Part II of these Articles Supplementary, capitalized
terms will have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.


                                      B-1




<PAGE>




                             PART I: TERMS OF AMPS

    1. Number of Shares; Ranking.

    (a) The initial number of authorized shares constituting the Series is 3,760
shares. No fractional shares of the Series will be issued.

    (b) Shares of the Series which at any time have been redeemed or purchased
by the Corporation will, after such redemption or purchase, have the status of
authorized but unissued shares of preferred stock.

    (c) Shares of the Series will rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other AMPS) as to
the payment of dividends to which such shares are entitled.

    (d) No Holder of shares of the Series will have, solely by reason of being
such a holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of the Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.

    2. Dividends.

    (a) The Holders of shares of the Series will be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and no more, payable
on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of the Series issued on the Date
of Original Issue will accumulate from the Date of Original Issue.

    (b) (i) Dividends will be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on the shares of the Series, as follows:

        (A) with respect to any Dividend Period of one year or less, on the
    Business Day following the last day of such Dividend Period; provided,
    however, if the Dividend Period is more than 91 days then on the 91st, 181st
    and 271st days within such period, if applicable, and on the Business Day
    following the last day of such Dividend Period; and

        (B) with respect to any Dividend Period of more than one year, on a
    quarterly basis on each January 1, April 1, July 1 and October 1 within such
    Dividend Period and on the Business Day following the last day of such
    Dividend Period.

    (ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
will be the first Business Day following such day for payment of dividends.

    (iii) The Corporation will pay to the Paying Agent not later than
12:00 noon, New York City time, on each Dividend Payment Date for the Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of the Series on such Dividend Payment Date. The Corporation
will not be required to establish any reserves for the payment of dividends.

    (iv) All moneys paid to the Paying Agent for the payment of dividends will
be held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2. Any
moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends will, upon request and to the
extent permitted by law, be repaid to the Corporation at the end of 90 days from
the date on which such moneys were to have been so applied.

    (v) Each dividend on the Series will be paid on the Dividend Payment Date
therefor to the Holders of the Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15


                                      B-2




<PAGE>



days preceding the payment date thereof, as may be fixed by the Board of
Directors. No interest will be payable in respect of any dividend payment or
payments which may be in arrears.

    (c) (i) The dividend rate on Outstanding shares of the Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor will be equal to the rate as determined
in the manner set forth under 'Designation' above. For each subsequent Dividend
Period for the Series, the dividend rate will be equal to the rate per annum
that results from an Auction (but the rate set at the Auction will not exceed
the Maximum Rate); provided, however, that if an Auction for any subsequent
Dividend Period of the Series is not held for any reason or if Sufficient
Clearing Orders have not been made in an Auction (other than as a result of all
shares of the Series being the subject of Submitted Hold Orders and other than
in an auction for a Special Dividend Period), then the dividend rate on the
shares of the Series for any such Dividend Period will be the Maximum Rate
(except (i) during a Default Period when the dividend rate will be the Default
Rate, as set forth in Section 2(c)(ii) below or (ii) after a Default Period and
prior to the beginning of the next Dividend Period when the dividend rate will
be the Maximum Rate at the close of business on the last day of such Default
Period). If the Corporation has declared a Special Dividend Period and there are
not Sufficient Clearing Orders, the dividend rate for the next rate period will
be the same as during the current rate period. If as a result of an
unforeseeable disruption of the financial markets, an Auction cannot be held for
a period of more than three business days, the dividend rate for the Subsequent
Dividend Period will be the same as the dividend rate for the current Dividend
Period.

    (ii) Subject to the cure provisions in Section 2(c)(iii) below, a 'Default
Period' with respect to the Series will commence on any date the Corporation
fails to deposit irrevocably in trust in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (A) the full amount of any declared dividend
on the Series payable on the Dividend Payment Date (a 'Dividend Default') or
(B) the full amount of any redemption price (the 'Redemption Price') payable on
the date fixed for redemption (the 'Redemption Date') (a 'Redemption Default'
and together with a Dividend Default, hereinafter referred to as 'Default').

    Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default will end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price will have been deposited irrevocably in trust in
same-day funds with the Paying Agent. In the case of a Dividend Default, the
Applicable Rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate, and each subsequent Dividend Period commencing
after the beginning of a Default Period will be a Standard Dividend Period;
provided, however, that the commencement of a Default Period will not by itself
cause the commencement of a new Dividend Period. No Auction will be held during
a Default Period.

    (iii) No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Corporation) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360 for the
Series. The Default Rate will be equal to the Reference Rate multiplied by
three (3).

    (iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) will be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be 360
for the Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any


                                      B-3




<PAGE>



Dividend Payment Date (or in respect of dividends on another date in connection
with a redemption during such Dividend Period) will be computed as described in
the preceding sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.

    (d) Any dividend payment made on shares of the Series will first be credited
against the earliest accumulated but unpaid dividends.

    (e) For so long as the shares of the Series are Outstanding, except as
otherwise contemplated by Part I of these Articles Supplementary, the
Corporation will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares ranking junior to the Series as to dividends or upon liquidation) with
respect to Common Shares or any other capital stock of the Corporation ranking
junior to the Series as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other capital stock ranking junior to the Series (except by conversion
into or exchange for shares of the Corporation ranking junior to the Series as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Corporation would have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and the 1940 Act Preferred Shares Asset Coverage would be achieved, (ii) all
cumulative and unpaid dividends due on or prior to the date of the transaction
have been declared and paid in full with respect to the Corporation's preferred
stock, including the Series or will have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent, and (iii) the Corporation
has redeemed the full number of shares of preferred stock required to be
redeemed by any mandatory provision for redemption, including the Series
required to be redeemed by any provision for mandatory redemption contained in
Section 3(a)(ii) of Part I of these Articles Supplementary.

    (f) For so long as shares of the Series are Outstanding, except as set forth
in the next sentence, the Corporation will not declare, pay or set apart for
payment on any series of stock of the Corporation ranking, as to the payment of
dividends, on a parity with the Series for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the Series
through its most recent Dividend Payment Date. When dividends are not paid in
full upon the Series through its most recent Dividend Payment Date or upon any
other series of stock ranking on a parity as to the payment of dividends with
the Series through its most recent Dividend Payment Date, all dividends declared
upon the Series and any other such series of stock ranking on a parity as to the
payment of dividends with the Series will be declared pro rata so that the
amount of dividends declared per share on the Series and such other series of
preferred stock ranking on a parity therewith will in all cases bear to each
other the same ratio that accumulated dividends per share on the Series and such
other series of preferred stock ranking on a parity therewith bear to each
other.

    3. Redemption.

    (a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Maryland law, the
Corporation may, at its option, redeem in whole or in part out of funds legally
available therefor shares of the Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ('Redemption Price'), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of these Articles
Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of the Series will be


                                      B-4




<PAGE>



subject to optional redemption except in accordance with any Specific Redemption
Provisions approved by the Board of Directors after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Corporation will not give a notice of or
effect any redemption pursuant to this Section 3(a)(i) unless, on the date on
which the Corporation gives such notice and on the Redemption Date, (a) the
Corporation has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable Redemption Date and having a value
not less than the amount (including any applicable premium) due to Holders of
the Series by reason of the redemption of the Series on the Redemption Date and
(b) the Corporation would have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to occur on
such date, it being understood that the provisions of paragraph (d) of this
Section 3 will be applicable in such circumstances in the event the Corporation
makes the deposit and takes the other action required thereby.

    (ii) If the Corporation fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is not
cured within ten Business Days following the relevant Valuation Date, in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test, or
the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an 'Asset Coverage Cure
Date'), the Series will be subject to mandatory redemption out of funds legally
available therefor. The number of shares of the Series to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of shares of
the Series the redemption of which, if deemed to have occurred immediately prior
to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Corporation meeting the Preferred Shares Basic Maintenance Amount
Test, and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all shares of the Series then Outstanding will be redeemed) and (B) the
maximum number of shares of the Series that can be redeemed out of funds
expected to be available therefor on the Mandatory Redemption Date at the
Mandatory Redemption Price set forth in subparagraph (a)(iii) of this
Section 3.

    (iii) In determining the shares of the Series required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Corporation will allocate
the number of shares required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata or among the Holders of the Series in proportion to
the number of shares they hold and shares of other preferred stock subject to
mandatory redemption provisions similar to those contained in this Section 3,
subject to the further provisions of this subparagraph (iii). The Corporation
will effect any required mandatory redemption pursuant to: (A) the Preferred
Shares Basic Maintenance Amount Test, as described in subparagraph (a)(ii) of
this Section 3, no later than 30 days after the Corporation last met the
Preferred Shares Basic Maintenance Amount Test, or (B) the 1940 Act Preferred
Shares Asset Coverage, as described in subparagraph (a)(ii) of this Section 3,
no later than 30 days after the Asset Coverage Cure Date (the 'Mandatory
Redemption Date'), except that if the Corporation does not have funds legally
available for the redemption of, or is not otherwise legally permitted to
redeem, the number of shares of the Series which would be required to be
redeemed by the Corporation under clause (A) of subparagraph (a)(ii) of this
Section 3 if sufficient funds were available, together with shares of other
preferred stock which are subject to mandatory redemption under provisions
similar to those contained in this Section 3, or the Corporation otherwise is
unable to effect such redemption on or prior to such Mandatory Redemption Date,
the Corporation will redeem those shares of the Series, and shares of other
preferred stock which it was unable to redeem, on the earliest practicable date
on which the Corporation will have such funds available, upon notice pursuant to
Section 3(b) to record owners of shares of the Series to be redeemed and the
Paying Agent. The Corporation will deposit with the Paying Agent funds
sufficient to redeem the specified number of shares of the Series with respect
to a redemption required under subparagraph (a)(ii) of this Section 3, by
1:00 P.M., New York City time, of the


                                      B-5




<PAGE>



Business Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding shares of the Series are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed will be redeemed pro rata
from the Holders of such shares in proportion to the number of the shares of the
Series held by such Holders, by lot or by such other method as the Corporation
will deem fair and equitable, subject, however, to the terms of any applicable
Specific Redemption Provisions. 'Mandatory Redemption Price' means the
Redemption Price plus (in the case of a Dividend Period of one year or more
only) a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.

    (b) In the event of a redemption pursuant to the foregoing Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation will deliver a notice of redemption to the Auction Agent (the
'Notice of Redemption') containing the information set forth below (i) in the
case of an optional redemption pursuant to Section 3(a)(i) above, one Business
Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the
10th day preceding the Mandatory Redemption Date. Only with respect to shares
held by the Securities Depository, the Auction Agent will use its reasonable
efforts to provide telephonic notice to each Holder of shares of the Series
called for redemption not later than the close of business on the Business Day
immediately following the day on which the Auction Agent determines the shares
to be redeemed (or, during a Default Period with respect to such shares, not
later than the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from the
Corporation). The Auction Agent will confirm such telephonic notice in writing
not later than the close of business on the third Business Day preceding the
date fixed for redemption by providing the Notice of Redemption to each Holder
of shares called for redemption, the Paying Agent (if different from the Auction
Agent) and the Securities Depository. Notice of Redemption will be addressed to
the registered owners of shares of the Series at their addresses appearing on
the share records of the Corporation. Such Notice of Redemption will set forth
(i) the date fixed for redemption, (ii) the number and identity of shares of the
Series to be redeemed, (iii) the redemption price (specifying the amount of
accumulated dividends to be included therein), (iv) that dividends on the shares
to be redeemed will cease to accumulate on such date fixed for redemption, and
(v) the provision under which redemption will be made. No defect in the Notice
of Redemption or in the transmittal or mailing thereof will affect the validity
of the redemption proceedings, except as required by applicable law. If fewer
than all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder will also specify the number of shares to be redeemed from
such Holder.

    (c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred stock, including the Series, may be redeemed at the option of the
Corporation unless all dividends in arrears on the Outstanding shares of the
Series and any other preferred stock have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing will not
prevent the purchase or acquisition of outstanding shares of preferred stock
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding shares of
preferred stock.

    (d) Upon the deposit of funds sufficient to redeem shares of the Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares will cease to
accumulate and such shares will no longer be deemed to be Outstanding for any
purpose (including, without limitation, for purposes of calculating whether the
Corporation has met the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of the
shares so called for redemption will cease and terminate, except the right of
such Holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price will be paid by the
Paying Agent to the nominee of the Securities Depository. The Corporation will
be entitled to receive from the Paying Agent, promptly after the date fixed


                                      B-6




<PAGE>



for redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of the Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of the
Series called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of two years from such redemption date will, to the extent
permitted by law, be paid to the Corporation, after which time the Holders of
shares of the Series so called for redemption may look only to the Corporation
for payment of the redemption price and all other amounts, if any, to which they
may be entitled; provided, however, that the Paying Agent will notify all
Holders whose funds are unclaimed by placing a notice in The Wall Street Journal
concerning the availability of such funds once each week for three consecutive
weeks. The Corporation will be entitled to receive, from time to time after the
date fixed for redemption, any interest earned on the funds so deposited.

    (e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption will be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of the Series will
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Corporation will have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Corporation may not have redeemed shares of
the Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of the Series and will include those shares of the
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.

    (f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of the Series called for redemption will be held in trust by the
Paying Agent for the benefit of holders of shares so to be redeemed.

    (g) So long as any shares of the Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.

    (h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of the Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of the Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation will have no voting rights. If fewer than all the Outstanding shares
of the Series are redeemed or otherwise acquired by the Corporation, the
Corporation will give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.

    (i) In the case of any redemption pursuant to this Section 3, only whole
shares of the Series will be redeemed, and in the event that any provision of
the Charter would require redemption of a fractional share, the Auction Agent
will be authorized to round up so that only whole shares are redeemed.

    (j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(k) of Part I of these Articles Supplementary, the Board of
Directors, upon notification to each Rating Agency, may authorize, create or
issue other series of preferred stock, including other series of AMPS, ranking
on a parity with the Series with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation, to the extent permitted by the 1940 Act, if upon
issuance of any such series, either (A) the net proceeds from the sale of such
stock (or such portion thereof needed to redeem or repurchase the


                                      B-7




<PAGE>



Outstanding Series) are deposited with the Paying Agent in accordance with
Section 3(d) of Part I of these Articles Supplementary, Notice of Redemption as
contemplated by Section 3(b) of Part I of these Articles Supplementary has been
delivered prior thereto or is sent promptly thereafter, and such proceeds are
used to redeem all Outstanding shares of the Series or (B) the Corporation would
meet the 1940 Act Preferred Shares Asset Coverage, the Preferred Shares Basic
Maintenance Amount Test and the requirements of Section 12(b) of Part I of these
Articles Supplementary.

    4. Designation of Dividend Period.

    (a) The initial Dividend Period for the Series will be as determined in the
manner set forth under 'Designation' above. The Corporation will designate the
duration of subsequent Dividend Periods of the Series; provided, however, that
no such designation is necessary for a Standard Dividend Period and, provided
further, that any designation of a Special Dividend Period will be effective
only if (i) notice thereof will have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the Series will have been cured as
provided above, (iii) Sufficient Clearing Orders will have existed in an Auction
held on the Auction Date immediately preceding the first day of such proposed
Special Dividend Period, (iv) if the Corporation will have mailed a Notice of
Redemption with respect to any shares and the redemption price with respect to
such shares will have been deposited with the Paying Agent, (v) in the case of
the designation of a Special Dividend Period, the Broker-Dealers will have
notified the Corporation in writing that it believes the Auction for the Special
Dividend Period will be successful, and (vi) each Rating Agency will have
confirmed in writing to the Corporation that such designation will not adversely
affect their respective then-current ratings of the Series.

    (b) If the Corporation proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of
such Special Dividend Period, notice will be (i) made by press release and
communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice will state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period, in which latter event the succeeding Dividend Period will be a Standard
Dividend Period. No later than 3:00 P.M., New York City time, on the second
Business Day next preceding the first day of any proposed Special Dividend
Period, the Corporation will deliver to the Auction Agent, who will promptly
deliver to the Broker-Dealers and Existing Holders, either:

        (i) a notice stating (A) that the Corporation has determined to
    designate the next succeeding Dividend Period as a Special Dividend Period,
    specifying the first and last days thereof and (B) the terms of any Specific
    Redemption Provisions; or

        (ii) a notice stating that the Corporation has determined not to
    exercise its option to designate a Special Dividend Period.

    If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the
Corporation will be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Dividend Period.


                                      B-8




<PAGE>




    5. Restrictions on Transfer. Shares of the Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding shares of the Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of the Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.

    6. Voting Rights.

    (a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of the Series will be entitled to one
vote for each share of the Series held on each matter on which the Holders of
the Series are entitled to vote, and (ii) the holders of the Outstanding shares
of preferred stock, including the Series, and holders of shares of Common
Shares will vote together as a single class on all matters submitted to the
stockholders; provided, however, that, with respect to the election of
directors, the holders of the Outstanding shares of preferred stock, including
the Series, represented in person or by proxy at a meeting for the election of
directors, will be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock, including the Common Shares, to
elect two directors of the Corporation, each share of preferred stock, including
the Series, entitling the holder thereof to one vote. The identities of the
nominees of such directorships may be fixed by the Board of Directors. Subject
to paragraph (b) of this Section 6, the holders of outstanding shares of Common
Shares and outstanding shares of preferred stock, including the Series, voting
together as a single class, will be entitled to elect the balance of the
directors.

    (b) If at any time dividends on the Series will be unpaid in an amount equal
to two full years' dividends on the Series (a 'Voting Period'), the number of
directors constituting the Board of Directors will be automatically increased by
the smallest number of additional directors that, when added to the number of
directors then constituting the Board of Directors, will (together with the two
directors elected by the holders of preferred stock, including the Series,
pursuant to paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of any shares of preferred stock, including
the Series, will be entitled, voting as a single class on a one-vote-per-share
basis (to the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), to elect the smallest number of such
additional directors of the Corporation that will constitute a majority of the
total number of directors of the Corporation so increased. The Voting Period and
the voting rights so created upon the occurrence of the conditions set forth in
this paragraph (b) of Section 6 will continue unless and until all dividends in
arrears on the Series will have been paid or declared and sufficient cash or
specified securities are set apart for the payment of such dividends. Upon the
termination of a Voting Period, the voting rights described in this paragraph
(b) of Section 6 will cease, subject always, however, to the revesting of such
voting rights in the holders of preferred stock, including the Series, upon the
further occurrence of any of the events described in this paragraph (b) of
Section 6.

    (c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including the Series, to elect additional directors
as described in paragraph (b) of this Section 6, the Corporation will notify the
Auction Agent, and the Auction Agent will call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Corporation fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting will be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred stock, including the Series, held during a Voting Period at which
directors are to be elected, such holders, voting


                                      B-9




<PAGE>




together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), will be entitled to elect the
number of directors prescribed in paragraph (b) of this Section 6 on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of preferred stock,
including Holders of the Series, present in person or by proxy will have the
power to adjourn the meeting without notice, other than an announcement at the
meeting, until a quorum is present.

    (d) For purposes of determining any rights of the holders of the shares of
preferred stock, including the Series, to vote on any matter, whether such right
is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including the
Series, is required, no holder of shares of preferred stock, including the
Series, will be entitled to vote and no share of preferred stock, including the
Series, will be deemed to be 'outstanding' for the purpose of voting or
determining the number of shares required to constitute a quorum, if prior to or
concurrently with the time of determination, sufficient Deposit Securities for
the redemption of such shares have been deposited in the case of the Series in
trust with the Paying Agent for that purpose and the requisite Notice of
Redemption with respect to such shares will have been given as provided in
Section 3(b) of Part I of these Articles Supplementary and in the case of other
preferred stock the Corporation has otherwise met the conditions for redemption
applicable to such shares.

    (e) The terms of office of all persons who are directors of the Corporation
at the time of a special meeting of Holders of the Series and holders of other
shares of preferred stock to elect directors pursuant to paragraph (b) of this
Section 6 will continue, notwithstanding the election at such meeting by the
holders of the number of directors that they are entitled to elect.

    (f) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the Series and
holders of shares of other preferred stock pursuant to paragraph (b) of this
Section 6 will terminate, the remaining directors will constitute the directors
of the Corporation and the voting rights of such holders to elect additional
directors pursuant to paragraph (b) of this Section 6 will cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.

    (g) Unless otherwise required by law or in the Corporation's Charter, the
Holders of the Series will not have any relative rights or preferences or other
special rights other than those specifically set forth herein. In the event that
the Corporation fails to pay any dividends on the Series of the Corporation or
fails to redeem any shares of the Series which it is required to redeem, or any
other event occurs which requires the mandatory redemption of the Series and the
required Notice of Redemption has not been given, other than the rights set
forth in paragraph (a) of Section 3 of Part I of these Articles Supplementary,
the exclusive remedy of the Holders of the Series will be the right to vote for
directors pursuant to the provisions of paragraph (b) of this Section 6. In no
event will the Holders of the Series have any right to sue for, or bring a
proceeding with respect to, such dividends or redemptions or damages for the
failure to receive the same.

    (h) For so long as any shares of preferred stock, including the Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, including the Series,
(i) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Corporation or a substantial part of its
property, or make any assignment for the benefit of creditors, or, except as may
be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (ii) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except


                                      B-10




<PAGE>




(A) liens the validity of which are being contested in good faith by appropriate
proceedings, (B) liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (C) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness senior to the Series, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness permitted under clause (iii) below and (E) liens to secure
payment for services rendered including, without limitation, services rendered
by the Corporation's Paying Agent and the Auction Agent; or (iii) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Corporation
may borrow as may be permitted by the Corporation's investment restrictions;
provided, however, that transfers of assets by the Corporation subject to an
obligation to repurchase will not be deemed to be indebtedness for purposes of
this provision to the extent that after any such transaction the Corporation has
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of the immediately preceding
Valuation Date.

    (i) The affirmative vote of the holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock, including the Series,
voting together as a separate class, will be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Corporation
under Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
preferred stock is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Corporation will, not later than ten Business Days prior to the
date on which such vote is to be taken, notify each Rating Agency that such vote
is to be taken and the nature of the action with respect to which such vote is
to be taken and will, not later than ten Business Days after the date on which
such vote is taken, notify each Rating Agency of the results of such vote.

    (j) The affirmative vote of the Holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, will be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the
Corporation's shares of capital stock. For purposes of the foregoing, no matter
will be deemed to adversely affect any rights, preference or power unless such
matter (i) alters or abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of redemption of such
series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any series described
in this Section (j) will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and/or preferred stock necessary to
authorize the action in question.

    (k) The Board of Directors, without the vote or consent of any holder of
shares of preferred stock, including the Series, or any other stockholder of the
Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to the Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
Series or the Holders thereof, provided that the Board of Directors receives
written confirmation from each relevant Rating Agency (with such confirmation in
no event being required to be obtained from a particular Rating Agency with
respect to definitions or other provisions relevant only to and adopted in
connection with another Rating Agency's rating of the the Series) that any such
amendment, alteration or repeal would not adversely affect the rating then
assigned by such Rating Agency.

    In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including the Series, or any other stockholder of the Corporation, but
only with confirmation from each Rating Agency, and after consultation with the


                                      B-11




<PAGE>




Broker-Dealers, provided that immediately following any such increase the
Corporation would meet the Preferred Shares Basic Maintenance Amount Test.

    7. Liquidation Rights.

    (a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of preferred stock, including the Series, will be entitled to receive out
of the assets of the Corporation available for distribution to stockholders,
after claims of creditors but before distribution or payment will be made in
respect of the Common Shares or to any other shares of stock of the Corporation
ranking junior to the preferred stock, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the 'Liquidation Preference'),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Directors, but excluding interest thereon), but such Holders will be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. The Series will rank on a parity
with shares of any other series of preferred stock of the Corporation as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation.

    (b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of preferred stock, including the Series, will be insufficient to permit
the payment in full to such holders of the amounts to which they are entitled,
then such available assets will be distributed among the holders of all
outstanding shares of preferred stock, including the Series, ratably in any such
distribution of assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in full. Unless and
until payment in full has been made to the holders of all outstanding shares of
preferred stock, including the Series, of the liquidation distributions to which
they are entitled, no dividends or distributions will be made to holders of
Common Shares or any stock of the Corporation ranking junior to the preferred
stock as to liquidation.

    (c) Neither the consolidation nor merger of the Corporation with or into any
other entity or entities, nor the sale, lease, exchange or transfer by the
Corporation of all or substantially all of its property and assets, will be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 7.

    (d) After the payment to Holders of the Series of the full preferential
amounts provided for in this Section 7, the Holders of the Series as such will
have no right or claim to any of the remaining assets of the Corporation.

    (e) In the event the assets of the Corporation or proceeds thereof available
for distribution to the Holders of the Series, upon dissolution, liquidation or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
will be insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution will
be made on account of any shares of any other series of preferred stock unless
proportionate distributive amounts will be paid on account of the Series,
ratably, in proportion to the full distributable amounts to which holders of all
shares of preferred stock are entitled upon such dissolution, liquidation or
winding up.

    (f) Subject to the rights of the holders of shares of other preferred stock
or after payment will have been made in full to the Holders of the Series as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Series with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation will, subject to any respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the Holders of the Series will not be entitled to
share therein.

    8. Auction Agent. For so long as any shares of the Series are Outstanding,
the Auction Agent, duly appointed by the Corporation to so act, will be in each
case a commercial bank, trust company or other financial institution independent
of the Corporation and its Affiliates (which,


                                      B-12




<PAGE>




however, may engage or have engaged in business transactions with the
Corporation or its Affiliates) and at no time will the Corporation or any of its
Affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any shares of the Series are Outstanding, the Corporation
will use its best efforts to enter into an agreement with a successor auction
agent containing substantially the same terms and conditions as the auction
agency agreement. The Corporation may remove the auction agent provided that
prior to such removal the Corporation will have entered into such an agreement
with a successor auction agent.

    9. 1940 Act Preferred Shares Asset Coverage. The Corporation will maintain,
as of the last Business Day of each month in which any shares of the Series are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) will be the sole remedy in the event the Corporation fails
to do so.

    10. Preferred Shares Basic Maintenance Amount. So long as any shares of the
Series are Outstanding and any Rating Agency so requires, the Corporation will
maintain, as of each Valuation Date, Moody's Eligible Assets and S&P Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) will be the sole remedy in the event the Corporation fails to
do so.

    11. Certain Other Restrictions. So long as any shares of the Series are
Outstanding and S&P, Moody's or any Other Rating Agency that is rating such
shares so requires, the Corporation will not, unless it has received written
confirmation from S&P (if S&P is then rating the Series), Moody's (if Moody's is
then rating the Series) and (if applicable) such Other Rating Agency, that any
such action would not impair the rating then assigned by such Rating Agency to
the Series, engage in any one or more of the following transactions:

        (a) purchase or sell futures contracts or options thereon with respect
    to portfolio securities or write put or call options on portfolio
    securities;

        (b) except in connection with a refinancing of the Series, issue
    additional shares of any series of preferred stock, including the Series or
    reissue any shares of preferred stock, including the Series previously
    purchased or redeemed by the Corporation;

        (c) engage in any short sales of securities;

        (d) lend portfolio securities;

        (e) merge or consolidate into or with any other fund; or

        (f) for purposes of valuation of Moody's Eligible Assets: (A) if the
    Corporation writes a call option, the underlying asset will be valued as
    follows: (1) if the option is exchange-traded and may be offset readily or
    if the option expires before the earliest possible redemption of the Series,
    at the lower of the Discounted Value of the underlying security of the
    option and the exercise price of the option or (2) otherwise, it has no
    value; (B) if the Corporation writes a put option, the underlying asset will
    be valued as follows: the lesser of (1) exercise price and (2) the
    Discounted Value of the underlying security; and (C) call or put option
    contracts which the Corporation buys have no value. For so long as the
    Series are rated by Moody's: (A) the Corporation will not engage in options
    transactions for leveraging or speculative purposes; (B) the Corporation
    will not write or sell any anticipatory contracts pursuant to which the
    Corporation hedges the anticipated purchase of an asset prior to completion
    of such purchase; (C) the Corporation will not enter into an option
    transaction with respect to portfolio securities unless, after giving effect
    thereto, the Corporation would continue to have Eligible Assets with an
    aggregate Discounted Value equal to or greater than the Preferred Shares
    Basic Maintenance Amount; (D) the Corporation will not enter into an option
    transaction with respect to portfolio securities unless after giving effect
    to such transaction the Corporation would continue to be in compliance with
    the provisions relating to the Preferred Shares Basic Maintenance Amount;
    (E) for purposes of the Preferred Shares Basic Maintenance Amount assets in
    margin accounts are not Eligible Assets; (F) the Corporation will write only
    exchange-traded options on exchanges approved by Moody's (if Moody's is then


                                      B-13




<PAGE>




    rating the Series); (G) where delivery may be made to the Corporation with
    any of a class of securities, the Corporation will assume for purposes of
    the Preferred Shares Basic Maintenance Amount that it takes delivery of that
    security which yields it the least value; (H) the Corporation will not
    engage in forward contracts; and (I) there will be a quarterly audit made of
    the Corporation's options transactions by the Corporation's independent
    auditors to confirm that the Corporation is in compliance with these
    standards.

        (g) For so long as the Series is rated by S&P, the Corporation will not
    purchase or sell futures contracts, write, purchase or sell options on
    futures contracts or write put options (except covered put options) or call
    options (except covered call options) on portfolio securities unless it
    receives written confirmation from S&P that engaging in such transactions
    will not impair the ratings then assigned to the Series by S&P.

    12. Compliance Procedures for Asset Maintenance Tests. For so long as any
shares of the Series are Outstanding and any Rating Agency so requires:

        (a) As of each Valuation Date, the Corporation will determine (i) the
    Market Value of each Eligible Asset owned by the Corporation on that date,
    (ii) the Discounted Value of each such Eligible Asset, (iii) whether the
    Preferred Shares Basic Maintenance Amount Test is met as of that date,
    (iv) the value (as used in the 1940 Act) of the total assets of the
    Corporation, less all liabilities, and (v) whether the 1940 Act Preferred
    Shares Asset Coverage is met as of that date.

        (b) Upon any failure to meet the Preferred Shares Basic Maintenance
    Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
    Date, the Corporation may use reasonable commercial efforts (including,
    without limitation, altering the composition of its portfolio, purchasing
    shares of the Series outside of an Auction or, in the event of a failure to
    file a certificate on a timely basis, submitting the requisite certificate),
    to meet (or certify in the case of a failure to file a certificate on a
    timely basis, as the case may be) the Preferred Shares Basic Maintenance
    Amount Test or 1940 Act Preferred Shares Asset Coverage on or prior to the
    Asset Coverage Cure Date.

        (c) Compliance with the Preferred Shares Basic Maintenance Amount and
    1940 Act Asset Coverage Tests will be determined with reference to those
    shares of the Series which are deemed to be Outstanding hereunder.

        (d) In the case of the asset coverage requirements for Moody's and S&P,
    the auditors must certify once per calendar year the asset coverage test on
    a date randomly selected by the auditor.

        (e) The Corporation will deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (i)-(iii) of
    paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
    Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
    Date of each month, (C) any date requested by any Rating Agency, (D) a
    Business Day on or before any Asset Coverage Cure Date relating to the
    Corporation's cure of a failure to meet the Preferred Shares Basic
    Maintenance Amount Test, (E) any day that Common Shares outstanding ,
    preferred shares of the Fund, including the Series, are redeemed and
    (F) any day the S&P Eligible Assets have an aggregate discounted value less
    than or equal to 110% of the Preferred Shares Basic Maintenance Amount. Such
    Preferred Shares Basic Maintenance Certificate will be delivered in the case
    of clause (i)(A) on the Date of Original Issue and in the case of all other
    clauses above on or before the seventh Business Day after the relevant
    Valuation Date or Asset Coverage Cure Date.

        (f) The Corporation will deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (iv) and (v)
    of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
    Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
    (A) the last Valuation Date of each quarter thereafter, and (B) as of a
    Business Day on or before any Asset Coverage Cure Date relating to the
    failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
    Preferred Shares Asset Coverage Certificate will be delivered in the case of
    clause (i) on the Date of Original Issue


                                      B-14




<PAGE>



    and in the case of clause (ii) on or before the seventh Business Day
    after the relevant Valuation Date or the Asset Coverage Cure Date. The
    certificates required by paragraphs (d) and (e) of this Section 12 may be
    combined into a single certificate.

        (g) Within ten Business Days of the Date of Original Issue, the
    Corporation will deliver to the Auction Agent and each Rating Agency a
    letter prepared by the Corporation's independent auditors (an 'Auditor's
    Certificate') regarding the accuracy of the calculations made by the
    Corporation in the Preferred Shares Basic Maintenance Certificate and the
    1940 Act Preferred Shares Asset Coverage Certificate required to be
    delivered by the Corporation on the Date of Original Issue. Within ten
    Business Days after delivery of the Preferred Shares Basic Maintenance
    Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
    relating to the last Valuation Date of each fiscal quarter of the
    Corporation, the Corporation will deliver to the Auction Agent and each
    Rating Agency an Auditor's Certificate regarding the accuracy of the
    calculations made by the Corporation in a Preferred Shares Basic Maintenance
    Certificate with respect to a date randomly selected by the Corporation's
    independent auditors during such fiscal quarter. In addition, the
    Corporation will deliver to the persons specified in the preceding sentence
    an Auditor's Certificate regarding the accuracy of the calculations made by
    the Corporation on each Preferred Shares Basic Maintenance Certificate and
    1940 Act Preferred Shares Asset Coverage Certificate delivered in relation
    to an Asset Coverage Cure Date within ten days after the relevant Asset
    Coverage Cure Date. If an Auditor's Certificate shows that an error was made
    in any such report, the calculation or determination made by the
    Corporation's independent auditors will be conclusive and binding on the
    Corporation.

        (h) The Auditor's Certificates referred to in paragraph (f) above will
    confirm, based upon the independent auditor's review of portfolio data
    provided by the Corporation, (i) the mathematical accuracy of the
    calculations reflected in the related Preferred Shares Basic Maintenance
    Amount Certificates and 1940 Act Preferred Shares Asset Coverage
    Certificates and (ii) that, based upon such calculations, the Corporation
    had, at such Valuation Date, met the Preferred Shares Basic Maintenance
    Amount Test.

        (i) In the event that a Preferred Shares Basic Maintenance Certificate
    or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
    applicable Valuation Date is not delivered within the time periods specified
    in this Section 12, the Corporation will be deemed to have failed to meet
    the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
    Shares Asset Coverage, as the case may be, on such Valuation Date for
    purposes of Section 12(b) of Part I of these Articles Supplementary. In the
    event that a Preferred Shares Basic Maintenance Certificate, a 1940 Act
    Preferred Shares Asset Coverage Certificate or an applicable Auditor's
    Certificate with respect to an Asset Coverage Cure Date is not delivered
    within the time periods specified herein, the Corporation will be deemed to
    have failed to meet the Preferred Shares Basic Maintenance Amount Test or
    the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
    related Valuation Date.

    13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, will be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 will be deemed
given on the earlier of the date received or the date five-days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.

    14. Waiver. To the extent permitted by Maryland law, Holders of at least
two-thirds of the Outstanding shares of the Series may waive any provision
hereof intended for their benefit in accordance with such procedures as may from
time to time be established by the Board of Directors.

    15. Termination. In the event that no shares of the Series are Outstanding,
all rights and preferences of such shares established and designated hereunder
will cease and terminate, and all obligations of the Corporation under these
Articles Supplementary will terminate.


                                      B-15




<PAGE>



    16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.

    17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms will have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:

        'AA' Composite Commercial Paper Rate' on any date means (i) the interest
    equivalent of the 7-day rate, in the case of a Dividend Period which is 7
    days or shorter; for Dividend Periods greater than 7 days but fewer than or
    equal to 31 days, the 30-day rate; for Dividend Periods greater than
    31 days but fewer than or equal to 61 days, the 60-day rate; for Dividend
    Periods greater than 61 days but fewer than or equal to 91 days, the 90 day
    rate; for Dividend Periods greater than 91 days but fewer than or equal to
    270 days, the rate described in clause (ii) below; for Dividend Periods
    greater than 270 days, the Treasury Index Rate; on commercial paper on
    behalf of financial issuers whose corporate bonds are rated 'AA' by S&P, or
    the equivalent of such rating by another nationally recognized rating
    agency, as announced by the Federal Reserve Bank of New York for the close
    of business on the Business Day immediately preceding such date; or (ii) if
    the Federal Reserve Bank of New York does not make available such a rate,
    then the arithmetic average of the interest equivalent of such rates on
    commercial paper placed on behalf of such issuers, as quoted on a discount
    basis or otherwise by the Commercial Paper Dealers to the Auction Agent for
    the close of business on the Business Day immediately preceding such date
    (rounded to the next highest .001 of 1%). If any Commercial Paper Dealer
    does not quote a rate required to determine the 'AA' Composite Commercial
    Paper Rate, such rate shall be determined on the basis of the quotations (or
    quotation) furnished by the remaining Commercial Paper Dealers (or Dealer),
    if any, or, if there are no such Commercial Paper Dealers, by the Auction
    Agent as agreed to by Merrill Lynch & Co. For purposes of this definition,
    (A) 'Commercial Paper Dealers' shall mean (1) Salomon Smith Barney Inc.,
    Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
    Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
    successor; and (3) in the event that any of the foregoing shall cease to
    quote rates for commercial paper of issuers of the sort described above, in
    substitution therefor, a nationally recognized dealer in commercial paper of
    such issuers then making such quotations selected by the Corporation, and
    (B) 'interest equivalent' of a rate stated on a discount basis for
    commercial paper of a given number of days' maturity shall mean a number
    equal to the quotient (rounded upward to the next higher one-thousandth of
    1%) of (1) such rate expressed as a decimal, divided by (2) the difference
    between (x) 1.00 and (y) a fraction, the numerator of which shall be the
    product of such rate expressed as a decimal, multiplied by the number of
    days in which such commercial paper shall mature and the denominator of
    which shall be 360.

        'Affiliate' means any person known to the Auction Agent to be controlled
    by, in control of or under common control with the Corporation; provided,
    however, that no Broker-Dealer controlled by, in control of or under common
    control with the Corporation will be deemed to be an Affiliate nor will any
    corporation or any Person controlled by, in control of or under common
    control with such corporation, one of the directors or executive officers of
    which is a director of the Corporation be deemed to be an Affiliate solely
    because such director or executive officer is also a director of the
    Corporation.

        'Agent Member' means a member of or a participant in the Securities
    Depository that will act on behalf of a Bidder.

        'All Hold Rate' means the 7-day 'AA' Composite Commercial Paper Rate.


                                      B-16




<PAGE>



        'AMPS' has the meaning set forth in Article FIRST of these Articles
    Supplementary.

        'Applicable Rate' means for each Dividend Period (i) if Sufficient
    Clearing Orders exist for the Auction in respect thereof, the Winning Bid
    Rate, (ii) if Sufficient Clearing Orders do not exist for the Auction in
    respect thereof, the Maximum Rate, and (iii) in the case of any Dividend
    Period if all the shares of the Series are the subject of Submitted Hold
    Orders for the Auction in respect thereof, the All Hold Rate.

        'Approved Price' means the 'fair value' as determined by the Corporation
    in accordance with the valuation procedures adopted from time to time by the
    Board of Directors and for which the Corporation receives a mark-to-market
    price (which, for the purpose of clarity, does not mean a Market Value
    Price) from an independent source at least semi-annually.

        'Asset Coverage Cure Date' has the meaning set forth in Section 3(a)(ii)
    of these Articles Supplementary.

        'Auction' means each periodic operation of the Auction Procedures.

        'Auction Agent' means The Bank of New York unless and until another
    commercial bank, trust company, or other financial institution appointed by
    a resolution of the Board of Directors enters into an agreement with the
    Corporation to follow the Auction Procedures for the purpose of determining
    the Applicable Rate.

        'Auction Date' means the first Business Day next preceding the first day
    of a Dividend Period for the Series.

        'Auction Procedures' means the procedures for conducting Auctions as set
    forth in Part II of these Articles Supplementary.

        'Auditor's Certificate' has the meaning set forth in Section 12(f) of
    Part I of these Articles Supplementary.

        'Beneficial Owner' means a customer of a Broker-Dealer who is listed on
    the records of that Broker-Dealer (or, if applicable, the Auction Agent) as
    a holder of shares of the Series.

        'Bid' has the meaning set forth in Section 2(a)(ii) of Part II of these
    Articles Supplementary.

        'Bidder' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary, provided however that neither the Corporation
    nor any Affiliate will be permitted to be Bidder in an Auction.

        'Board of Directors' or 'Board' means the Board of Directors of the
    Corporation or any duly authorized committee thereof as permitted by
    applicable law.

        'Broker-Dealer' means any broker-dealer or broker-dealers, or other
    entity permitted by law to perform the functions required of a Broker-Dealer
    by the Auction Procedures, that has been selected by the Corporation and has
    entered into a Broker-Dealer Agreement that remains effective.

        'Broker-Dealer Agreement' means an agreement between the Auction Agent
    and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
    the Auction Procedures.

        'Business Day' means a day on which the New York Stock Exchange is open
    for trading and which is not a Saturday, Sunday or other day on which banks
    in The City of New York, New York are authorized or obligated by law to
    close.

        'Charter' has the meaning set forth in the preamble to these Articles
    Supplementary.

        'Code' means the Internal Revenue Code of 1986, as amended.

        'Commission' means the Securities and Exchange Commission.

        'Common Shares' means the shares of the Corporation's Common Stock, par
    value $.001 per share.

        'Corporation' has the meaning set forth in the preamble to these
    Articles Supplementary.


                                      B-17




<PAGE>




        'Date of Original Issue' means the date on which the Series is
    originally issued by the Corporation.

        'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
    these Articles Supplementary.

        'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
    of Part I of these Articles Supplementary.

        'Default Rate' has the meaning set forth in Sections 2(c)(iii) of
    Part I of these Articles Supplementary.

        'Deposit Securities' means cash and any obligations or securities,
    including Short Term Money Market Instruments that are Eligible Assets,
    rated at least AAA or A-1 by S&P, except that, for purposes of optional
    redemption, such obligations or securities will be considered 'Deposit
    Securities' only if they also are rated at least P-1 by Moody's.

        'Discount Factor' means the S&P Discount Factor (if S&P is then rating
    the Series), the Moody's Discount Factor (if Moody's is then rating the
    Series) or the discount factor established by any Other Rating Agency which
    is then rating the Series and which so requires, whichever is applicable.

        'Discounted Value' means the quotient of the Market Value of an Eligible
    Asset divided by the applicable Discount Factor, provided that with respect
    to an Eligible Asset that is currently callable, Discounted Value will be
    equal to the quotient as calculated above or the call price, whichever is
    lower, and that with respect to an Eligible Asset that is prepayable,
    Discounted Value will be equal to the quotient as calculated above or the
    par value, whichever is lower.

        'Dividend Default' has the meaning set forth in Section 2(c)(ii) of
    Part I of these Articles Supplementary.

        'Dividend Payment Date' means any date on which dividends are payable
    pursuant to Section 2(b) of Part I hereof.

        'Dividend Period' means the initial period determined in the manner set
    forth under 'Designation' above, and thereafter, the period commencing on
    the Business Day following each Dividend Period and ending on the calendar
    day immediately preceding the next Dividend Payment Date.

        'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
    rating the Series), S&P Eligible Assets (if S&P is then rating the Series),
    and/or Other Rating Agency Eligible Assets if any Other Rating Agency is
    then rating the Series, whichever is applicable.

        'Existing Holder' has the meaning set forth in Section 1 of Part II of
    these Articles Supplementary.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Holder' means, with respect to the Series, the registered holder of
    shares of the Series as the same appears on the stock ledger or stock
    records of the Corporation.

        'Investment Manager' means Cohen & Steers Capital Management, Inc.

        'Liquidation Preference' means $25,000 per share of the Series.

        'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iii)
    of Part I of these Articles Supplementary.

        'Mandatory Redemption Price' has the meaning set forth in Section
    3(a)(iii) of Part I of these Articles Supplementary.

        'Market Value' means the fair market value of an asset of the
    Corporation as computed as follows: Securities listed on the New York Stock
    Exchange at the last sale price reflected on the consolidated tape at the
    close of the New York Stock Exchange on the Business Day as of which such
    value is being determined provided that, if there has been no sale on such


                                      B-18




<PAGE>



    day, the securities are valued at the closing mean prices on such day and
    provided further that, if no prices are quoted on such day, then the
    security is valued by such method as the Board of Directors will determine
    in good faith to reflect its fair market value. Readily marketable
    securities not listed on the New York Stock Exchange but listed on other
    domestic or foreign securities exchanges or admitted to trading on the
    National Association of Securities Dealers Automated Quotations, Inc.
    ('NASDAQ') National List are valued in a like manner. Portfolio securities
    traded on more than one securities exchange are valued at the last sale
    price on the business day as of which such value is being determined as
    reflected on the tape at the close of the exchange representing the
    principal market for such securities. Readily marketable securities traded
    in the over-the-counter market, including listed securities whose primary
    market is believed by the Investment Manager to be over-the-counter, but
    excluding securities admitted to trading on the NASDAQ National List, are
    valued at the current bid prices as reported by NASDAQ or, in the case of
    securities not quoted by NASDAQ, the National Quotation Bureau or such other
    comparable source as the directors deem appropriate to reflect their fair
    market value. The fair market value of certain fixed-income securities is
    computed based upon (i) the basis of prices provided by a Pricing Service or
    (ii) the lower of the value set forth in bids from two independent dealers
    in securities, one of which bids will be in writing, in each case with
    interest accrued added to such computation for those assets of the
    Corporation where such computation does not include interest accrued. The
    independent dealers from whom bids are sought will be either (a) market
    makers in the securities being valued or (b) members of the National
    Association of Securities Dealers, Inc. Where securities are traded on more
    than one exchange and also over-the-counter, the securities will generally
    be valued using the quotations the Board of Directors believes reflect most
    closely the value of such securities.

    'Maximum Rate' means, on any date on which the Applicable Rate is
determined, the applicable percentage of the 'AA' Composite Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the Series by Moody's and S&P subject to
upward but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers; provided that immediately following
any such increase the Corporation would be in compliance with the Preferred
Shares Basic Maintenance Amount.

<Table>
<Caption>
   MOODY'S                  S&P                APPLICABLE
CREDIT RATING          CREDIT RATING           PERCENTAGE
-------------          -------------           ----------
<S>                   <C>                      <C>
Aa3 or Above          AA- or Above                150%
A3 or A1              A- to A+                    200%
Baa3 to Baa1          BBB- to BBB+                225%
Below Baa3            Below BBB-                  275%
</Table>

    'Moody's' means Moody's Investors Service, Inc. and its successors at law.

    'Moody's Discount Factor' means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows. The
Moody's Discount Factor for any Moody's Eligible Asset other than the securities
set forth below will be the percentage provided in writing by Moody's.

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                          DISCOUNT FACTOR(1)(2)(3)
                                                          ------------------------
<S>                                                       <C>
Common stock of REITs                                               154%
Preferred stock of REITs
    with Senior Implied Moody's (or S&P) rating:                    154%
    without Senior Implied Moody's (or S&P) rating:                 208%
Preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P) rating:                    208%
    without Senior Implied Moody's (or S&P) rating:                 250%
</Table>

                                                        (footnotes on next page)


                                      B-19




<PAGE>




(footnotes from previous page)

(1) A Discount Factor of 250% will be applied to those assets in a single
    Moody's Real Estate Industry/Property Sector Classification which exceed 30%
    of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
    Assets.

(2) A Discount Factor of 250% will be applied if dividends on such securities
    have not been paid consistently (either quarterly or annually) over the
    previous three years, or for such shorter time period that such securities
    have been outstanding.

(3) A Discount Factor of 250% will be applied if the market capitalization
    (including common stock and preferred stock) of an issuer is below $500
    million.

    (b) Debt Securities of REITs and Other Real Estate Companies:

<Table>
<Caption>
          TERMS OF MATURITY OF
       NON-INVESTMENT GRADE BONDS         Aaa     Aa     A     Baa     Ba     B     NR(1)
       --------------------------         ---     --     -     ---     --     -     -----
<S>                                       <C>    <C>    <C>    <C>    <C>    <C>    <C>
1 year or less                            109%   112%   115%   118%   137%   150%   250%
2 years or less (but longer than 1 year)  115%   118%   122%   125%   146%   160%   250%
3 years or less (but longer than 2
  years)                                  120%   123%   127%   131%   153%   168%   250%
4 years or less (but longer than 3
  years)                                  126%   129%   133%   138%   161%   176%   250%
5 years or less (but longer than 4
  years)                                  132%   135%   139%   144%   168%   185%   250%
7 years or less (but longer than 5
  years)                                  139%   143%   147%   152%   179%   197%   250%
10 years or less (but longer than 7
  years)                                  145%   150%   155%   160%   189%   208%   250%
15 years or less (but longer than 10
  years)                                  150%   155%   160%   165%   196%   216%   250%
20 years or less (but longer than 15
  years)                                  150%   155%   160%   165%   196%   228%   250%
30 years or less (but longer than 20
  years)                                  150%   155%   160%   165%   196%   229%   250%
Greater than 30 years                     165%   173%   181%   189%   205%   240%   250%
</Table>

---------

(1) Unless conclusions regarding liquidity risk as well as estimates of both the
    probability and severity of default for the corporation's or municipal
    issuer's assets can be derived from other sources as well as combined with a
    number of sources as presented by the Corporation to Moody's, securities
    rated below B by Moody's and unrated securities, which are securities rated
    by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
    Assets. If a corporate or municipal debt security is unrated by Moody's, S&P
    or Fitch, the Corporation will use the percentage set forth under 'Below B
    and Unrated' in the Corporate or Municipal Debt Tables. Ratings assigned by
    S&P or Fitch are generally accepted by Moody's at face value. However,
    adjustments to face value may be made to particular categories of credits
    for which the S&P and/or Fitch rating does not seem to approximate a Moody's
    rating equivalent. Split rated securities assigned by S&P and Fitch will be
    accepted at the lower of the two ratings.

    (c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):

<Table>
<Caption>
                                                 U.S. TREASURY STRIPS   U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY                         DISCOUNT FACTOR          DISCOUNT FACTOR
--------------------------                         ---------------          ---------------
<S>                                              <C>                    <C>
1 year or less                                           107%                     107%
2 years or less (but longer than 1 year)                 113%                     115%
3 years or less (but longer than 2 years)                118%                     121%
4 years or less (but longer than 3 years)                123%                     128%
5 years or less (but longer than 4 years)                128%                     135%
7 years or less (but longer than 5 years)                135%                     147%
10 years or less (but longer than 7 years)               141%                     163%
15 years or less (but longer than 10 years)              146%                     191%
20 years or less (but longer than 15 years)              154%                     218%
30 years or less (but longer than 20 years)              154%                     244%
</Table>

    (d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.


                                      B-20




<PAGE>



        'Moody's Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt security of REITs and
       Other Real Estate Companies. (i) Common stock of REITs and preferred
       stock and any debt security of REITs and Other Real Estate Companies:
       (A) which comprise at least 7 of the 14 Moody's Real Estate
       Industry/Property Sector Classifications ('Moody's Sector
       Classifications') listed below and of which no more than 35% may
       constitute a single such classification; (B) which in the aggregate
       constitute at least 40 separate issues of common stock, preferred stock,
       and debt securities, issued by at least 30 issuers; (C) issued by a
       single issuer which in the aggregate constitute no more than 7.0% of the
       Market Value of Moody's Eligible Assets, and (D) issued by a single
       issuer which, with respect to 50% of the Market Value of Moody's Eligible
       Assets, constitute in the aggregate no more than 5% of Market Value of
       Moody's Eligible Assets; and

           (ii) Unrated debt securities issued by an issuer which: (A) has not
       filed for bankruptcy within the past three years; (B) is current on all
       principal and interest on its fixed income obligations; (C) is current on
       all preferred stock dividends; (D) possesses a current, unqualified
       auditor's report without qualified, explanatory language and (E) in the
       aggregate do not exceed 10% of the discounted Moody's Eligible Assets;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if

               (i) the counterparty to the swap transaction has a short-term
           rating of not less than P-1 by Moody's or A-1 by S&P or, if the
           counterparty does not have a short-term rating, the counterparty's
           senior unsecured long-term debt rating is A3 or higher by Moody's or
           A+ or higher by S&P;

               (ii) the original aggregate notional amount of the interest rate
           swap transaction or transactions is not to be greater than the
           liquidation preference of the AMPS originally issued;

               (iii) the interest rate swap transaction will be marked-to-market
           daily;

               (iv) an interest rate swap that is in-the-money is discounted at
           the counterparty's corporate debt rating for the maturity of the swap
           for purposes of calculating Moody's Eligible Assets; and

               (v) an interest rate swap that is out-of-the money includes that
           negative mark-to-market amount as indebtedness for purposes of
           calculating the Preferred Shares Basic Maintenance amount;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by
       Moody's);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are rated at least P-1, (B) in the case of demand deposits,
       time deposits and overnight funds, the supporting entity is rated at
       least A2, or (C) in all other cases, the supporting entity (1) is rated
       A2 and the security matures within one month, (2) is rated A1 and the
       security matures within three months or (3) is rated at least Aa3 and the
       security matures within six months; provided, however, that for purposes
       of this definition, such instruments (other than commercial paper rated
       by S&P and not rated by Moody's) need not meet any otherwise applicable
       Moody's rating criteria; and

           (e) Cash (including, for this purpose, interest and dividends due on
       assets rated (A) Baa3 or higher by Moody's if the payment date is within
       five Business Days of the Valuation Date, (B) A2 or higher if the payment
       date is within thirty days of the Valuation Date, and (C) A1 or higher if
       the payment date is within 49 days of the relevant valuation date) and
       receivables for Moody's Eligible Assets sold if the receivable is due
       within five Business Days of the Valuation Date, and if the trades which
       generated such receivables are (A) settled through clearing house firms
       with respect to which the Corporation has received prior written
       authorization from Moody's or (B) (1) with counterparties having a
       Moody's long-term debt rating of at least Baa3 or (2) with

                                      B-21




<PAGE>



       counterparties having a Moody's Short-Term Money Market Instrument rating
       of at least P-1.

        'Moody's Real Estate Industry/ Property Sector Classification' means,
    for the purposes of determining Moody's Eligible Assets, each of the
    following Industry Classifications (as defined by the National Association
    of Real Estate Investment Trusts, 'NAREIT'):

            1. Office

            2. Industrial

            3. Mixed

            4. Shopping Centers

            5. Regional Malls

            6. Free Standing

            7. Apartments

            8. Manufactured Homes

            9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment in
    consultation with the independent auditor and/or Moody's, as necessary.

        '1933 Act' means the Securities Act of 1933, as amended.

        '1940 Act' means the Investment Company Act of 1940, as amended.

        '1940 Act Preferred Shares Asset Coverage' means asset coverage, as
    determined in accordance with Section 18(h) of the 1940 Act, of at least
    200% with respect to all outstanding senior securities of the Corporation
    which are stock, including all outstanding shares of the Series (or such
    other asset coverage as may in the future be specified in or under the 1940
    Act as the minimum asset coverage for senior securities which are stock of a
    closed-end investment company as a condition of declaring dividends on its
    common shares), determined on the basis of values calculated as of a time
    within 48 hours (not including Sundays or holidays) next preceding the time
    of such determination.

        '1940 Act Preferred Shares Asset Coverage Certificate' means the
    certificate required to be delivered by the Corporation pursuant to Section
    12(e) of these Articles Supplementary.

        'Notice of Redemption' means any notice with respect to the redemption
    of the Series pursuant to Section 3 of Part I of these Articles
    Supplementary.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Other Rating Agency' means any rating agency other than S&P or Moody's
    then providing a rating for the Series pursuant to the request of the
    Corporation.

        'Other Rating Agency Eligible Assets' means assets of the Corporation
    designated by any Other Rating Agency as eligible for inclusion in
    calculating the discounted value of the Corporation's assets in connection
    with such Other Rating Agency's rating of the Series.

        'Other Real Estate Companies' companies which generally derive at least
    50% of their revenue from real estate or has at least 50% of its assets in
    real estate, but not including REITs.


                                      B-22




<PAGE>



        'Outstanding' means, as of any date, shares of the Series theretofore
    issued by the Corporation except, without duplication, (i) any shares of the
    Series theretofore canceled, redeemed or repurchased by the Corporation, or
    delivered to the Auction Agent for cancellation or with respect to which the
    Corporation has given notice of redemption and irrevocably deposited with
    the Paying Agent sufficient funds to redeem such shares and (ii) any shares
    of the Series represented by any certificate in lieu of which a new
    certificate has been executed and delivered by the Corporation.
    Notwithstanding the foregoing, (A) for purposes of voting rights (including
    the determination of the number of shares required to constitute a quorum),
    any shares of the Series as to which the Corporation or any Affiliate is the
    Existing Holder will be disregarded and not deemed Outstanding; (B) in
    connection with any Auction, any shares of the Series as to which the
    Corporation or any person known to the Auction Agent to be an Affiliate is
    the Existing Holder will be disregarded and not deemed Outstanding; and
    (C) for purposes of determining the Preferred Shares Basic Maintenance
    Amount, shares of the Series held by the Corporation will be disregarded and
    not deemed Outstanding, but shares held by any Affiliate will be deemed
    Outstanding.

        'Paying Agent' means The Bank of New York unless and until another
    entity appointed by a resolution of the Board of Directors enters into an
    agreement with the Corporation to serve as paying agent, which paying agent
    may be the same as the Auction Agent.

        'Person' or 'Persons' means and includes an individual, a partnership,
    the corporation, a trust, a corporation, a limited liability company, an
    unincorporated association, a joint venture or other entity or a government
    or any agency or political subdivision thereof.

        'Potential Beneficial Owner or Holder' has the meaning set forth in
    Section 1 of Part II of these Articles Supplementary.

        'Preferred Shares Basic Maintenance Amount' means as of any Valuation
    Date as the dollar amount equal to the difference of:

           (i) the sum of (A) the product resulting from multiplying the number
       of shares of the Series outstanding on such date by the Liquidation
       Preference per share (plus the product of the number of shares of any
       other series of preferred shares outstanding on such date multiplied by
       the liquidation preference of such shares), plus any redemption premium
       applicable to the Series (or other preferred shares) then subject to
       redemption; plus (B) the aggregate amount of dividends that will have
       accumulated (whether or not earned or declared) for the shares of the
       Series outstanding and any other series of preferred shares outstanding
       on such date to the 30th day after such Valuation Date; plus (C) the
       aggregate amount of dividends that would accumulate on shares of the
       Series outstanding from the first Dividend Payment Date after the
       Valuation Date therefor through the 56th day after such Valuation Date,
       at the Maximum Rate (plus the aggregate amount of dividends that would
       accumulate on other outstanding preferred shares from the first
       respective dividend payment date for such shares after the Valuation
       Date through the 56th day after such Valuation Date, at the respective
       maximum rates for such other outstanding preferred shares); plus (D)
       the amount of anticipated Corporation non-interest expenses for the 90
       days subsequent to such Valuation Date; plus (E) the amount of the
       current outstanding balances of any indebtedness which is senior to
       the shares of the Series plus interest actually accrued together
       with 30 days additional interest on the current outstanding balances
       calculated at the current rate; plus (F) any other current liabilities
       payable during the 30 days subsequent to such Valuation Date, including,
       without limitation, indebtedness due within one year and any redemption
       premium due with respect to shares of the Series and any other
       outstanding series of preferred shares for which a Notice of Redemption
       or notice of redemption, respectively, has been given, as of such
       Valuation Date, to the extent not reflected in any of (i)(A) through
       (i)(E); and plus (G) any current liabilities as of such Valuation
       Date to the extent not reflected in any of (i)(A) through (i)(F); less

           (ii) the sum of any cash plus the value of any of the Corporation's
       assets irrevocably deposited by the Corporation for the payment of any
       (i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
       the Discounted Value of the security, except that if the


                                      B-23




<PAGE>


       security matures prior to the relevant redemption payment date and is
       either fully guaranteed by the U.S. Government or is rated at least P-1
       by Moody's and A-1 by S&P, it will be valued at its face value).

        'Preferred Shares Basic Maintenance Amount Test' means a test which is
    met if the lower of the aggregate Discounted Values of the Moody's Eligible
    Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
    Basic Maintenance Amount.

        'Preferred Shares Basic Maintenance Certificate' has the meaning set
    forth in Section 12(d) of Part I of these Articles Supplementary.

        'Pricing Service' means any of the following: Bloomberg, Bridge
    Information Services, Data Resources Inc., Interactive Data, International
    Securities Market Association, Merrill Lynch Securities Pricing Service,
    Muller Data Corp., Reuters, Standard & Poors/J.J. Kenny, Telerate, Trepp
    Pricing and Wood Gundy.

        'Rating Agency' means Moody's and S&P as long as such rating agency is
    then rating the Series.

        'Redemption Date' has the meaning set forth in Section 2(c)(ii) of
    Part II of these Articles Supplementary.

        'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
    Part I of these Articles Supplementary.

        'Redemption Price' has the meaning set forth in Section 3(a)(i) of
    Part I of these Articles Supplementary.

        'Reference Rate' means, with respect to the determination of the Default
    Rate, the applicable 'AA' Composite Commercial Paper Rate (for a Dividend
    Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
    Dividend Period of 184 days or more).

        'Registrar' means The Bank of New York, unless and until another entity
    appointed by a resolution of the Board of Directors enters into an agreement
    with the Corporation to serve as transfer agent.

        'REIT' or real estate investment trust, means a company dedicated to
    owning, and usually operating, income producing real estate, or to financing
    real estate.

        'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
    Inc., or its successors at law. 'S&P Discount Factor' means, for purposes of
    determining the Discounted Value of any S&P Eligible Asset, the percentage
    determined as follows. The S&P Discount Factor for any S&P Eligible Asset
    other than the securities set forth below will be the percentage provided in
    writing by S&P:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
MINIMUM NUMBER OF:
Issuers(1)                                               44        40        44        30
Real Estate Industry/Property Sectors(2)                 10         8         7         7
PERCENT OF ASSETS IN:
Largest Real Estate Industry/Property Sector             17%       25%       30%       30%
2nd Largest Real Estate Industry/Property Sector         15%       20%       25%       25%
3rd Largest Real Estate Industry/Property Sector         12%       15%       15%       15%
4th Largest Real Estate Industry/Property Sector         12%       12%       12%       12%
S&P DISCOUNT FACTOR:
common stock                                            190%      208%      223%      231%
preferred stock(3)                                      157%      167%      174%      178%
</Table>

---------

(1) Three issuers may each constitute 6% of assets and four issuers may each
    constitute 5% of assets.
                                              (footnotes continued on next page)


                                      B-24




<PAGE>



(footnotes continued from previous page)

(2) As defined by NAREIT.

(3) Applies to preferred stock of real estate companies, subject to
    diversification guidelines whereby at least 34% of the preferred assets are
    rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
    Moody's equivalent) or greater; and the balance of the preferred assets is
    rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
    common stock will apply to preferred stock which is not in compliance with
    the diversification standard.

    (b) Debt Securities:

<Table>
<Caption>
                                                    DIVERSIFICATION STANDARD
                                              -------------------------------------
BOND RATING(1)                                LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
--------------                                -------   -------   -------   -------
<S>                                           <C>       <C>       <C>       <C>
A                                              116%      117%      119%      118%
A-                                             117%      119%      120%      120%
BBB+                                           119%      121%      122%      122%
BBB                                            121%      122%      124%      124%
BBB-                                           122%      124%      126%      126%
BB+                                            127%      130%      133%      132%
BB                                             133%      137%      141%      139%
BB-                                            139%      144%      149%      147%
B+                                             152%      159%      166%      164%
B                                              163%      172%      182%      179%
B-                                             176%      188%      202%      197%
CCC+                                           198%      212%      230%      224%
CCC                                            236%      262%      295%      284%
</Table>

---------

(1) The S&P Discount Factors for debt securities will also be applied to any
    interest rate swap or cap, in which case the rating of the counterparty will
    determine the appropriate rating category.

(2) If a security is unrated by S&P but is rated by Moody's, the conversion
    chart under S&P OC Test Rating Chart will apply.

    (c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:

<Table>
<S>                                                           <C>
52-week Treasury Bills*                                       102%
Two-Year Treasury Notes                                       104%
Three-Year Treasury Notes                                     108%
Five-Year Treasury Notes                                      109%
10-Year Treasury Notes                                        115%
30-Year Treasury Bonds                                        126%
</Table>

---------

* Treasury Bills with maturities of less than 52 weeks will be discounted at the
  appropriate Short-Term Money Market Instrument levels. Treasury Bills that
  mature the next day are considered cash equivalents and are valued at 100%.

Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the Treasury
Strip, e.g., a Treasury interest-only Strip with a maturity of seven years will
apply the discount factor for the U.S. Treasury securities with a 10-year
maturity. Treasury principal-only Strips will apply the discount factor that is
two categories greater than its maturity, e.g., a Treasury principal-only Strip
with a maturity of seven years will apply the discount factor for U.S. Treasury
securities with a 30-year maturity.

    (d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.

        'S&P Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt securities of REITs
       and Real Estate Companies;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if (i) the counterparty to the
       swap transaction has a short-term rating of not less than A-1 or, if the
       counterparty does not have a short-term rating, the counterparty's senior
       unsecured long-term debt rating is A+ or higher and (ii) the original
       aggregate notional amount of the interest rate swap transaction or


                                      B-25




<PAGE>




       transactions is not to be greater than the liquidation preference of the
       Series and any other outstanding preferred shares originally issued. The
       interest rate swap transaction will be marked-to-market daily;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are issued by an institution, which, at the time of
       investment, is a permitted bank (including commercial paper issued by a
       corporation which complies with the applicable assumptions that follow)
       ('permitted bank' means any bank, domestic or foreign, whose commercial
       paper is rated A-1+) provided, however, that Short-Term Money Market
       Instruments with maturities of 30 days of less, invested in an
       institution rated A-1 may comprise up to 20% of eligible portfolio
       assets; and

           (e) Cash, which is any immediately available funds in U.S. dollars or
       any currency other than U.S. dollars which is a freely convertible
       currency, and Cash Equivalents, which means investments (other than Cash)
       that are one or more of the following obligations or securities:
       (i) U.S. Government Securities; (ii) certificates of deposits of,
       banker's acceptances issued by or money market accounts in any depository
       institution or trust company incorporated under the laws of the United
       States of America or any state thereof and subject to supervision and
       examination by Federal and/ or state banking authorities, so long as the
       deposits offered by such depository institution or trust company at the
       time of such investments are rated and have a rating of at least 'P-1' by
       Moody's and 'A-1+' by S&P (or, in the case of the principal depository
       institution in a holding company system whose deposits are not so rated,
       the long term debt obligations of such holding company are rated and such
       rating is at least 'A-1' by Moody's and 'A+' by S&P); (iii) commercial
       paper issued by any depositary institution or trust company incorporated
       under the laws of the United States of America or any state thereof and
       subject to supervision and examination by Federal and/or state banking
       authorities, or any corporation incorporated under the laws of the United
       States of America or any state thereof, so long as the commercial paper
       of such issuer is rated and has at the time of such investment a short
       term rating of at least 'P-1' by Moody's and 'A-1+' by S&P on its
       commercial paper; (iv) securities bearing interest or sold at a discount
       issued by any corporation incorporated under the laws of the United
       States of America or any state thereof the obligations of which at the
       time of such investment are rated and that have a credit rating of at
       least 'P-1' by Moody's and 'A-1+' by S&P either at the time of such
       investment or the making of a contractual commitment providing for such
       investment; (v) shares of any money market fund organized under the laws
       of a jurisdiction other than the United States, so long as such money
       market fund is rated and has at the time of such investment a short-term
       rating of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and
       ownership of such investments will not cause the issuer to become engaged
       in a trade or business within the United States for U.S. Federal income
       tax purposes or subject the issuer to tax on a net income basis; and
       (vi) unleveraged overnight repurchase obligations on customary terms with
       respect to investments described in clauses (i) through (iv) above
       entered into a depository institution, trust company or corporation that
       has a short-term rating of at least 'A-1+' by S&P; provided, that (i) in
       no event will Cash Equivalents include any obligation that provides for
       payment of interest alone; (ii) Cash Equivalents referred to in clauses
       (ii) and (iii) above will mature within 183 days of issuance;
       (iii) either Moody's or S&P changes its rating system, then any ratings
       included in this definition will be deemed to be an equivalent rating in
       a successor rating category of Moody's or S&P, as the case may be;
       (iv) if either Moody's or S&P is not in the business of rating
       securities, then any ratings included in this definition will be deemed
       to be an equivalent rating from another Rating Agency; (v) Cash
       Equivalents (other than U.S. Government Securities or money market funds
       maintained by the Custodian) will not include any such investment of more
       than $100 million in any single issuer; and (vi) in no event will Cash
       Equivalents include any obligation that is not denominated in Dollars,
       any synthetic securities, any Securities with ratings containing an


                                      B-26




<PAGE>




       'r' subscript, and IOs or any POs (other than commercial paper with a
       maturity within 183 days of issuance).

       'S&P OC Test Rating Chart' means the chart set forth below:

<Table>
<Caption>
MOODY'S RATING          MAPPED S&P RATING
--------------          -----------------
<S>                     <C>
Aaa                         AA+
Aa1                         AA
Aa2                         AA-
Aa3                         A+
A1                          A
A2                          A-
A3                          BBB+
Baa1                        BBB
Baa2                        BBB-
Baa3                        BB+
Ba1                         BB-
Ba2                         B+
Ba3                         B
B1                          B-
B2                          CCC+
B3                          CCC
Caa                         CCC-
NR or below Caa             NR
</Table>

        'S&P Real Estate Industry/Property Sector Classification' means, for the
    purposes of determining S&P Eligible Assets, each of the following Industry
    Classifications (as defined by NAREIT):

            1. Office

            2. Industrial

            3. Mixed

            4. Shopping Centers

            5. Regional Malls

            6. Free Standing

            7. Apartments

            8. Manufactured Homes

            9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment, and, when
    necessary will consult with the independent auditor and/or S&P, as
    necessary.

        'Securities Depository' means The Depository Trust Company and its
    successors and assigns or any successor securities depository selected by
    the Corporation that agrees to follow the procedures required to be followed
    by such securities depository in connection with the Series.

        'Sell Order' has the meaning set forth in Section 2(ii) of Part II of
    these Articles Supplementary.


                                      B-27




<PAGE>




        'Short-Term Money Market Instrument' means the following types of
    instruments if, on the date of purchase or other acquisition thereof by the
    Corporation, the remaining term to maturity thereof is not in excess of 180
    days:

           (i) commercial paper rated A-1 if such commercial paper matures in
       30 days or A-1+if such commercial paper matures in over 30 days;

           (ii) demand or time deposits in, and banker's acceptances and
       certificates of deposit of (A) a depository institution or trust company
       incorporated under the laws of the United States of America or any state
       thereof or the District of Columbia or (B) a United States branch office
       or agency of a foreign depository institution (provided that such branch
       office or agency is subject to banking regulation under the laws of the
       United States, any state thereof or the District of Columbia);

           (iii) overnight funds; and

           (iv) U.S. Government Securities.

        'Special Dividend Period' means a Dividend Period that is not a Standard
    Dividend Period.

        'Specific Redemption Provisions' means, with respect to any Special
    Dividend Period of more than one year, either, or any combination of (i) a
    period (a 'Non-Call Period') determined by the Board of Directors after
    consultation with the Broker-Dealers, during which the shares subject to
    such Special Dividend Period are not subject to redemption at the option of
    the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
    number of whole years as determined by the Board of Directors after
    consultation with the Broker-Dealers, during each year of which the shares
    subject to such Special Dividend Period will be redeemable at the
    Corporation's option at a price per share equal to the Liquidation
    Preference plus accumulated but unpaid dividends (whether or not earned or
    declared) plus a premium expressed as a percentage or percentages of the
    Liquidation Preference or expressed as a formula using specified variables
    as determined by the Board of Directors after consultation with the
    Broker-Dealers.

        'Standard Dividend Period' means a Dividend Period of 7 days, unless the
    day after such 7th day is not a Business Day, then the number of days ending
    on the calendar day next preceding the next Business Day (such Business Day,
    being the Dividend Payment Date).

        'Submission Deadline' means 1:00 p.m., New York City time, on any
    Auction Date or such other time on any Auction Date by which Broker-Dealers
    are required to submit Orders to the Auction Agent as specified by the
    Auction Agent from time to time.

        'Transfer Agent' means The Bank of New York, unless and until another
    entity appointed by a resolution of the Board of Directors enters into an
    agreement with the Corporation to serve as Transfer Agent.

        'Treasury Index Rate' means the average yield to maturity for actively
    traded marketable U.S. Treasury fixed interest rate securities having the
    same number of 30-day periods to maturity as the length of the applicable
    Dividend Period, determined, to the extent necessary, by linear
    interpolation based upon the yield for such securities having the next
    shorter and next longer number of 30-day periods to maturity treating all
    Dividend Periods with a length greater than the longest maturity for such
    securities as having a length equal to such longest maturity, in all cases
    based upon data set forth in the most recent weekly statistical release
    published by the Board of Governors of the Federal Reserve System (currently
    in H.15 (519)); provided, however, if the most recent such statistical
    release will not have been published during the 15 days preceding the date
    of computation, the foregoing computations will be based upon the average of
    comparable data as quoted to the Corporation by at least three recognized
    dealers in U.S. Government Securities selected by the Corporation.

        'U.S. Government Securities' means direct obligations of the United
    States or by its agencies or instrumentalities that are entitled to the full
    faith and credit of the United States


                                      B-28




<PAGE>




    and that, other than United States Treasury Bills, provide for the periodic
    payment of interest and the full payment of principal at maturity or call
    for redemption.

        'Valuation Date' means the last Business Day of each week, or such other
    date as the Corporation and Rating Agencies may agree to for purposes of
    determining the Preferred Shares Basic Maintenance Amount.

        'Voting Period' has the meaning set forth in Section 6(b) of Part I of
    these Articles Supplementary.

        'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
    Part II of these Articles Supplementary.

    18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.

                          PART II: AUCTION PROCEDURES

    1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms will have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary will have the
respective meanings specified in Part I of these Articles Supplementary.

        'Agent Member' means a member of or participant in the Securities
    Depository that will act on behalf of Existing Holders or Potential Holders
    of shares of the Series.

        'Available Shares of the Series' has the meaning set forth in Section
    4(a)(i) of Part II of these Articles Supplementary.

        'Existing Holder' means (a) a person who beneficially owns those shares
    of the Series listed in that person's name in the records of the Auction
    Agent or (b) the beneficial owner of those shares of the Series which are
    listed under such person's Broker-Dealer's name in the records of the
    Auction Agent, which Broker-Dealer will have signed a Master Purchaser's
    Letter.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Master Purchaser's Letter' means the letter which is required to be
    executed by each prospective purchaser of shares of the Series or the
    Broker-Dealer through whom the shares will be held.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Potential Holder,' means (a) any Existing Holder who may be interested
    in acquiring additional shares of the Series or (b) any other person who may
    be interested in acquiring shares of the Series and who has signed a Master
    Purchaser's Letter or whose shares will be listed under such person's
    Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer
    will have executed a Master Purchaser's Letter.

        'Sell Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Submitted Bid Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Hold Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Order' has the meaning set forth in Section 4(a) of Part II
    of these Articles Supplementary.


                                      B-29




<PAGE>



        'Submitted Sell Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Sufficient Clearing Orders' means that all shares of the Series are the
    subject of Submitted Hold Orders or that the number of shares of the Series
    that are the subject of Submitted Buy Orders by Potential Holders specifying
    one or more rates equal to or less than the Maximum Rate exceeds or equals
    the sum of (A) the number of shares of the Series that are subject of
    Submitted Hold/Sell Orders by Existing Holders specifying one or more rates
    higher than the Maximum Applicable Rate and (B) the number of shares of the
    Series that are subject to Submitted Sell Orders.

        'Winning Bid Rate' means the lowest rate specified in the Submitted
    Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
    specifying such lowest rate and all other Submitted Hold/Sell Orders from
    Existing Holders specifying lower rates were accepted and (B) each Submitted
    Buy Order from Potential Holders specifying such lowest rate and all other
    Submitted Buy Orders from Potential Holders specifying lower rates were
    accepted, would result in the Existing Holders described in clause (A) above
    continuing to hold an aggregate number of shares of the Series which, when
    added to the number of shares of the Series to be purchased by the Potential
    Holders described in clause (B) above and the number of shares of the Series
    subject to Submitted Hold Orders, would be equal to the number of shares of
    the Series.

    2. Orders.

    (a) On or prior to the Submission Deadline on each Auction Date for shares
of the Series:

        (i) each Beneficial Owner of shares of the Series may submit to its
    Broker-Dealer by telephone or otherwise information as to:

           (A) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner desires to continue to
       hold without regard to the Applicable Rate for such shares for the next
       succeeding Dividend Period of such shares;

           (B) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner offers to sell if the
       Applicable Rate for such shares for the next succeeding Dividend Period
       of such shares will be less than the rate per annum specified by such
       Beneficial Owner; and/or

           (C) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner offers to sell without
       regard to the Applicable Rate for such shares for the next succeeding
       Dividend Period of such shares; and

        (ii) each Broker-Dealer, using lists of Potential Beneficial Owners,
    will in good faith for the purpose of conducting a competitive Auction in a
    commercially reasonable manner, contact Potential Beneficial Owners (by
    telephone or otherwise), including Persons that are not Beneficial Owners,
    on such lists to determine the number of shares, if any, of the Series which
    each such Potential Beneficial Owner offers to purchase if the Applicable
    Rate for such shares for the next succeeding Dividend Period of such shares
    will not be less than the rate per annum specified by such Potential
    Beneficial Owner.

        For the purposes hereof, the communication by a Beneficial Owner or
    Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
    Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C)
    or (ii) of this paragraph (a) is hereinafter referred to as an 'Order' and
    collectively as 'Orders' and each Beneficial Owner and each Potential
    Beneficial Owner placing an Order with a Broker-Dealer, and such
    Broker-Dealer placing an Order with the Auction Agent, is hereinafter
    referred to as a 'Bidder' and collectively as 'Bidders'; an Order containing
    the information referred to in clause (i)(A) of this paragraph (a) is
    hereinafter referred to as a 'Hold Order' and collectively as 'Hold Orders';
    an Order containing the information referred to in clause (i)(B) or (ii) of
    this paragraph (a) is hereinafter referred to as a 'Bid' and collectively as
    'Bids'; and an Order containing the


                                      B-30




<PAGE>



    information referred to in clause (i)(C) of this paragraph (a) is
    hereinafter referred to as a 'Sell Order' and collectively as 'Sell Orders.'

    (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of the
Series subject to an Auction on any Auction Date will constitute an irrevocable
offer to sell:

        (A) the number of Outstanding shares of the Series specified in such Bid
    if the Applicable Rate for shares of the Series determined on such Auction
    Date will be less than the rate specified therein;

        (B) such number or a lesser number of Outstanding shares of the Series
    to be determined as set forth in clause (iv) of paragraph (a) of Section 5
    of this Part II if the Applicable Rate for such shares determined on such
    Auction Date will be equal to the rate specified therein; or

        (C) the number of Outstanding shares of the Series specified in such Bid
    if the rate specified therein will be higher than the Maximum Rate for such
    shares, or such number or a lesser number of Outstanding shares of the
    Series to be determined as set forth in clause (iii) of paragraph (b) of
    Section 5 of this Part II if the rate specified therein will be higher than
    the Maximum Rate for such shares and Sufficient Clearing Bids for such
    shares do not exist.

    (ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
the Series subject to an Auction on any Auction Date will constitute an
irrevocable offer to sell:

        (A) the number of Outstanding shares of the Series specified in such
    Sell Order; or

        (B) such number or a lesser number of Outstanding shares of the Series
    as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
    if Sufficient Clearing Bids for such shares do not exist;

provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of the Series will not be liable to any Person for failing to sell
such shares pursuant to a Sell Order described in the proviso to paragraph (c)
of Section 3 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.

    (iii)A Bid by a Potential Holder of shares of the Series subject to an
Auction on any Auction Date will constitute an irrevocable offer to purchase:

        (A) the number of Outstanding shares of the Series specified in such Bid
    if the Applicable Rate for such shares determined on such Auction Date will
    be higher than the rate specified therein; or (B) such number or a lesser
    number of Outstanding shares of the Series as set forth in clause (v) of
    paragraph (a) of Section 5 of this Part II if the Applicable Rate for such
    shares determined on such Auction Date will be equal to the rate specified
    therein.

    (c) No Order for any number of shares of the Series other than whole shares
will be valid.

    3. Submission of Orders by Broker-Dealers to Auction Agent.

    (a) Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for shares of the Series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
will specify with respect to each Order for such shares:

        (i) the name of the Bidder placing such Order (which will be the
    Broker-Dealer unless otherwise permitted by the Corporation);

        (ii) the aggregate number of shares of the Series that are the subject
    of such Order;


                                      B-31




<PAGE>




        (iii) to the extent that such Bidder is an Existing Holder of such
    shares:

           (A) the number of shares of the Series, if any, subject to any Hold
       Order of such Existing Holder;

           (B) the number of shares of the Series, if any, subject to any Bid of
       such Existing Holder and the rate specified in such Bid; and

           (C) the number of shares of the Series, if any, subject to any Sell
       Order of such Existing Holder; and

        (iv) to the extent such Bidder is a Potential Holder of such shares, the
    rate and number of such shares specified in such Potential Holder's Bid.

    (b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one thousandth (.001) of 1%.

    (c) If an Order or Orders covering all of the Outstanding shares of the
Series held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of the Series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Dividend Period consisting of more than 91
Dividend Period days, the Auction Agent will deem a Sell Order to have been
submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.

    (d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding shares of
the Series subject to an Auction held by such Existing Holder, such Orders will
be considered valid in the following order of priority:

        (i) all Hold Orders for such shares will be considered valid, but only
    up to and including in the aggregate the number of Outstanding shares of the
    Series held by such Existing Holder, and if the number of shares of the
    Series subject to such Hold Orders exceeds the number of Outstanding shares
    of the Series held by such Existing Holder, the number of shares subject to
    each such Hold Order will be reduced pro rata to cover the number of
    Outstanding shares of the Series held by such Existing Holder;

        (ii) (A) any Bid for shares of the Series will be considered valid up to
    and including the excess of the number of Outstanding shares of the Series
    held by such Existing Holder over the number of shares of the Series subject
    to any Hold Orders referred to in clause (i) above;

           (B) subject to subclause (A), if more than one Bid of an Existing
       Holder for shares of the Series is submitted to the Auction Agent with
       the same rate and the number of Outstanding shares of the Series subject
       to such Bids is greater than such excess, such Bids will be considered
       valid up to and including the amount of such excess, and the number of
       shares of the Series subject to each Bid with the same rate will be
       reduced pro rata to cover the number of shares of the Series equal to
       such excess;

           (C) subject to subclauses (A) and (B), if more than one Bid of an
       Existing Holder for shares of the Series is submitted to the Auction
       Agent with different rates, such Bids will be considered valid in the
       ascending order of their respective rates up to and including the amount
       of such excess; and

           (D) in any such event, the number, if any, of such Outstanding shares
       of the Series subject to any portion of Bids considered not valid in
       whole or in part under this clause (ii) will be treated as the subject of
       a Bid for shares of the Series by or on behalf of a Potential Holder at
       the rate therein specified; and


                                      B-32




<PAGE>




        (iii) all Sell Orders for shares of the Series will be considered valid
    up to and including the excess of the number of Outstanding shares of the
    Series held by such Existing Holder over the sum of shares of the Series
    subject to valid Hold Orders referred to in clause (i) above and valid Bids
    referred to in clause (ii) above.

    (e) If more than one Bid for one or more shares of the Series is submitted
to the Auction Agent by or on behalf of any Potential Holder, each such Bid
submitted will be a separate Bid with the rate and number of shares therein
specified.

    (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, will be irrevocable.

    4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.

    (a) Not earlier than the Submission Deadline on each Auction Date for shares
of the Series, the Auction Agent will assemble all valid Orders submitted or
deemed submitted to it by the Broker-Dealers in respect of shares of the Series
(each such Order as submitted or deemed submitted by a Broker-Dealer being
hereinafter referred to individually as a 'Submitted Hold Order,' a 'Submitted
Bid' or a 'Submitted Sell Order,' as the case may be, or as a 'Submitted Order'
and collectively as 'Submitted Hold Orders,' 'Submitted Bids' or 'Submitted Sell
Orders,' as the case may be, or as 'Submitted Orders') and will determine for
the Series:

        (i) the excess of the number of Outstanding shares of the Series over
    the number of Outstanding shares of the Series subject to Submitted Hold
    Orders (such excess being hereinafter referred to as the 'Available Shares
    of the Series');

        (ii) from the Submitted Orders for shares of the Series whether:

           (A) the number of Outstanding shares of the Series subject to
       Submitted Bids of Potential Holders specifying one or more rates equal to
       or lower than the Maximum Rate (for all Dividend Periods) for shares of
       the Series; exceeds or is equal to the sum of

           (B) the number of Outstanding shares of the Series subject to
       Submitted Bids of Existing Holders specifying one or more rates higher
       than the Maximum Rate (for all Dividend Periods) for shares of the
       Series; and

           (C) the number of Outstanding shares of the Series subject to
       Submitted Sell Orders(in the event such excess or such equality exists
       (other than because the number of shares of the Series in subclauses (B)
       and (C) above is zero because all of the Outstanding shares of the Series
       are subject to Submitted Hold Orders), such Submitted Bids in subclause
       (A) above being hereinafter referred to collectively as 'Sufficient
       Clearing Bids' for shares of the Series); and

        (iii) if Sufficient Clearing Bids for shares of the Series exist, the
    lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
    shares of the Series) which if:

           (A) (I) each such Submitted Bid of Existing Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Existing Holders
       specifying lower rates were rejected, thus entitling such Existing
       Holders to continue to hold the shares of the Series that are subject to
       such Submitted Bids; and

           (B) (I) each such Submitted Bid of Potential Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Potential Holders
       specifying lower rates were accepted; would result in such Existing
       Holders described in subclause (A) above continuing to hold an aggregate
       number of Outstanding shares of the Series which, when added to the
       number of Outstanding shares of the Series to be purchased by such
       Potential Holders described in subclause (B) above, would equal not less
       than the Available Shares of the Series.

    (b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a)of this Section 4, the Auction Agent will advise the Corporation of
the Maximum Rate for shares of the Series for which an Auction is being held on
the Auction Date and, based on such


                                      B-33




<PAGE>




determination, the Applicable Rate for shares of the Series for the next
succeeding Dividend Period thereof as follows:

        (i) if Sufficient Clearing Bids for shares of the Series exist, that the
    Applicable Rate for all shares of the Series for the next succeeding
    Dividend Period thereof will be equal to the Winning Bid Rate for shares of
    the Series so determined;

        (ii) if Sufficient Clearing Bids for shares of the Series do not exist
    (other than because all of the Outstanding shares of the Series are subject
    to Submitted Hold Orders), that the Applicable Rate for all shares of the
    Series for the next succeeding Dividend Period thereof will be equal to the
    Maximum Rate for shares of the Series; or

        (iii) if all of the Outstanding shares of the Series are subject to
    Submitted Hold Orders, that the Applicable Rate for all shares of the Series
    for the next succeeding Dividend Period thereof will be the All Hold Rate.

    5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the shares of the Series that
are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and
Submitted Sell Orders will be accepted or rejected by the Auction Agent and the
Auction Agent will take such other action as set forth below:

        (a) If Sufficient Clearing Bids for shares of the Series have been made,
    all Submitted Sell Orders with respect to shares of the Series will be
    accepted and, subject to the provisions of paragraphs (d) and (e) of this
    Section 5, Submitted Bids with respect to shares of the Series will be
    accepted or rejected as follows in the following order of priority and all
    other Submitted Bids with respect to shares of the Series will be rejected:

           (i) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is higher than the Winning Bid Rate for shares
       of the Series will be accepted, thus requiring each such Existing Holder
       to sell the shares of the Series subject to such Submitted Bids;

           (ii) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       the Series will be rejected, thus entitling each such Existing Holder to
       continue to hold the shares of the Series subject to such Submitted Bids;

           (iii)Potential Holders' Submitted Bids for shares of the Series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       the Series will be accepted;

           (iv) each Existing Holder's Submitted Bid for shares of the Series
       specifying a rate that is equal to the Winning Bid Rate for shares of the
       Series will be rejected, thus entitling such Existing Holder to continue
       to hold shares of the Series subject to such Submitted Bid, unless the
       number of Outstanding shares of the Series subject to all such Submitted
       Bids will be greater than the number of shares of the Series ('remaining
       shares') in the excess of the Available Shares of the Series over the
       number of shares of the Series subject to Submitted Bids described in
       clauses (ii) and (iii) of this paragraph (a), in which event such
       Submitted Bid of such Existing Holder will be rejected in part, and such
       Existing Holder will be entitled to continue to hold shares of the Series
       subject to such Submitted Bid, but only in an amount equal to the shares
       of the Series obtained by multiplying the number of remaining shares by a
       fraction, the numerator of which will be the number of Outstanding shares
       of the Series held by such Existing Holder subject to such Submitted Bid
       and the denominator of which will be the aggregate number of Outstanding
       shares of the Series subject to such Submitted Bids made by all such
       Existing Holders that specified a rate equal to the Winning Bid Rate for
       shares of the Series; and

           (v) each Potential Holder's Submitted Bid for shares of the Series
       specifying a rate that is equal to the Winning Bid Rate for shares of the
       Series will be accepted but only in an amount equal to the number of
       shares of the Series obtained by multiplying the number of shares in the
       excess of the Available Shares of the Series over the number of


                                      B-34




<PAGE>




       shares of the Series subject to Submitted Bids described in clauses (ii)
       through (iv) of this paragraph (a) by a fraction, the numerator of which
       will be the number of Outstanding shares of the Series subject to such
       Submitted Bid and the denominator of which will be the aggregate number
       of Outstanding shares of the Series subject to such Submitted Bids made
       by all such Potential Holders that specified a rate equal to the Winning
       Bid Rate for shares of the Series.

        (b) If Sufficient Clearing Bids for shares of the Series have not been
    made (other than because all of the Outstanding shares of the Series are
    subject to Submitted Hold Orders), subject to the provisions of paragraph
    (d) of this Section 5, Submitted Orders for shares of the Series will be
    accepted or rejected as follows in the following order of priority and all
    other Submitted Bids for shares of the Series will be rejected:

           (i) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of the Series will be rejected, thus entitling such Existing
       Holders to continue to hold the shares of the Series subject to such
       Submitted Bids;

           (ii) Potential Holders' Submitted Bids for shares of the Series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of the Series will be accepted; and

           (iii) Each Existing Holder's Submitted Bid for shares of the Series
       specifying any rate that is higher than the Maximum Rate for shares of
       the Series and the Submitted Sell Orders for shares of the Series of each
       Existing Holder will be accepted, thus entitling each Existing Holder
       that submitted or on whose behalf was submitted any such Submitted Bid or
       Submitted Sell Order to sell the shares of the Series subject to such
       Submitted Bid or Submitted Sell Order, but in both cases only in an
       amount equal to the number of shares of the Series obtained by
       multiplying the number of shares of the Series subject to Submitted Bids
       described in clause (ii) of this paragraph (b) by a fraction, the
       numerator of which will be the number of Outstanding shares of the Series
       held by such Existing Holder subject to such Submitted Bid or Submitted
       Sell Order and the denominator of which will be the aggregate number of
       Outstanding shares of the Series subject to all such Submitted Bids and
       Submitted Sell Orders.

        (c) If all of the Outstanding shares of the Series are subject to
    Submitted Hold Orders, all Submitted Bids for shares of the Series will be
    rejected.

        (d) If, as a result of the procedures described in clause (iv) or (v) of
    paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
    Existing Holder would be entitled or required to sell, or any Potential
    Holder would be entitled or required to purchase, a fraction of a share of
    the Series on any Auction Date, the Auction Agent will, in such manner as it
    will determine in its sole discretion, round up or down the number of shares
    of the Series to be purchased or sold by any Existing Holder or Potential
    Holder on such Auction Date as a result of such procedures so that the
    number of shares so purchased or sold by each Existing Holder or Potential
    Holder on such Auction Date will be whole shares of the Series.

        (e) If, as a result of the procedures described in clause (v) of
    paragraph (a) of this Section 5 any Potential Holder would be entitled or
    required to purchase less than a whole share of the Series on any Auction
    Date, the Auction Agent will, in such manner as it will determine in its
    sole discretion, allocate shares of the Series for purchase among Potential
    Holders so that only whole shares of the Series are purchased on such
    Auction Date as a result of such procedures by any Potential Holder, even if
    such allocation results in one or more Potential Holders not purchasing
    shares of the Series on such Auction Date.

        (f) Based on the results of each Auction for shares of the Series, the
    Auction Agent will determine the aggregate number of shares of the Series to
    be purchased and the aggregate number of shares of the Series to be sold by
    Potential Holders and Existing Holders and, with respect to each Potential
    Holder and Existing Holder, to the extent that such aggregate number of
    shares to be purchased and such aggregate number of shares to be sold
    differ,


                                      B-35




<PAGE>




    determine to which other Potential Holder(s) or Existing Holder(s) they will
    deliver, or from which other Potential Holder(s) or Existing Holder(s) they
    will receive, as the case may be, shares of the Series. Notwithstanding any
    provision of the Auction Procedures or the Settlement Procedures to the
    contrary, in the event an Existing Holder or Beneficial Owner of shares of
    the Series with respect to whom a Broker-Dealer submitted a Bid to the
    Auction Agent for such shares that was accepted in whole or in part, or
    submitted or is deemed to have submitted a Sell Order for such shares that
    was accepted in whole or in part, fails to instruct its Agent Member to
    deliver such shares against payment therefor, partial deliveries of shares
    of the Series that have been made in respect of Potential Holders' or
    Potential Beneficial Owners' Submitted Bids for shares of the Series that
    have been accepted in whole or in part will constitute good delivery to such
    Potential Holders and Potential Beneficial Owners.

        (g) Neither the Corporation nor the Auction Agent nor any affiliate of
    either will have any responsibility or liability with respect to the failure
    of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
    Beneficial Owner or its respective Agent Member to deliver any shares of the
    Series or to pay for shares of the Series sold or purchased pursuant to the
    Auction Procedures or otherwise.

    6. Transfer of AMPS. Unless otherwise permitted by the Corporation, a
Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of shares of the Series only in whole shares and only pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the procedures described
in this Part II or to a Broker-Dealer; provided, however, that (a) a sale,
transfer or other disposition of shares of the Series from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
will not be deemed to be a sale, transfer or other disposition for purposes of
this Section 6 if such Broker-Dealer remains the Existing Holder of the shares
so sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other Person, if permitted by the Corporation)
to whom such transfer is made will advise the Auction Agent of such transfer.

                         [Remainder of page left blank]


                                      B-36




<PAGE>




    IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Assistant Secretary as of this  day of  , 2004.

WITNESS:

By:  ..............................
   Name: Lawrence B. Stoller
   Title: Assistant Secretary

                                          COHEN & STEERS QUALITY
                                          INCOME REALTY FUND, INC.

                                          By: .................................
                                            Name: Adam Derechin
                                            Title: Vice President

    THE UNDERSIGNED, Vice President of the COHEN & STEERS QUALITY INCOME REALTY
FUND, INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.

                                          By: .................................
                                            Name: Adam Derechin
                                            Title: Vice President

                                      B-37




<PAGE>


                                     PART C

                               OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(1) Financial Statements:

    Part A -- Financial Highlights for the six months ended June 30, 2004
              (unaudited), the year ended December 31, 2003 (audited) and the
              period February 28, 2002 through December 31, 2002 (audited)

    Part B -- Report of Independent Accountants

           -- Statement of Assets and Liabilities, as of December 31, 2003
              (audited)

           -- Statement of Operations, for the year ended December 31, 2003
              (audited)

           -- Statement of Changes in Net Assets, for the year ended
              December 31, 2003 and the period February 28, 2002 through
              December 31, 2002 (audited)

           -- Notes to Financial Statements (audited)

           -- Statement of Assets and Liabilities, as of June 30, 2004
              (unaudited)

           -- Statement of Operations for the six months ended June 30, 2004
              (unaudited)

           -- Statement of Changes in Net Assets for the six months ended
              June 30, 2004 (unaudited) and the period February 28, 2002 through
              December 31, 2002 (audited)

           -- Financial Highlights for the six months ended June 30, 2004
              (unaudited) and the period February 28, 2002 through December 31,
              2002 (audited)

           -- Notes to Financial Statements (unaudited)

    All other financial statements, schedules and historical financial
information are omitted because the conditions requiring their filing do not
exist.

(2) Exhibits:


<Table>
<C>  <S>
(a)  -- Articles of Incorporation.'D'
     -- (i) Articles of Amendment.'D''D'
(b)  -- By-Laws. Incorporated by reference to the Registration
        Statement.'D'
(c)  -- Not applicable.
(d)  -- (i) Form of Articles Supplementary Creating Series M7
        Auction Market Preferred Shares.*
     -- (ii) Specimen Certificate for Series M7 Auction Market
        Preferred Shares.*
(e)  -- Dividend Reinvestment Plan.'D''D'
(f)  -- Not applicable.
(g)  -- Investment Management Agreement.'D''D'
(h)  -- Form of Purchase Agreement.*
(i)  -- Not applicable.
(j)  -- Form of Master Custodian Agreement.'D''D'
(k)  -- (i) Form of Transfer Agency, Registrar and Dividend
        Disbursing Agreement.'D''D'
     -- (ii) Form of Administration Agreement between the Fund
        and the Investment Manager.'D''D'
     -- (iii) Form of Administration Agreement between the Fund
        and State Street Bank and Trust Company.'D''D'
     -- (iv) Form of Auction Agency Agreement between the Fund
        and The Bank of New York.*
     -- (v) Form of Broker-Dealer Agreement.*
</Table>


                                      C-1




<PAGE>




<Table>
<C>  <S>
(l)  -- (i) Opinion and Consent of Simpson Thacher & Bartlett
        LLP.*
     -- (ii) Opinion and Consent of Venable LLP.*
(m)  -- Not applicable.
(n)  -- Consent of Independent Registered Public Accounting
        Firm.*
(o)  -- Not applicable.
(p)  -- Not applicable.
(q)  -- Not applicable.
(r)  -- (i) Code of Ethics of the Fund.'D''D'
     -- (ii) Code of Ethics of Investment Manager.'D''D'
(s)  -- (i) Powers of Attorney, except for the Powers of Attorney
        for Richard E. Kroon,
        Frank K. Ross and C. Edward Ward, Jr.'D'
     -- (ii) Powers of Attorney for Richard E. Kroon, Frank K.
        Ross and C. Edward Ward, Jr.*
</Table>


---------

     * Filed herewith.


    'D' Incorporated by reference to the Fund's Registration Statement on
        Form N-2, (File Nos. 333-68150 and 811-10481) filed on August 22, 2001.


 'D''D' Incorporated by reference to Amendment No. 1 to the Fund's Registration
        Statement, (File Nos. 333-68150 and 811-10481) filed January 23, 2002.

ITEM 25. MARKETING ARRANGEMENTS

    See Exhibit 2(h).

ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

    The approximate expenses in connection with the Offering, all of which are
being borne by the Registrant, are as follows:


<Table>
<S>                                                           <C>
Printing Costs..............................................  $125,000
Legal Fees..................................................  $160,000
Auditing Fees...............................................  $ 45,000
Registration Fees...........................................  $ 11,919
S&P and Moody's Rating Initial Costs........................  $ 52,600
Miscellaneous...............................................  $  1,000
                                                              --------
                                                              $395,519
                                                              --------
                                                              --------
</Table>


ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

    None.

                                      C-2




<PAGE>


ITEM 28. NUMBER OF HOLDERS OF SECURITIES


    Set forth below is the number of record holders as of November 8, 2004, of
each class of securities of the Registrant:



<Table>
<Caption>
                                                                NUMBER OF
                       TITLE OF CLASS                         RECORD HOLDERS
                       --------------                         --------------
<S>                                                           <C>
Common Shares...............................................        134
Series T AMPS, par value $0.001 per share...................          1
Series TH AMPS, par value $0.001 per share..................          1
Series F AMPS, par value $0.001 per share...................          1
Series W AMPS, par value $0.001 per share...................          1
Series M28 AMPS, par value $0.001 per share.................          1
Series M7 AMPS, par value $0.001 per share..................          0
</Table>


ITEM 29. INDEMNIFICATION

    It is the Registrant's policy to indemnify its directors, officers,
employees and other agents to the maximum extent permitted by Section 2-418 of
the General Corporation Law of the State of Maryland as set forth in Article
NINTH of Registrant's Charter (the 'Charter'), and Article VIII, of the
Registrant's By-Laws. The liability of the Registrant's directors and officers
is dealt with in Article NINTH of Registrant's Charter. The liability of Cohen &
Steers Capital Management, Inc., the Registrant's investment manager (the
'Investment Manager'), for any loss suffered by the Registrant or its
stockholders is set forth in Section 5 of the Investment Management Agreement.

    Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 29, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER

    The description of the Investment Manager under the caption 'Management of
the Fund' in the Prospectus and in the Statement of Additional Information,
respectively, constituting Parts A and B, respectively, of this Registration
Statement are incorporated by reference herein.

    The following is a list of the Directors and Officers of the Investment
Manager. None of the persons listed below has had other business connections of
a substantial nature during the past two fiscal years.

                                      C-3




<PAGE>



<Table>
<Caption>
     Name                                                Title
    -----                                               -------
<S>                                    <C>
Robert H. Steers.                      Co-Chairman and Co-Chief Executive Officer, Director
Martin Cohen.........................  Co-Chairman and Co-Chief Executive Officer, Director
Joseph M. Harvey.....................  President
Adam Derechin........................  Chief Operating Officer
John J. McCombe......................  Executive Vice President
Douglas R. Bond......................  Executive Vice President
Lawrence B. Stoller..................  Senior Vice President and General Counsel
William F. Scapell...................  Senior Vice President, Director of Fixed Income Investments
Robert Becker........................  Senior Vice President
William J. Frischling................  Senior Vice President
James S. Corl........................  Senior Vice President
Kevin P. Norton......................  Senior Vice President
Jay J. Chen..........................  Senior Vice President
Victor M. Gomez......................  Senior Vice President and Chief Financial Officer
Rahul Bhattacharjee..................  Vice President and Director of Investment Research
Anthony Dotro........................  Vice President
Mark Freed...........................  Vice President
Robert Tisler........................  Vice President
Norbert Berrios......................  Vice President
Terrance R. Ober.....................  Vice President
Thomas Bohjalian.....................  Vice President
David Oakes..........................  Vice President
Hoyt Peters..........................  Vice President
Salvatore Rappa......................  Vice President and Associate General Counsel
John McLean..........................  Vice President and Associate General Counsel
Blair Lewis..........................  Vice President
Scott Collins........................  Vice President
Rizaldi Santiago.....................  Controller
</Table>

    Cohen & Steers Capital Management, Inc. acts as Investment Manager of, in
addition to the Registrant, the following registered investment companies:

    Cohen & Steers Advantage Income Realty Fund, Inc.

    Cohen & Steers Institutional Realty Shares, Inc.

    Cohen & Steers Realty Income Fund, Inc.

    Cohen & Steers Premium Income Realty Fund, Inc.

    Cohen & Steers Realty Shares, Inc.

    Cohen & Steers REIT and Preferred Income Fund, Inc.

    Cohen & Steers REIT and Utility Income Fund, Inc.

    Cohen & Steers Select Utility Fund, Inc.

    Cohen & Steers Total Return Realty Fund, Inc.

    Cohen & Steers Realty Focus Fund, Inc.

    Cohen & Steers Utility Fund, Inc.

    American Skandia Trust -- AST Cohen & Steers Realty Portfolio

ITEM 31. LOCATION OF ACCOUNTS AND RECORDS

    The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940, as amended
and the Rules thereunder will be maintained as follows: journals, ledgers,
securities records and other original records will be maintained principally at
the offices of the Registrant's Administrator and Custodian, State Street Bank
and Trust Company. All other records so required to be maintained will be
maintained at

                                      C-4




<PAGE>



the offices of Cohen & Steers Capital Management, Inc., 757 Third
Avenue, New York, New York 10017.

ITEM 32. MANAGEMENT SERVICES

    Not applicable.

ITEM 33. UNDERTAKINGS


    (1) The Registrant undertakes to suspend the offering of AMPS until the
prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.


    (2) Not applicable.

    (3) Not applicable.

    (4) Not applicable.

    (5) The Registrant undertakes that:

        a. for the purpose of determining any liability under the Securities
           Act, the information omitted from the form of prospectus filed as
           part of this Registration Statement in reliance upon Rule 430A and
           contained in the form of prospectus filed by the Registrant pursuant
           to 497(h) under the 1933 Act shall be deemed to be part of the
           Registration Statement as of the time it was declared effective; and

        b. for the purpose of determining any liability under the Securities
           Act, each post-effective amendment that contains a form of prospectus
           shall be deemed to be a new registration statement relating to the
           securities offered therein, and the offering of such securities at
           that time shall be deemed to be the initial bona fide offering
           thereof.

    (6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.

                                      C-5




<PAGE>


                                   SIGNATURES


    Pursuant to requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of New York and the State of New York, on the 12th day of November 2004.


                                          COHEN & STEERS QUALITY INCOME
                                          REALTY FUND, INC.

                                          By:          /s/ MARTIN COHEN
                                              ..................................
                                                        MARTIN COHEN
                                               PRESIDENT, TREASURER (PRINCIPAL
                                              FINANCIAL AND ACCOUNTING OFFICER)
                                                        AND DIRECTOR

    Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.


<Table>
<Caption>
               Signature                                Title                           Date
               ---------                                -----                           ----
<S>                                         <C>                                   <C>
                    *                       Director, Chairman and Secretary      November 12, 2004
...........................................
           (ROBERT H. STEERS)

                /s/ MARTIN COHEN            Director, President and Treasurer     November 12, 2004
..........................................
              (MARTIN COHEN)

                            *               Director                              November 12, 2004
..........................................
              (BONNIE COHEN)

                            *               Director                              November 12, 2004
..........................................
            (GEORGE GROSSMAN)

                            *               Director                              November 12, 2004
..........................................
            (RICHARD E. KROON)

                            *               Director                              November 12, 2004
..........................................
           (RICHARD J. NORMAN)

                                            Director                              November 12, 2004
..........................................
             (FRANK K. ROSS)

                            *               Director                              November 12, 2004
..........................................
         (WILLARD H. SMITH, JR.)

                            *               Director                              November 12, 2004
..........................................
          (C. EDWARD WARD, JR.)

        *By:      /S/ MARTIN COHEN
..........................................
               MARTIN COHEN
            ATTORNEY-IN-FACT**
</Table>



---------
** Powers of attorney were previously filed, except for the powers of attorney
   for Richard E. Kroon, Frank K. Ross and C. Edward Ward, Jr., which are filed
   herewith.


                                      C-6


                            STATEMENT OF DIFFERENCES
                            ------------------------
The dagger symbol shall be expressed as...................................  'D'
The division sign shall be expressed as...................................[div]


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2D
<SEQUENCE>2
<FILENAME>ex99-2di.txt
<DESCRIPTION>EXHIBIT 2(D)(I)
<TEXT>

<PAGE>
                                                                 EXHIBIT 2(d)(i)

                             ARTICLES SUPPLEMENTARY

                COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
            Articles Supplementary Creating And Fixing The Rights of
               Series M7 Taxable Auction Market Preferred Shares

    Cohen & Steers Quality Income Realty Fund, Inc., a Maryland corporation
having its principal office in the City of Baltimore in the State of Maryland
(the 'Corporation'), certifies to the State Department of Assessments and
Taxation of Maryland that:

    First: Pursuant to authority expressly vested in the Board of Directors of
the Corporation by Article FIFTH of its Articles of Incorporation, as amended
and supplemented (which as hereafter amended, restated and supplemented from
time to time, is together with these Articles Supplementary, the 'Charter'), and
the Maryland General Corporation Law (the 'MGCL'), the Board of Directors has
duly classified out of the Corporation's authorized and unissued common stock,
and authorized the creation and issuance of, 3,760 shares of the Corporation's
Taxable Auction Market Preferred Shares ('AMPS') (par value $.001 per share) and
has further classified all of such shares as 'Series M7 AMPS,' liquidation
preference $25,000 per share (herein referred to as the 'Series').

    Second: Pursuant to Section 2-411 of the MGCL and authority granted by
Article III of the Corporation's By-laws, the Board of Directors of the
Corporation has appointed a pricing committee (the 'Pricing Committee') and has
authorized such Pricing Committee to fix the terms of the Series, as set forth
herein.

    Third: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the Series
are as follows:

                                  DESIGNATION

    Series M7 AMPS: A series of AMPS, par value $.001 per share, liquidation
preference $25,000 per share, is hereby designated 'Series M7 Taxable Auction
Market Preferred Shares'. Each share of the Series may be issued on a date to be
determined by the Board of Directors of the Corporation or pursuant to their
delegated authority; have an initial dividend rate per annum, initial Dividend
Period and an initial Dividend Payment Date as will be determined in advance of
the issuance thereof by the Board of Directors of the Corporation or pursuant to
their delegated authority; and have such other preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, in addition to those required by applicable law, or as
are set forth in Part I and Part II of these Articles Supplementary. The Series
will constitute a separate series of AMPS of the Corporation.

    Subject to the provisions of Section 11(b) of Part I hereof, the Board of
Directors of the Corporation may, in the future, reclassify additional shares of
the Corporation's unissued common stock as preferred stock, with the same
preferences, rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption and other terms herein
described, except that the dividend rate for its initial Dividend Period, its
initial Dividend Payment Date and any other changes in the terms herein set
forth will be as set forth in the Articles Supplementary with respect to the
additional shares.

    As used in Part I and Part II of these Articles Supplementary, capitalized
terms will have the meanings provided in Section 17 of Part I and Section 1 of
Part II of these Articles Supplementary.

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                             PART I: TERMS OF AMPS

    1. Number of Shares; Ranking.

    (a) The initial number of authorized shares constituting the Series is 3,760
shares. No fractional shares of the Series will be issued.

    (b) Shares of the Series which at any time have been redeemed or purchased
by the Corporation will, after such redemption or purchase, have the status of
authorized but unissued shares of preferred stock.

    (c) Shares of the Series will rank on a parity with shares of any other
series of preferred stock of the Corporation (including any other AMPS) as to
the payment of dividends to which such shares are entitled.

    (d) No Holder of shares of the Series will have, solely by reason of being
such a holder, any preemptive or other right to acquire, purchase or subscribe
for any shares of the Series, Common Shares of the Corporation or other
securities of the Corporation which it may hereafter issue or sell.

    2. Dividends.

    (a) The Holders of shares of the Series will be entitled to receive, when,
as and if declared by the Board of Directors, out of funds legally available
therefor, cumulative cash dividends on their shares at the Applicable Rate,
determined as set forth in paragraph (c) of this Section 2, and no more, payable
on the respective dates determined as set forth in paragraph (b) of this
Section 2. Dividends on the Outstanding shares of the Series issued on the Date
of Original Issue will accumulate from the Date of Original Issue.

    (b) (i) Dividends will be payable when, as and if declared by the Board of
Directors following the initial Dividend Payment Date, subject to subparagraph
(b)(ii) of this Section 2, on the shares of the Series, as follows:

        (A) with respect to any Dividend Period of one year or less, on the
    Business Day following the last day of such Dividend Period; provided,
    however, if the Dividend Period is more than 91 days then on the 91st, 181st
    and 271st days within such period, if applicable, and on the Business Day
    following the last day of such Dividend Period; and

        (B) with respect to any Dividend Period of more than one year, on a
    quarterly basis on each January 1, April 1, July 1 and October 1 within such
    Dividend Period and on the Business Day following the last day of such
    Dividend Period.

    (ii) If a day for payment of dividends resulting from the application of
subparagraph (b) above is not a Business Day, then the Dividend Payment Date
will be the first Business Day following such day for payment of dividends.

    (iii) The Corporation will pay to the Paying Agent not later than
12:00 noon, New York City time, on each Dividend Payment Date for the Series, an
aggregate amount of immediately available funds equal to the dividends to be
paid to all Holders of the Series on such Dividend Payment Date. The Corporation
will not be required to establish any reserves for the payment of dividends.

    (iv) All moneys paid to the Paying Agent for the payment of dividends will
be held in trust for the payment of such dividends by the Paying Agent for the
benefit of the Holders specified in subparagraph (b)(v) of this Section 2. Any
moneys paid to the Paying Agent in accordance with the foregoing but not applied
by the Paying Agent to the payment of dividends will, upon request and to the
extent permitted by law, be repaid to the Corporation at the end of 90 days from
the date on which such moneys were to have been so applied.

    (v) Each dividend on the Series will be paid on the Dividend Payment Date
therefor to the Holders of the Series as their names appear on the stock ledger
or stock records of the Corporation on the Business Day next preceding such
Dividend Payment Date; provided, however, if dividends are in arrears, they may
be declared and paid at any time to Holders as their names appear on the stock
ledger or stock records of the Corporation on such date not exceeding 15

                                      B-2





<PAGE>


days preceding the payment date thereof, as may be fixed by the Board of
Directors. No interest will be payable in respect of any dividend payment or
payments which may be in arrears.

    (c) (i) The dividend rate on Outstanding shares of the Series during the
period from and after the Date of Original Issue to and including the last day
of the initial Dividend Period therefor will be equal to the rate as determined
in the manner set forth under 'Designation' above. For each subsequent Dividend
Period for the Series, the dividend rate will be equal to the rate per annum
that results from an Auction (but the rate set at the Auction will not exceed
the Maximum Rate); provided, however, that if an Auction for any subsequent
Dividend Period of the Series is not held for any reason or if Sufficient
Clearing Orders have not been made in an Auction (other than as a result of all
shares of the Series being the subject of Submitted Hold Orders and other than
in an auction for a Special Dividend Period), then the dividend rate on the
shares of the Series for any such Dividend Period will be the Maximum Rate
(except (i) during a Default Period when the dividend rate will be the Default
Rate, as set forth in Section 2(c)(ii) below or (ii) after a Default Period and
prior to the beginning of the next Dividend Period when the dividend rate will
be the Maximum Rate at the close of business on the last day of such Default
Period). If the Corporation has declared a Special Dividend Period and there are
not Sufficient Clearing Orders, the dividend rate for the next rate period will
be the same as during the current rate period. If as a result of an
unforeseeable disruption of the financial markets, an Auction cannot be held for
a period of more than three business days, the dividend rate for the Subsequent
Dividend Period will be the same as the dividend rate for the current Dividend
Period.

    (ii) Subject to the cure provisions in Section 2(c)(iii) below, a 'Default
Period' with respect to the Series will commence on any date the Corporation
fails to deposit irrevocably in trust in same-day funds, with the Paying Agent
by 12:00 noon, New York City time, (A) the full amount of any declared dividend
on the Series payable on the Dividend Payment Date (a 'Dividend Default') or
(B) the full amount of any redemption price (the 'Redemption Price') payable on
the date fixed for redemption (the 'Redemption Date') (a 'Redemption Default'
and together with a Dividend Default, hereinafter referred to as 'Default').

    Subject to the cure provisions of Section 2(c)(iii) below, a Default Period
with respect to a Dividend Default or a Redemption Default will end on the
Business Day on which, by 12:00 noon, New York City time, all unpaid dividends
and any unpaid Redemption Price will have been deposited irrevocably in trust in
same-day funds with the Paying Agent. In the case of a Dividend Default, the
Applicable Rate for each Dividend Period commencing during a Default Period will
be equal to the Default Rate, and each subsequent Dividend Period commencing
after the beginning of a Default Period will be a Standard Dividend Period;
provided, however, that the commencement of a Default Period will not by itself
cause the commencement of a new Dividend Period. No Auction will be held during
a Default Period.

    (iii) No Default Period with respect to a Dividend Default or Redemption
Default will be deemed to commence if the amount of any dividend or any
Redemption Price due (if such default is not solely due to the willful failure
of the Corporation) is deposited irrevocably in trust, in same-day funds with
the Paying Agent by 12:00 noon, New York City time within three Business Days
after the applicable Dividend Payment Date or Redemption Date, together with an
amount equal to the Default Rate applied to the amount of such non-payment based
on the actual number of days comprising such period divided by 360 for the
Series. The Default Rate will be equal to the Reference Rate multiplied by
three (3).

    (iv) The amount of dividends per share payable (if declared) on each
Dividend Payment Date of each Dividend Period of less than one (1) year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) will be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) that such share was Outstanding and for which the Applicable
Rate or the Default Rate was applicable and the denominator of which will be 360
for the Series, multiplying the amount so obtained by $25,000, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one (1)
year or more, the amount of dividends per share payable on any

                                      B-3





<PAGE>


Dividend Payment Date (or in respect of dividends on another date in connection
with a redemption during such Dividend Period) will be computed as described in
the preceding sentence, except that it will be determined on the basis of a year
consisting of twelve 30-day months.

    (d) Any dividend payment made on shares of the Series will first be credited
against the earliest accumulated but unpaid dividends.

    (e) For so long as the shares of the Series are Outstanding, except as
otherwise contemplated by Part I of these Articles Supplementary, the
Corporation will not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares ranking junior to the Series as to dividends or upon liquidation) with
respect to Common Shares or any other capital stock of the Corporation ranking
junior to the Series as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any Common
Shares or other capital stock ranking junior to the Series (except by conversion
into or exchange for shares of the Corporation ranking junior to the Series as
to dividends and upon liquidation), unless (i) immediately after such
transaction, the Corporation would have Eligible Assets with an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and the 1940 Act Preferred Shares Asset Coverage would be achieved, (ii) all
cumulative and unpaid dividends due on or prior to the date of the transaction
have been declared and paid in full with respect to the Corporation's preferred
stock, including the Series or will have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent, and (iii) the Corporation
has redeemed the full number of shares of preferred stock required to be
redeemed by any mandatory provision for redemption, including the Series
required to be redeemed by any provision for mandatory redemption contained in
Section 3(a)(ii) of Part I of these Articles Supplementary.

    (f) For so long as shares of the Series are Outstanding, except as set forth
in the next sentence, the Corporation will not declare, pay or set apart for
payment on any series of stock of the Corporation ranking, as to the payment of
dividends, on a parity with the Series for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the Series
through its most recent Dividend Payment Date. When dividends are not paid in
full upon the Series through its most recent Dividend Payment Date or upon any
other series of stock ranking on a parity as to the payment of dividends with
the Series through its most recent Dividend Payment Date, all dividends declared
upon the Series and any other such series of stock ranking on a parity as to the
payment of dividends with the Series will be declared pro rata so that the
amount of dividends declared per share on the Series and such other series of
preferred stock ranking on a parity therewith will in all cases bear to each
other the same ratio that accumulated dividends per share on the Series and such
other series of preferred stock ranking on a parity therewith bear to each
other.

    3. Redemption.

    (a) (i) After the initial Dividend Period, subject to the provisions of this
Section 3 and to the extent permitted under the 1940 Act and Maryland law, the
Corporation may, at its option, redeem in whole or in part out of funds legally
available therefor shares of the Series herein designated as (A) having a
Dividend Period of one year or less, on the Business Day after the last day of
such Dividend Period by delivering a notice of redemption not less than 15
calendar days and not more than 40 calendar days prior to the Redemption Date,
at a redemption price per share equal to $25,000, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date ('Redemption Price'), or (B) having a Dividend Period of
more than one year, on any Business Day prior to the end of the relevant
Dividend Period by delivering a notice of redemption not less than 15 calendar
days and not more than 40 calendar days prior to the Redemption Date, at the
Redemption Price, plus a redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealers and set forth in any
applicable Specific Redemption Provisions at the time of the designation of such
Dividend Period as set forth in Section 4 of Part I of these Articles
Supplementary; provided, however, that during a Dividend Period of more than one
year, no shares of the Series will be

                                      B-4





<PAGE>


subject to optional redemption except in accordance with any Specific Redemption
Provisions approved by the Board of Directors after consultation with the
Broker-Dealers at the time of the designation of such Dividend Period.
Notwithstanding the foregoing, the Corporation will not give a notice of or
effect any redemption pursuant to this Section 3(a)(i) unless, on the date on
which the Corporation gives such notice and on the Redemption Date, (a) the
Corporation has available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable Redemption Date and having a value
not less than the amount (including any applicable premium) due to Holders of
the Series by reason of the redemption of the Series on the Redemption Date and
(b) the Corporation would have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were to occur on
such date, it being understood that the provisions of paragraph (d) of this
Section 3 will be applicable in such circumstances in the event the Corporation
makes the deposit and takes the other action required thereby.

    (ii) If the Corporation fails as of any Valuation Date to meet the Preferred
Shares Basic Maintenance Amount Test or, as of the last Business Day of any
month, the 1940 Act Preferred Shares Asset Coverage, and such failure is not
cured within ten Business Days following the relevant Valuation Date, in the
case of a failure to meet the Preferred Shares Basic Maintenance Amount Test, or
the last Business Day of the following month in the case of a failure to meet
the 1940 Act Preferred Shares Asset Coverage (each an 'Asset Coverage Cure
Date'), the Series will be subject to mandatory redemption out of funds legally
available therefor. The number of shares of the Series to be redeemed in such
circumstances will be equal to the lesser of (A) the minimum number of shares of
the Series the redemption of which, if deemed to have occurred immediately prior
to the opening of business on the relevant Asset Coverage Cure Date, would
result in the Corporation meeting the Preferred Shares Basic Maintenance Amount
Test, and the 1940 Act Preferred Shares Asset Coverage, as the case may be, in
either case as of the relevant Asset Coverage Cure Date (provided that, if there
is no such minimum number of shares the redemption of which would have such
result, all shares of the Series then Outstanding will be redeemed) and (B) the
maximum number of shares of the Series that can be redeemed out of funds
expected to be available therefor on the Mandatory Redemption Date at the
Mandatory Redemption Price set forth in subparagraph (a)(iii) of this
Section 3.

    (iii) In determining the shares of the Series required to be redeemed in
accordance with the foregoing Section 3(a)(ii), the Corporation will allocate
the number of shares required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount Test or the 1940 Act Preferred Shares Asset Coverage,
as the case may be, pro rata or among the Holders of the Series in proportion to
the number of shares they hold and shares of other preferred stock subject to
mandatory redemption provisions similar to those contained in this Section 3,
subject to the further provisions of this subparagraph (iii). The Corporation
will effect any required mandatory redemption pursuant to: (A) the Preferred
Shares Basic Maintenance Amount Test, as described in subparagraph (a)(ii) of
this Section 3, no later than 30 days after the Corporation last met the
Preferred Shares Basic Maintenance Amount Test, or (B) the 1940 Act Preferred
Shares Asset Coverage, as described in subparagraph (a)(ii) of this Section 3,
no later than 30 days after the Asset Coverage Cure Date (the 'Mandatory
Redemption Date'), except that if the Corporation does not have funds legally
available for the redemption of, or is not otherwise legally permitted to
redeem, the number of shares of the Series which would be required to be
redeemed by the Corporation under clause (A) of subparagraph (a)(ii) of this
Section 3 if sufficient funds were available, together with shares of other
preferred stock which are subject to mandatory redemption under provisions
similar to those contained in this Section 3, or the Corporation otherwise is
unable to effect such redemption on or prior to such Mandatory Redemption Date,
the Corporation will redeem those shares of the Series, and shares of other
preferred stock which it was unable to redeem, on the earliest practicable date
on which the Corporation will have such funds available, upon notice pursuant to
Section 3(b) to record owners of shares of the Series to be redeemed and the
Paying Agent. The Corporation will deposit with the Paying Agent funds
sufficient to redeem the specified number of shares of the Series with respect
to a redemption required under subparagraph (a)(ii) of this Section 3, by
1:00 P.M., New York City time, of the

                                      B-5





<PAGE>


Business Day immediately preceding the Mandatory Redemption Date. If fewer than
all of the Outstanding shares of the Series are to be redeemed pursuant to this
Section 3(a)(iii), the number of shares to be redeemed will be redeemed pro rata
from the Holders of such shares in proportion to the number of the shares of the
Series held by such Holders, by lot or by such other method as the Corporation
will deem fair and equitable, subject, however, to the terms of any applicable
Specific Redemption Provisions. 'Mandatory Redemption Price' means the
Redemption Price plus (in the case of a Dividend Period of one year or more
only) a redemption premium, if any, determined by the Board of Directors after
consultation with the Broker-Dealers and set forth in any applicable Specific
Redemption Provisions.

    (b) In the event of a redemption pursuant to the foregoing Section 3(a), the
Corporation will file a notice of its intention to redeem with the Securities
and Exchange Commission so as to provide at least the minimum notice required
under Rule 23c-2 under the 1940 Act or any successor provision. In addition, the
Corporation will deliver a notice of redemption to the Auction Agent (the
'Notice of Redemption') containing the information set forth below (i) in the
case of an optional redemption pursuant to Section 3(a)(i) above, one Business
Day prior to the giving of notice to the Holders, (ii) in the case of a
mandatory redemption pursuant to Section 3(a)(ii) above, on or prior to the
10th day preceding the Mandatory Redemption Date. Only with respect to shares
held by the Securities Depository, the Auction Agent will use its reasonable
efforts to provide telephonic notice to each Holder of shares of the Series
called for redemption not later than the close of business on the Business Day
immediately following the day on which the Auction Agent determines the shares
to be redeemed (or, during a Default Period with respect to such shares, not
later than the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from the
Corporation). The Auction Agent will confirm such telephonic notice in writing
not later than the close of business on the third Business Day preceding the
date fixed for redemption by providing the Notice of Redemption to each Holder
of shares called for redemption, the Paying Agent (if different from the Auction
Agent) and the Securities Depository. Notice of Redemption will be addressed to
the registered owners of shares of the Series at their addresses appearing on
the share records of the Corporation. Such Notice of Redemption will set forth
(i) the date fixed for redemption, (ii) the number and identity of shares of the
Series to be redeemed, (iii) the redemption price (specifying the amount of
accumulated dividends to be included therein), (iv) that dividends on the shares
to be redeemed will cease to accumulate on such date fixed for redemption, and
(v) the provision under which redemption will be made. No defect in the Notice
of Redemption or in the transmittal or mailing thereof will affect the validity
of the redemption proceedings, except as required by applicable law. If fewer
than all shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder will also specify the number of shares to be redeemed from
such Holder.

    (c) Notwithstanding the provisions of paragraph (a) of this Section 3, no
preferred stock, including the Series, may be redeemed at the option of the
Corporation unless all dividends in arrears on the Outstanding shares of the
Series and any other preferred stock have been or are being contemporaneously
paid or set aside for payment; provided, however, that the foregoing will not
prevent the purchase or acquisition of outstanding shares of preferred stock
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to holders of all outstanding shares of
preferred stock.

    (d) Upon the deposit of funds sufficient to redeem shares of the Series with
the Paying Agent and the giving of the Notice of Redemption to the Auction Agent
under paragraph (b) of this Section 3, dividends on such shares will cease to
accumulate and such shares will no longer be deemed to be Outstanding for any
purpose (including, without limitation, for purposes of calculating whether the
Corporation has met the Preferred Shares Basic Maintenance Amount Test or the
1940 Act Preferred Shares Asset Coverage), and all rights of the Holders of the
shares so called for redemption will cease and terminate, except the right of
such Holder to receive the redemption price specified herein, but without any
interest or other additional amount. Such redemption price will be paid by the
Paying Agent to the nominee of the Securities Depository. The Corporation will
be entitled to receive from the Paying Agent, promptly after the date fixed

                                      B-6





<PAGE>


for redemption, any cash deposited with the Paying Agent in excess of (i) the
aggregate redemption price of the shares of the Series called for redemption on
such date and (ii) such other amounts, if any, to which Holders of shares of the
Series called for redemption may be entitled. Any funds so deposited that are
unclaimed at the end of two years from such redemption date will, to the extent
permitted by law, be paid to the Corporation, after which time the Holders of
shares of the Series so called for redemption may look only to the Corporation
for payment of the redemption price and all other amounts, if any, to which they
may be entitled; provided, however, that the Paying Agent will notify all
Holders whose funds are unclaimed by placing a notice in The Wall Street Journal
concerning the availability of such funds once each week for three consecutive
weeks. The Corporation will be entitled to receive, from time to time after the
date fixed for redemption, any interest earned on the funds so deposited.

    (e) To the extent that any redemption for which Notice of Redemption has
been given is not made by reason of the absence of legally available funds
therefor, or is otherwise prohibited, such redemption will be made as soon as
practicable to the extent such funds become legally available or such redemption
is no longer otherwise prohibited. Failure to redeem shares of the Series will
be deemed to exist at any time after the date specified for redemption in a
Notice of Redemption when the Corporation will have failed, for any reason
whatsoever, to deposit in trust with the Paying Agent the redemption price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Corporation may not have redeemed shares of
the Series for which a Notice of Redemption has been given, dividends may be
declared and paid on shares of the Series and will include those shares of the
Series for which Notice of Redemption has been given but for which deposit of
funds has not been made.

    (f) All moneys paid to the Paying Agent for payment of the redemption price
of shares of the Series called for redemption will be held in trust by the
Paying Agent for the benefit of holders of shares so to be redeemed.

    (g) So long as any shares of the Series are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the date fixed for redemption to the nominee of the Securities Depository for
distribution to Agent Members for distribution to the persons for whom they are
acting as agent.

    (h) Except for the provisions described above, nothing contained in these
Articles Supplementary limits any right of the Corporation to purchase or
otherwise acquire any shares of the Series outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on, or the mandatory or
optional redemption price with respect to, any shares of the Series for which
Notice of Redemption has been given and the Corporation meets the 1940 Act
Preferred Shares Asset Coverage and the Preferred Shares Basic Maintenance
Amount Test after giving effect to such purchase or acquisition on the date
thereof. Any shares which are purchased, redeemed or otherwise acquired by the
Corporation will have no voting rights. If fewer than all the Outstanding shares
of the Series are redeemed or otherwise acquired by the Corporation, the
Corporation will give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.

    (i) In the case of any redemption pursuant to this Section 3, only whole
shares of the Series will be redeemed, and in the event that any provision of
the Charter would require redemption of a fractional share, the Auction Agent
will be authorized to round up so that only whole shares are redeemed.

    (j) Notwithstanding anything herein to the contrary, including, without
limitation, Section 6(k) of Part I of these Articles Supplementary, the Board of
Directors, upon notification to each Rating Agency, may authorize, create or
issue other series of preferred stock, including other series of AMPS, ranking
on a parity with the Series with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation, to the extent permitted by the 1940 Act, if upon
issuance of any such series, either (A) the net proceeds from the sale of such
stock (or such portion thereof needed to redeem or repurchase the

                                      B-7





<PAGE>


Outstanding Series) are deposited with the Paying Agent in accordance with
Section 3(d) of Part I of these Articles Supplementary, Notice of Redemption as
contemplated by Section 3(b) of Part I of these Articles Supplementary has been
delivered prior thereto or is sent promptly thereafter, and such proceeds are
used to redeem all Outstanding shares of the Series or (B) the Corporation would
meet the 1940 Act Preferred Shares Asset Coverage, the Preferred Shares Basic
Maintenance Amount Test and the requirements of Section 12(b) of Part I of these
Articles Supplementary.

    4. Designation of Dividend Period.

    (a) The initial Dividend Period for the Series will be as determined in the
manner set forth under 'Designation' above. The Corporation will designate the
duration of subsequent Dividend Periods of the Series; provided, however, that
no such designation is necessary for a Standard Dividend Period and, provided
further, that any designation of a Special Dividend Period will be effective
only if (i) notice thereof will have been given as provided herein, (ii) any
failure to pay in a timely manner to the Auction Agent the full amount of any
dividend on, or the redemption price of, the Series will have been cured as
provided above, (iii) Sufficient Clearing Orders will have existed in an Auction
held on the Auction Date immediately preceding the first day of such proposed
Special Dividend Period, (iv) if the Corporation will have mailed a Notice of
Redemption with respect to any shares and the redemption price with respect to
such shares will have been deposited with the Paying Agent, (v) in the case of
the designation of a Special Dividend Period, the Broker-Dealers will have
notified the Corporation in writing that it believes the Auction for the Special
Dividend Period will be successful, and (vi) each Rating Agency will have
confirmed in writing to the Corporation that such designation will not adversely
affect their respective then-current ratings of the Series.

    (b) If the Corporation proposes to designate any Special Dividend Period,
not fewer than seven Business Days (or two Business Days in the event the
duration of the Dividend Period prior to such Special Dividend Period is fewer
than eight days) nor more than 30 Business Days prior to the first day of
such Special Dividend Period, notice will be (i) made by press release and
communicated by the Corporation by telephonic or other means to the Auction
Agent and each Broker-Dealer and confirmed in writing promptly thereafter. Each
such notice will state (A) that the Corporation proposes to exercise its option
to designate a succeeding Special Dividend Period, specifying the first and last
days thereof and the Maximum Applicable Rate for such Special Dividend Period
and (B) that the Corporation will by 3:00 P.M., New York City time, on the
second Business Day next preceding the first day of such Special Dividend
Period, notify the Auction Agent, who will promptly notify the Broker-Dealers,
of either (x) its determination, subject to certain conditions, to proceed with
such Special Dividend Period, subject to the terms of any Specific Redemption
Provisions, or (y) its determination not to proceed with such Special Dividend
Period, in which latter event the succeeding Dividend Period will be a Standard
Dividend Period. No later than 3:00 P.M., New York City time, on the second
Business Day next preceding the first day of any proposed Special Dividend
Period, the Corporation will deliver to the Auction Agent, who will promptly
deliver to the Broker-Dealers and Existing Holders, either:

        (i) a notice stating (A) that the Corporation has determined to
    designate the next succeeding Dividend Period as a Special Dividend Period,
    specifying the first and last days thereof and (B) the terms of any Specific
    Redemption Provisions; or

        (ii) a notice stating that the Corporation has determined not to
    exercise its option to designate a Special Dividend Period.

    If the Corporation fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent or is
unable to make the confirmation provided in clause (v) of paragraph (a) of this
Section 4 by 3:00 P.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Dividend Period, the
Corporation will be deemed to have delivered a notice to the Auction Agent with
respect to such Dividend Period to the effect set forth in clause (ii) above,
thereby resulting in a Standard Dividend Period.

                                      B-8





<PAGE>



    5. Restrictions on Transfer. Shares of the Series may be transferred only
(a) pursuant to an order placed in an Auction, (b) to or through a Broker-Dealer
or (c) to the Corporation or any Affiliate. Notwithstanding the foregoing, a
transfer other than pursuant to an Auction will not be effective unless the
selling Existing Holder or the Agent Member of such Existing Holder, in the case
of an Existing Holder whose shares are listed in its own name on the books of
the Auction Agent, or the Broker-Dealer or Agent Member of such Broker-Dealer,
in the case of a transfer between persons holding shares of the Series through
different Broker-Dealers, advises the Auction Agent of such transfer. The
certificates representing the shares of the Series issued to the Securities
Depository will bear legends with respect to the restrictions described above
and stop-transfer instructions will be issued to the Transfer Agent and/or
Registrar.

    6. Voting Rights.

    (a) Except as otherwise provided in the Charter or as otherwise required by
applicable law, (i) each Holder of shares of the Series will be entitled to one
vote for each share of the Series held on each matter on which the Holders of
the Series are entitled to vote, and (ii) the holders of the Outstanding shares
of preferred stock, including the Series, and holders of shares of Common
Shares will vote together as a single class on all matters submitted to the
stockholders; provided, however, that, with respect to the election of
directors, the holders of the Outstanding shares of preferred stock, including
the Series, represented in person or by proxy at a meeting for the election of
directors, will be entitled, as a class, to the exclusion of the holders of all
other securities and classes of capital stock, including the Common Shares, to
elect two directors of the Corporation, each share of preferred stock, including
the Series, entitling the holder thereof to one vote. The identities of the
nominees of such directorships may be fixed by the Board of Directors. Subject
to paragraph (b) of this Section 6, the holders of outstanding shares of Common
Shares and outstanding shares of preferred stock, including the Series, voting
together as a single class, will be entitled to elect the balance of the
directors.

    (b) If at any time dividends on the Series will be unpaid in an amount equal
to two full years' dividends on the Series (a 'Voting Period'), the number of
directors constituting the Board of Directors will be automatically increased by
the smallest number of additional directors that, when added to the number of
directors then constituting the Board of Directors, will (together with the two
directors elected by the holders of preferred stock, including the Series,
pursuant to paragraph (a) of this Section 6) constitute a majority of such
increased number, and the holders of any shares of preferred stock, including
the Series, will be entitled, voting as a single class on a one-vote-per-share
basis (to the exclusion of the holders of all other securities and classes of
capital stock of the Corporation), to elect the smallest number of such
additional directors of the Corporation that will constitute a majority of the
total number of directors of the Corporation so increased. The Voting Period and
the voting rights so created upon the occurrence of the conditions set forth in
this paragraph (b) of Section 6 will continue unless and until all dividends in
arrears on the Series will have been paid or declared and sufficient cash or
specified securities are set apart for the payment of such dividends. Upon the
termination of a Voting Period, the voting rights described in this paragraph
(b) of Section 6 will cease, subject always, however, to the revesting of such
voting rights in the holders of preferred stock, including the Series, upon the
further occurrence of any of the events described in this paragraph (b) of
Section 6.

    (c) As soon as practicable after the accrual of any right of the holders of
shares of preferred stock, including the Series, to elect additional directors
as described in paragraph (b) of this Section 6, the Corporation will notify the
Auction Agent, and the Auction Agent will call a special meeting of such
holders, by mailing a notice of such special meeting to such holders, such
meeting to be held not less than ten nor more than 90 days after the date of
mailing of such notice. If the Corporation fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting will be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting of holders of
preferred stock, including the Series, held during a Voting Period at which
directors are to be elected, such holders, voting

                                      B-9





<PAGE>



together as a class (to the exclusion of the holders of all other securities and
classes of capital stock of the Corporation), will be entitled to elect the
number of directors prescribed in paragraph (b) of this Section 6 on a
one-vote-per-share basis. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of the holders of shares of preferred stock,
including Holders of the Series, present in person or by proxy will have the
power to adjourn the meeting without notice, other than an announcement at the
meeting, until a quorum is present.

    (d) For purposes of determining any rights of the holders of the shares of
preferred stock, including the Series, to vote on any matter, whether such right
is created by these Articles Supplementary, by statute or otherwise, if
redemption of some or all of the shares of preferred stock, including the
Series, is required, no holder of shares of preferred stock, including the
Series, will be entitled to vote and no share of preferred stock, including the
Series, will be deemed to be 'outstanding' for the purpose of voting or
determining the number of shares required to constitute a quorum, if prior to or
concurrently with the time of determination, sufficient Deposit Securities for
the redemption of such shares have been deposited in the case of the Series in
trust with the Paying Agent for that purpose and the requisite Notice of
Redemption with respect to such shares will have been given as provided in
Section 3(b) of Part I of these Articles Supplementary and in the case of other
preferred stock the Corporation has otherwise met the conditions for redemption
applicable to such shares.

    (e) The terms of office of all persons who are directors of the Corporation
at the time of a special meeting of Holders of the Series and holders of other
shares of preferred stock to elect directors pursuant to paragraph (b) of this
Section 6 will continue, notwithstanding the election at such meeting by the
holders of the number of directors that they are entitled to elect.

    (f) Simultaneously with the termination of a Voting Period, the terms of
office of the additional directors elected by the Holders of the Series and
holders of shares of other preferred stock pursuant to paragraph (b) of this
Section 6 will terminate, the remaining directors will constitute the directors
of the Corporation and the voting rights of such holders to elect additional
directors pursuant to paragraph (b) of this Section 6 will cease, subject to the
provisions of the last sentence of paragraph (b) of this Section 6.

    (g) Unless otherwise required by law or in the Corporation's Charter, the
Holders of the Series will not have any relative rights or preferences or other
special rights other than those specifically set forth herein. In the event that
the Corporation fails to pay any dividends on the Series of the Corporation or
fails to redeem any shares of the Series which it is required to redeem, or any
other event occurs which requires the mandatory redemption of the Series and the
required Notice of Redemption has not been given, other than the rights set
forth in paragraph (a) of Section 3 of Part I of these Articles Supplementary,
the exclusive remedy of the Holders of the Series will be the right to vote for
directors pursuant to the provisions of paragraph (b) of this Section 6. In no
event will the Holders of the Series have any right to sue for, or bring a
proceeding with respect to, such dividends or redemptions or damages for the
failure to receive the same.

    (h) For so long as any shares of preferred stock, including the Series, are
outstanding, the Corporation will not, without the affirmative vote of the
Holders of a majority of the outstanding preferred stock, including the Series,
(i) institute any proceedings to be adjudicated bankrupt or insolvent, or
consent to the institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consenting to reorganization or relief under any
applicable federal or state law relating to bankruptcy or insolvency, or consent
to the appointment of a receiver, liquidator, assignee, trustee, sequestrator
(or other similar official) of the Corporation or a substantial part of its
property, or make any assignment for the benefit of creditors, or, except as may
be required by applicable law, admit in writing its inability to pay its debts
generally as they become due or take any corporate action in furtherance of any
such action; (ii) create, incur or suffer to exist, or agree to create, incur or
suffer to exist, or consent to cause or permit in the future (upon the happening
of a contingency or otherwise) the creation, incurrence or existence of any
material lien, mortgage, pledge, charge, security interest, security agreement,
conditional sale or trust receipt or other material encumbrance of any kind upon
any of the Corporation's assets as a whole, except

                                      B-10





<PAGE>



(A) liens the validity of which are being contested in good faith by appropriate
proceedings, (B) liens for taxes that are not then due and payable or that can
be paid thereafter without penalty, (C) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness senior to the Series, (D) liens, pledges, charges, security
interests, security agreements or other encumbrances arising in connection with
any indebtedness permitted under clause (iii) below and (E) liens to secure
payment for services rendered including, without limitation, services rendered
by the Corporation's Paying Agent and the Auction Agent; or (iii) create,
authorize, issue, incur or suffer to exist any indebtedness for borrowed money
or any direct or indirect guarantee of such indebtedness for borrowed money or
any direct or indirect guarantee of such indebtedness, except the Corporation
may borrow as may be permitted by the Corporation's investment restrictions;
provided, however, that transfers of assets by the Corporation subject to an
obligation to repurchase will not be deemed to be indebtedness for purposes of
this provision to the extent that after any such transaction the Corporation has
Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount as of the immediately preceding
Valuation Date.

    (i) The affirmative vote of the holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock, including the Series,
voting together as a separate class, will be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely affecting such
shares or any action requiring a vote of security holders of the Corporation
under Section 13(a) of the 1940 Act. In the event a vote of holders of shares of
preferred stock is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Corporation will, not later than ten Business Days prior to the
date on which such vote is to be taken, notify each Rating Agency that such vote
is to be taken and the nature of the action with respect to which such vote is
to be taken and will, not later than ten Business Days after the date on which
such vote is taken, notify each Rating Agency of the results of such vote.

    (j) The affirmative vote of the Holders of a majority, as defined in the
1940 Act, of the outstanding shares of preferred stock of any series, voting
separately from any other series, will be required with respect to any matter
that materially and adversely affects the rights, preferences, or powers of that
series in a manner different from that of other series or classes of the
Corporation's shares of capital stock. For purposes of the foregoing, no matter
will be deemed to adversely affect any rights, preference or power unless such
matter (i) alters or abolishes any preferential right of such series;
(ii) creates, alters or abolishes any right in respect of redemption of such
series; or (iii) creates or alters (other than to abolish) any restriction on
transfer applicable to such series. The vote of holders of any series described
in this Section (j) will in each case be in addition to a separate vote of the
requisite percentage of Common Shares and/or preferred stock necessary to
authorize the action in question.

    (k) The Board of Directors, without the vote or consent of any holder of
shares of preferred stock, including the Series, or any other stockholder of the
Corporation, may from time to time amend, alter or repeal any or all of the
definitions contained herein, add covenants and other obligations of the
Corporation, or confirm the applicability of covenants and other obligations set
forth herein, all in connection with obtaining or maintaining the rating of any
Rating Agency with respect to the Series, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of the
Series or the Holders thereof, provided that the Board of Directors receives
written confirmation from each relevant Rating Agency (with such confirmation in
no event being required to be obtained from a particular Rating Agency with
respect to definitions or other provisions relevant only to and adopted in
connection with another Rating Agency's rating of the the Series) that any such
amendment, alteration or repeal would not adversely affect the rating then
assigned by such Rating Agency.

    In addition, subject to compliance with applicable law, the Board of
Directors may amend the definition of Maximum Rate to increase the percentage
amount by which the Reference Rate is multiplied to determine the Maximum Rate
shown therein without the vote or consent of the holders of shares of preferred
stock, including the Series, or any other stockholder of the Corporation, but
only with confirmation from each Rating Agency, and after consultation with the

                                      B-11





<PAGE>



Broker-Dealers, provided that immediately following any such increase the
Corporation would meet the Preferred Shares Basic Maintenance Amount Test.

    7. Liquidation Rights.

    (a) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, the holders of
shares of preferred stock, including the Series, will be entitled to receive out
of the assets of the Corporation available for distribution to stockholders,
after claims of creditors but before distribution or payment will be made in
respect of the Common Shares or to any other shares of stock of the Corporation
ranking junior to the preferred stock, as to liquidation payments, a liquidation
distribution in the amount of $25,000 per share (the 'Liquidation Preference'),
plus an amount equal to all unpaid dividends accrued to and including the date
fixed for such distribution or payment (whether or not declared by the Board of
Directors, but excluding interest thereon), but such Holders will be entitled to
no further participation in any distribution or payment in connection with any
such liquidation, dissolution or winding up. The Series will rank on a parity
with shares of any other series of preferred stock of the Corporation as to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation.

    (b) If, upon any such liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or involuntary, the assets of the
Corporation available for distribution among the holders of all outstanding
shares of preferred stock, including the Series, will be insufficient to permit
the payment in full to such holders of the amounts to which they are entitled,
then such available assets will be distributed among the holders of all
outstanding shares of preferred stock, including the Series, ratably in any such
distribution of assets according to the respective amounts which would be
payable on all such shares if all amounts thereon were paid in full. Unless and
until payment in full has been made to the holders of all outstanding shares of
preferred stock, including the Series, of the liquidation distributions to which
they are entitled, no dividends or distributions will be made to holders of
Common Shares or any stock of the Corporation ranking junior to the preferred
stock as to liquidation.

    (c) Neither the consolidation nor merger of the Corporation with or into any
other entity or entities, nor the sale, lease, exchange or transfer by the
Corporation of all or substantially all of its property and assets, will be
deemed to be a liquidation, dissolution or winding up of the Corporation for
purposes of this Section 7.

    (d) After the payment to Holders of the Series of the full preferential
amounts provided for in this Section 7, the Holders of the Series as such will
have no right or claim to any of the remaining assets of the Corporation.

    (e) In the event the assets of the Corporation or proceeds thereof available
for distribution to the Holders of the Series, upon dissolution, liquidation or
winding up of the affairs of the Corporation, whether voluntary or involuntary,
will be insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (a) of this Section 7, no such distribution will
be made on account of any shares of any other series of preferred stock unless
proportionate distributive amounts will be paid on account of the Series,
ratably, in proportion to the full distributable amounts to which holders of all
shares of preferred stock are entitled upon such dissolution, liquidation or
winding up.

    (f) Subject to the rights of the holders of shares of other preferred stock
or after payment will have been made in full to the Holders of the Series as
provided in paragraph (a) of this Section 7, but not prior thereto, any other
series or class of shares ranking junior to the Series with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Corporation will, subject to any respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the Holders of the Series will not be entitled to
share therein.

    8. Auction Agent. For so long as any shares of the Series are Outstanding,
the Auction Agent, duly appointed by the Corporation to so act, will be in each
case a commercial bank, trust company or other financial institution independent
of the Corporation and its Affiliates (which,

                                      B-12





<PAGE>



however, may engage or have engaged in business transactions with the
Corporation or its Affiliates) and at no time will the Corporation or any of its
Affiliates act as the Auction Agent in connection with the Auction Procedures.
If the Auction Agent resigns or for any reason its appointment is terminated
during any period that any shares of the Series are Outstanding, the Corporation
will use its best efforts to enter into an agreement with a successor auction
agent containing substantially the same terms and conditions as the auction
agency agreement. The Corporation may remove the auction agent provided that
prior to such removal the Corporation will have entered into such an agreement
with a successor auction agent.

    9. 1940 Act Preferred Shares Asset Coverage. The Corporation will maintain,
as of the last Business Day of each month in which any shares of the Series are
Outstanding, the 1940 Act Preferred Shares Asset Coverage; provided, however,
that Section 3(a)(ii) will be the sole remedy in the event the Corporation fails
to do so.

    10. Preferred Shares Basic Maintenance Amount. So long as any shares of the
Series are Outstanding and any Rating Agency so requires, the Corporation will
maintain, as of each Valuation Date, Moody's Eligible Assets and S&P Eligible
Assets, as applicable, having an aggregate Discounted Value equal to or greater
than the Preferred Shares Basic Maintenance Amount; provided, however, that
Section 3(a)(ii) will be the sole remedy in the event the Corporation fails to
do so.

    11. Certain Other Restrictions. So long as any shares of the Series are
Outstanding and S&P, Moody's or any Other Rating Agency that is rating such
shares so requires, the Corporation will not, unless it has received written
confirmation from S&P (if S&P is then rating the Series), Moody's (if Moody's is
then rating the Series) and (if applicable) such Other Rating Agency, that any
such action would not impair the rating then assigned by such Rating Agency to
the Series, engage in any one or more of the following transactions:

        (a) purchase or sell futures contracts or options thereon with respect
    to portfolio securities or write put or call options on portfolio
    securities;

        (b) except in connection with a refinancing of the Series, issue
    additional shares of any series of preferred stock, including the Series or
    reissue any shares of preferred stock, including the Series previously
    purchased or redeemed by the Corporation;

        (c) engage in any short sales of securities;

        (d) lend portfolio securities;

        (e) merge or consolidate into or with any other fund; or

        (f) for purposes of valuation of Moody's Eligible Assets: (A) if the
    Corporation writes a call option, the underlying asset will be valued as
    follows: (1) if the option is exchange-traded and may be offset readily or
    if the option expires before the earliest possible redemption of the Series,
    at the lower of the Discounted Value of the underlying security of the
    option and the exercise price of the option or (2) otherwise, it has no
    value; (B) if the Corporation writes a put option, the underlying asset will
    be valued as follows: the lesser of (1) exercise price and (2) the
    Discounted Value of the underlying security; and (C) call or put option
    contracts which the Corporation buys have no value. For so long as the
    Series are rated by Moody's: (A) the Corporation will not engage in options
    transactions for leveraging or speculative purposes; (B) the Corporation
    will not write or sell any anticipatory contracts pursuant to which the
    Corporation hedges the anticipated purchase of an asset prior to completion
    of such purchase; (C) the Corporation will not enter into an option
    transaction with respect to portfolio securities unless, after giving effect
    thereto, the Corporation would continue to have Eligible Assets with an
    aggregate Discounted Value equal to or greater than the Preferred Shares
    Basic Maintenance Amount; (D) the Corporation will not enter into an option
    transaction with respect to portfolio securities unless after giving effect
    to such transaction the Corporation would continue to be in compliance with
    the provisions relating to the Preferred Shares Basic Maintenance Amount;
    (E) for purposes of the Preferred Shares Basic Maintenance Amount assets in
    margin accounts are not Eligible Assets; (F) the Corporation will write only
    exchange-traded options on exchanges approved by Moody's (if Moody's is then

                                      B-13





<PAGE>



    rating the Series); (G) where delivery may be made to the Corporation with
    any of a class of securities, the Corporation will assume for purposes of
    the Preferred Shares Basic Maintenance Amount that it takes delivery of that
    security which yields it the least value; (H) the Corporation will not
    engage in forward contracts; and (I) there will be a quarterly audit made of
    the Corporation's options transactions by the Corporation's independent
    auditors to confirm that the Corporation is in compliance with these
    standards.

        (g) For so long as the Series is rated by S&P, the Corporation will not
    purchase or sell futures contracts, write, purchase or sell options on
    futures contracts or write put options (except covered put options) or call
    options (except covered call options) on portfolio securities unless it
    receives written confirmation from S&P that engaging in such transactions
    will not impair the ratings then assigned to the Series by S&P.

    12. Compliance Procedures for Asset Maintenance Tests. For so long as any
shares of the Series are Outstanding and any Rating Agency so requires:

        (a) As of each Valuation Date, the Corporation will determine (i) the
    Market Value of each Eligible Asset owned by the Corporation on that date,
    (ii) the Discounted Value of each such Eligible Asset, (iii) whether the
    Preferred Shares Basic Maintenance Amount Test is met as of that date,
    (iv) the value (as used in the 1940 Act) of the total assets of the
    Corporation, less all liabilities, and (v) whether the 1940 Act Preferred
    Shares Asset Coverage is met as of that date.

        (b) Upon any failure to meet the Preferred Shares Basic Maintenance
    Amount Test or 1940 Act Preferred Shares Asset Coverage on any Valuation
    Date, the Corporation may use reasonable commercial efforts (including,
    without limitation, altering the composition of its portfolio, purchasing
    shares of the Series outside of an Auction or, in the event of a failure to
    file a certificate on a timely basis, submitting the requisite certificate),
    to meet (or certify in the case of a failure to file a certificate on a
    timely basis, as the case may be) the Preferred Shares Basic Maintenance
    Amount Test or 1940 Act Preferred Shares Asset Coverage on or prior to the
    Asset Coverage Cure Date.

        (c) Compliance with the Preferred Shares Basic Maintenance Amount and
    1940 Act Asset Coverage Tests will be determined with reference to those
    shares of the Series which are deemed to be Outstanding hereunder.

        (d) In the case of the asset coverage requirements for Moody's and S&P,
    the auditors must certify once per calendar year the asset coverage test on
    a date randomly selected by the auditor.

        (e) The Corporation will deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (i)-(iii) of
    paragraph (a) of this Section 12 (a 'Preferred Shares Basic Maintenance
    Certificate') as of (A) the Date of Original Issue, (B) the last Valuation
    Date of each month, (C) any date requested by any Rating Agency, (D) a
    Business Day on or before any Asset Coverage Cure Date relating to the
    Corporation's cure of a failure to meet the Preferred Shares Basic
    Maintenance Amount Test, (E) any day that Common Shares outstanding ,
    preferred shares of the Fund, including the Series, are redeemed and
    (F) any day the S&P Eligible Assets have an aggregate discounted value less
    than or equal to 110% of the Preferred Shares Basic Maintenance Amount. Such
    Preferred Shares Basic Maintenance Certificate will be delivered in the case
    of clause (i)(A) on the Date of Original Issue and in the case of all other
    clauses above on or before the seventh Business Day after the relevant
    Valuation Date or Asset Coverage Cure Date.

        (f) The Corporation will deliver to the Auction Agent and each Rating
    Agency a certificate which sets forth a determination of items (iv) and (v)
    of paragraph (a) of this Section 12 (a '1940 Act Preferred Shares Asset
    Coverage Certificate') (i) as of the Date of Original Issue, and (ii) as of
    (A) the last Valuation Date of each quarter thereafter, and (B) as of a
    Business Day on or before any Asset Coverage Cure Date relating to the
    failure to meet the 1940 Act Preferred Shares Asset Coverage. Such 1940 Act
    Preferred Shares Asset Coverage Certificate will be delivered in the case of
    clause (i) on the Date of Original Issue

                                      B-14





<PAGE>


    and in the case of clause (ii) on or before the seventh Business Day
    after the relevant Valuation Date or the Asset Coverage Cure Date. The
    certificates required by paragraphs (d) and (e) of this Section 12 may be
    combined into a single certificate.

        (g) Within ten Business Days of the Date of Original Issue, the
    Corporation will deliver to the Auction Agent and each Rating Agency a
    letter prepared by the Corporation's independent auditors (an 'Auditor's
    Certificate') regarding the accuracy of the calculations made by the
    Corporation in the Preferred Shares Basic Maintenance Certificate and the
    1940 Act Preferred Shares Asset Coverage Certificate required to be
    delivered by the Corporation on the Date of Original Issue. Within ten
    Business Days after delivery of the Preferred Shares Basic Maintenance
    Certificate and the 1940 Act Preferred Shares Asset Coverage Certificate
    relating to the last Valuation Date of each fiscal quarter of the
    Corporation, the Corporation will deliver to the Auction Agent and each
    Rating Agency an Auditor's Certificate regarding the accuracy of the
    calculations made by the Corporation in a Preferred Shares Basic Maintenance
    Certificate with respect to a date randomly selected by the Corporation's
    independent auditors during such fiscal quarter. In addition, the
    Corporation will deliver to the persons specified in the preceding sentence
    an Auditor's Certificate regarding the accuracy of the calculations made by
    the Corporation on each Preferred Shares Basic Maintenance Certificate and
    1940 Act Preferred Shares Asset Coverage Certificate delivered in relation
    to an Asset Coverage Cure Date within ten days after the relevant Asset
    Coverage Cure Date. If an Auditor's Certificate shows that an error was made
    in any such report, the calculation or determination made by the
    Corporation's independent auditors will be conclusive and binding on the
    Corporation.

        (h) The Auditor's Certificates referred to in paragraph (f) above will
    confirm, based upon the independent auditor's review of portfolio data
    provided by the Corporation, (i) the mathematical accuracy of the
    calculations reflected in the related Preferred Shares Basic Maintenance
    Amount Certificates and 1940 Act Preferred Shares Asset Coverage
    Certificates and (ii) that, based upon such calculations, the Corporation
    had, at such Valuation Date, met the Preferred Shares Basic Maintenance
    Amount Test.

        (i) In the event that a Preferred Shares Basic Maintenance Certificate
    or 1940 Act Preferred Shares Asset Coverage Certificate with respect to an
    applicable Valuation Date is not delivered within the time periods specified
    in this Section 12, the Corporation will be deemed to have failed to meet
    the Preferred Shares Basic Maintenance Amount Test or the 1940 Act Preferred
    Shares Asset Coverage, as the case may be, on such Valuation Date for
    purposes of Section 12(b) of Part I of these Articles Supplementary. In the
    event that a Preferred Shares Basic Maintenance Certificate, a 1940 Act
    Preferred Shares Asset Coverage Certificate or an applicable Auditor's
    Certificate with respect to an Asset Coverage Cure Date is not delivered
    within the time periods specified herein, the Corporation will be deemed to
    have failed to meet the Preferred Shares Basic Maintenance Amount Test or
    the 1940 Preferred Shares Asset Coverage, as the case may be, as of the
    related Valuation Date.

    13. Notice. All notices or communications hereunder, unless otherwise
specified in these Articles Supplementary, will be sufficiently given if in
writing and delivered in person, by telecopier or mailed by first-class mail,
postage prepaid. Notices delivered pursuant to this Section 13 will be deemed
given on the earlier of the date received or the date five-days after which such
notice is mailed, except as otherwise provided in these Articles Supplementary
or by the MGCL for notices of stockholders' meetings.

    14. Waiver. To the extent permitted by Maryland law, Holders of at least
two-thirds of the Outstanding shares of the Series may waive any provision
hereof intended for their benefit in accordance with such procedures as may from
time to time be established by the Board of Directors.

    15. Termination. In the event that no shares of the Series are Outstanding,
all rights and preferences of such shares established and designated hereunder
will cease and terminate, and all obligations of the Corporation under these
Articles Supplementary will terminate.

                                      B-15





<PAGE>


    16. Amendment. Subject to the provisions of these Articles Supplementary,
the Board of Directors may, by resolution duly adopted without stockholder
approval (except as otherwise provided by these Articles Supplementary or
required by applicable law), amend these Articles Supplementary to reflect any
amendments hereto which the Board of Directors is entitled to adopt pursuant to
the terms of Section 6(k) of Part I of these Articles Supplementary without
stockholder approval. To the extent permitted by applicable law, the Board of
Directors may interpret, amend or adjust the provisions of these Articles
Supplementary to resolve any inconsistency or ambiguity or to remedy any patent
defect.

    17. Definitions. As used in Part I and Part II of these Articles
Supplementary, the following terms will have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:

        'AA' Composite Commercial Paper Rate' on any date means (i) the interest
    equivalent of the 7-day rate, in the case of a Dividend Period which is 7
    days or shorter; for Dividend Periods greater than 7 days but fewer than or
    equal to 31 days, the 30-day rate; for Dividend Periods greater than
    31 days but fewer than or equal to 61 days, the 60-day rate; for Dividend
    Periods greater than 61 days but fewer than or equal to 91 days, the 90 day
    rate; for Dividend Periods greater than 91 days but fewer than or equal to
    270 days, the rate described in clause (ii) below; for Dividend Periods
    greater than 270 days, the Treasury Index Rate; on commercial paper on
    behalf of financial issuers whose corporate bonds are rated 'AA' by S&P, or
    the equivalent of such rating by another nationally recognized rating
    agency, as announced by the Federal Reserve Bank of New York for the close
    of business on the Business Day immediately preceding such date; or (ii) if
    the Federal Reserve Bank of New York does not make available such a rate,
    then the arithmetic average of the interest equivalent of such rates on
    commercial paper placed on behalf of such issuers, as quoted on a discount
    basis or otherwise by the Commercial Paper Dealers to the Auction Agent for
    the close of business on the Business Day immediately preceding such date
    (rounded to the next highest .001 of 1%). If any Commercial Paper Dealer
    does not quote a rate required to determine the 'AA' Composite Commercial
    Paper Rate, such rate shall be determined on the basis of the quotations (or
    quotation) furnished by the remaining Commercial Paper Dealers (or Dealer),
    if any, or, if there are no such Commercial Paper Dealers, by the Auction
    Agent as agreed to by Merrill Lynch & Co. For purposes of this definition,
    (A) 'Commercial Paper Dealers' shall mean (1) Salomon Smith Barney Inc.,
    Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
    Goldman Sachs & Co.; (2) in lieu of any thereof, its respective Affiliate or
    successor; and (3) in the event that any of the foregoing shall cease to
    quote rates for commercial paper of issuers of the sort described above, in
    substitution therefor, a nationally recognized dealer in commercial paper of
    such issuers then making such quotations selected by the Corporation, and
    (B) 'interest equivalent' of a rate stated on a discount basis for
    commercial paper of a given number of days' maturity shall mean a number
    equal to the quotient (rounded upward to the next higher one-thousandth of
    1%) of (1) such rate expressed as a decimal, divided by (2) the difference
    between (x) 1.00 and (y) a fraction, the numerator of which shall be the
    product of such rate expressed as a decimal, multiplied by the number of
    days in which such commercial paper shall mature and the denominator of
    which shall be 360.

        'Affiliate' means any person known to the Auction Agent to be controlled
    by, in control of or under common control with the Corporation; provided,
    however, that no Broker-Dealer controlled by, in control of or under common
    control with the Corporation will be deemed to be an Affiliate nor will any
    corporation or any Person controlled by, in control of or under common
    control with such corporation, one of the directors or executive officers of
    which is a director of the Corporation be deemed to be an Affiliate solely
    because such director or executive officer is also a director of the
    Corporation.

        'Agent Member' means a member of or a participant in the Securities
    Depository that will act on behalf of a Bidder.

        'All Hold Rate' means the 7-day 'AA' Composite Commercial Paper Rate.

                                      B-16





<PAGE>


        'AMPS' has the meaning set forth in Article FIRST of these Articles
    Supplementary.

        'Applicable Rate' means for each Dividend Period (i) if Sufficient
    Clearing Orders exist for the Auction in respect thereof, the Winning Bid
    Rate, (ii) if Sufficient Clearing Orders do not exist for the Auction in
    respect thereof, the Maximum Rate, and (iii) in the case of any Dividend
    Period if all the shares of the Series are the subject of Submitted Hold
    Orders for the Auction in respect thereof, the All Hold Rate.

        'Approved Price' means the 'fair value' as determined by the Corporation
    in accordance with the valuation procedures adopted from time to time by the
    Board of Directors and for which the Corporation receives a mark-to-market
    price (which, for the purpose of clarity, does not mean a Market Value
    Price) from an independent source at least semi-annually.

        'Asset Coverage Cure Date' has the meaning set forth in Section 3(a)(ii)
    of these Articles Supplementary.

        'Auction' means each periodic operation of the Auction Procedures.

        'Auction Agent' means The Bank of New York unless and until another
    commercial bank, trust company, or other financial institution appointed by
    a resolution of the Board of Directors enters into an agreement with the
    Corporation to follow the Auction Procedures for the purpose of determining
    the Applicable Rate.

        'Auction Date' means the first Business Day next preceding the first day
    of a Dividend Period for the Series.

        'Auction Procedures' means the procedures for conducting Auctions as set
    forth in Part II of these Articles Supplementary.

        'Auditor's Certificate' has the meaning set forth in Section 12(f) of
    Part I of these Articles Supplementary.

        'Beneficial Owner' means a customer of a Broker-Dealer who is listed on
    the records of that Broker-Dealer (or, if applicable, the Auction Agent) as
    a holder of shares of the Series.

        'Bid' has the meaning set forth in Section 2(a)(ii) of Part II of these
    Articles Supplementary.

        'Bidder' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary, provided however that neither the Corporation
    nor any Affiliate will be permitted to be Bidder in an Auction.

        'Board of Directors' or 'Board' means the Board of Directors of the
    Corporation or any duly authorized committee thereof as permitted by
    applicable law.

        'Broker-Dealer' means any broker-dealer or broker-dealers, or other
    entity permitted by law to perform the functions required of a Broker-Dealer
    by the Auction Procedures, that has been selected by the Corporation and has
    entered into a Broker-Dealer Agreement that remains effective.

        'Broker-Dealer Agreement' means an agreement between the Auction Agent
    and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
    the Auction Procedures.

        'Business Day' means a day on which the New York Stock Exchange is open
    for trading and which is not a Saturday, Sunday or other day on which banks
    in The City of New York, New York are authorized or obligated by law to
    close.

        'Charter' has the meaning set forth in the preamble to these Articles
    Supplementary.

        'Code' means the Internal Revenue Code of 1986, as amended.

        'Commission' means the Securities and Exchange Commission.

        'Common Shares' means the shares of the Corporation's Common Stock, par
    value $.001 per share.

        'Corporation' has the meaning set forth in the preamble to these
    Articles Supplementary.

                                      B-17





<PAGE>



        'Date of Original Issue' means the date on which the Series is
    originally issued by the Corporation.

        'Default' has the meaning set forth in Section 2(c)(ii) of Part I of
    these Articles Supplementary.

        'Default Period' has the meaning set forth in Sections 2(c)(ii) or (iii)
    of Part I of these Articles Supplementary.

        'Default Rate' has the meaning set forth in Sections 2(c)(iii) of
    Part I of these Articles Supplementary.

        'Deposit Securities' means cash and any obligations or securities,
    including Short Term Money Market Instruments that are Eligible Assets,
    rated at least AAA or A-1 by S&P, except that, for purposes of optional
    redemption, such obligations or securities will be considered 'Deposit
    Securities' only if they also are rated at least P-1 by Moody's.

        'Discount Factor' means the S&P Discount Factor (if S&P is then rating
    the Series), the Moody's Discount Factor (if Moody's is then rating the
    Series) or the discount factor established by any Other Rating Agency which
    is then rating the Series and which so requires, whichever is applicable.

        'Discounted Value' means the quotient of the Market Value of an Eligible
    Asset divided by the applicable Discount Factor, provided that with respect
    to an Eligible Asset that is currently callable, Discounted Value will be
    equal to the quotient as calculated above or the call price, whichever is
    lower, and that with respect to an Eligible Asset that is prepayable,
    Discounted Value will be equal to the quotient as calculated above or the
    par value, whichever is lower.

        'Dividend Default' has the meaning set forth in Section 2(c)(ii) of
    Part I of these Articles Supplementary.

        'Dividend Payment Date' means any date on which dividends are payable
    pursuant to Section 2(b) of Part I hereof.

        'Dividend Period' means the initial period determined in the manner set
    forth under 'Designation' above, and thereafter, the period commencing on
    the Business Day following each Dividend Period and ending on the calendar
    day immediately preceding the next Dividend Payment Date.

        'Eligible Assets' means Moody's Eligible Assets (if Moody's is then
    rating the Series), S&P Eligible Assets (if S&P is then rating the Series),
    and/or Other Rating Agency Eligible Assets if any Other Rating Agency is
    then rating the Series, whichever is applicable.

        'Existing Holder' has the meaning set forth in Section 1 of Part II of
    these Articles Supplementary.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Holder' means, with respect to the Series, the registered holder of
    shares of the Series as the same appears on the stock ledger or stock
    records of the Corporation.

        'Investment Manager' means Cohen & Steers Capital Management, Inc.

        'Liquidation Preference' means $25,000 per share of the Series.

        'Mandatory Redemption Date' has meaning set forth in Section 3(a)(iii)
    of Part I of these Articles Supplementary.

        'Mandatory Redemption Price' has the meaning set forth in Section
    3(a)(iii) of Part I of these Articles Supplementary.

        'Market Value' means the fair market value of an asset of the
    Corporation as computed as follows: Securities listed on the New York Stock
    Exchange at the last sale price reflected on the consolidated tape at the
    close of the New York Stock Exchange on the Business Day as of which such
    value is being determined provided that, if there has been no sale on such

                                      B-18





<PAGE>


    day, the securities are valued at the closing mean prices on such day and
    provided further that, if no prices are quoted on such day, then the
    security is valued by such method as the Board of Directors will determine
    in good faith to reflect its fair market value. Readily marketable
    securities not listed on the New York Stock Exchange but listed on other
    domestic or foreign securities exchanges or admitted to trading on the
    National Association of Securities Dealers Automated Quotations, Inc.
    ('NASDAQ') National List are valued in a like manner. Portfolio securities
    traded on more than one securities exchange are valued at the last sale
    price on the business day as of which such value is being determined as
    reflected on the tape at the close of the exchange representing the
    principal market for such securities. Readily marketable securities traded
    in the over-the-counter market, including listed securities whose primary
    market is believed by the Investment Manager to be over-the-counter, but
    excluding securities admitted to trading on the NASDAQ National List, are
    valued at the current bid prices as reported by NASDAQ or, in the case of
    securities not quoted by NASDAQ, the National Quotation Bureau or such other
    comparable source as the directors deem appropriate to reflect their fair
    market value. The fair market value of certain fixed-income securities is
    computed based upon (i) the basis of prices provided by a Pricing Service or
    (ii) the lower of the value set forth in bids from two independent dealers
    in securities, one of which bids will be in writing, in each case with
    interest accrued added to such computation for those assets of the
    Corporation where such computation does not include interest accrued. The
    independent dealers from whom bids are sought will be either (a) market
    makers in the securities being valued or (b) members of the National
    Association of Securities Dealers, Inc. Where securities are traded on more
    than one exchange and also over-the-counter, the securities will generally
    be valued using the quotations the Board of Directors believes reflect most
    closely the value of such securities.

    'Maximum Rate' means, on any date on which the Applicable Rate is
determined, the applicable percentage of the 'AA' Composite Commercial Paper
Rate on the date of such Auction determined as set forth below based on the
lower of the credit ratings assigned to the Series by Moody's and S&P subject to
upward but not downward adjustment in the discretion of the Board of Directors
after consultation with the Broker-Dealers; provided that immediately following
any such increase the Corporation would be in compliance with the Preferred
Shares Basic Maintenance Amount.

<Table>
<Caption>
   MOODY'S                  S&P                APPLICABLE
CREDIT RATING          CREDIT RATING           PERCENTAGE
-------------          -------------           ----------
<S>                   <C>                      <C>
Aa3 or Above          AA- or Above                150%
A3 or A1              A- to A+                    200%
Baa3 to Baa1          BBB- to BBB+                225%
Below Baa3            Below BBB-                  275%
</Table>

    'Moody's' means Moody's Investors Service, Inc. and its successors at law.

    'Moody's Discount Factor' means, for purposes of determining the Discounted
Value of any Moody's Eligible Asset, the percentage determined as follows. The
Moody's Discount Factor for any Moody's Eligible Asset other than the securities
set forth below will be the percentage provided in writing by Moody's.

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                          DISCOUNT FACTOR(1)(2)(3)
                                                          ------------------------
<S>                                                       <C>
Common stock of REITs                                               154%
Preferred stock of REITs
    with Senior Implied Moody's (or S&P) rating:                    154%
    without Senior Implied Moody's (or S&P) rating:                 208%
Preferred stock of Other Real Estate Companies
    with Senior Implied Moody's (or S&P) rating:                    208%
    without Senior Implied Moody's (or S&P) rating:                 250%
</Table>

                                                        (footnotes on next page)

                                      B-19





<PAGE>



(footnotes from previous page)

(1) A Discount Factor of 250% will be applied to those assets in a single
    Moody's Real Estate Industry/Property Sector Classification which exceed 30%
    of Moody's Eligible Assets but are not greater than 35% of Moody's Eligible
    Assets.

(2) A Discount Factor of 250% will be applied if dividends on such securities
    have not been paid consistently (either quarterly or annually) over the
    previous three years, or for such shorter time period that such securities
    have been outstanding.

(3) A Discount Factor of 250% will be applied if the market capitalization
    (including common stock and preferred stock) of an issuer is below $500
    million.

    (b) Debt Securities of REITs and Other Real Estate Companies:

<Table>
<Caption>
          TERMS OF MATURITY OF
       NON-INVESTMENT GRADE BONDS         Aaa     Aa     A     Baa     Ba     B     NR(1)
       --------------------------         ---     --     -     ---     --     -     -----
<S>                                       <C>    <C>    <C>    <C>    <C>    <C>    <C>
1 year or less                            109%   112%   115%   118%   137%   150%   250%
2 years or less (but longer than 1 year)  115%   118%   122%   125%   146%   160%   250%
3 years or less (but longer than 2
  years)                                  120%   123%   127%   131%   153%   168%   250%
4 years or less (but longer than 3
  years)                                  126%   129%   133%   138%   161%   176%   250%
5 years or less (but longer than 4
  years)                                  132%   135%   139%   144%   168%   185%   250%
7 years or less (but longer than 5
  years)                                  139%   143%   147%   152%   179%   197%   250%
10 years or less (but longer than 7
  years)                                  145%   150%   155%   160%   189%   208%   250%
15 years or less (but longer than 10
  years)                                  150%   155%   160%   165%   196%   216%   250%
20 years or less (but longer than 15
  years)                                  150%   155%   160%   165%   196%   228%   250%
30 years or less (but longer than 20
  years)                                  150%   155%   160%   165%   196%   229%   250%
Greater than 30 years                     165%   173%   181%   189%   205%   240%   250%
</Table>

---------

(1) Unless conclusions regarding liquidity risk as well as estimates of both the
    probability and severity of default for the corporation's or municipal
    issuer's assets can be derived from other sources as well as combined with a
    number of sources as presented by the Corporation to Moody's, securities
    rated below B by Moody's and unrated securities, which are securities rated
    by neither Moody's, S&P nor Fitch, are limited to 10% of Moody's Eligible
    Assets. If a corporate or municipal debt security is unrated by Moody's, S&P
    or Fitch, the Corporation will use the percentage set forth under 'Below B
    and Unrated' in the Corporate or Municipal Debt Tables. Ratings assigned by
    S&P or Fitch are generally accepted by Moody's at face value. However,
    adjustments to face value may be made to particular categories of credits
    for which the S&P and/or Fitch rating does not seem to approximate a Moody's
    rating equivalent. Split rated securities assigned by S&P and Fitch will be
    accepted at the lower of the two ratings.

    (c) U.S. Treasury Securities and U.S. Treasury Strips (as defined by
Moody's):

<Table>
<Caption>
                                                 U.S. TREASURY STRIPS   U.S. TREASURY SECURITIES
REMAINING TERM TO MATURITY                         DISCOUNT FACTOR          DISCOUNT FACTOR
--------------------------                         ---------------          ---------------
<S>                                              <C>                    <C>
1 year or less                                           107%                     107%
2 years or less (but longer than 1 year)                 113%                     115%
3 years or less (but longer than 2 years)                118%                     121%
4 years or less (but longer than 3 years)                123%                     128%
5 years or less (but longer than 4 years)                128%                     135%
7 years or less (but longer than 5 years)                135%                     147%
10 years or less (but longer than 7 years)               141%                     163%
15 years or less (but longer than 10 years)              146%                     191%
20 years or less (but longer than 15 years)              154%                     218%
30 years or less (but longer than 20 years)              154%                     244%
</Table>

    (d) Short-Term Instruments and Cash. The Moody's Discount Factor applied to
Moody's Eligible Assets that are short term money instruments (as defined by
Moody's) will be (i) 100%, so long as such portfolio securities mature or have a
demand feature at par exercisable within 49 days of the relevant valuation date,
(ii) 102%, so long as such portfolio securities mature or have a demand feature
at par not exercisable within 49 days of the relevant valuation date, and
(iii) 125%, if such securities are not rated by Moody's, so long as such
portfolio securities are rated at least A-1+/AA or SP-1+/AA by S&P or Fitch and
mature or have a demand feature at par exercisable within 49 days of the
relevant valuation date. A Moody's Discount Factor of 100% will be applied to
cash.

                                      B-20





<PAGE>


        'Moody's Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt security of REITs and
       Other Real Estate Companies. (i) Common stock of REITs and preferred
       stock and any debt security of REITs and Other Real Estate Companies:
       (A) which comprise at least 7 of the 14 Moody's Real Estate
       Industry/Property Sector Classifications ('Moody's Sector
       Classifications') listed below and of which no more than 35% may
       constitute a single such classification; (B) which in the aggregate
       constitute at least 40 separate issues of common stock, preferred stock,
       and debt securities, issued by at least 30 issuers; (C) issued by a
       single issuer which in the aggregate constitute no more than 7.0% of the
       Market Value of Moody's Eligible Assets, and (D) issued by a single
       issuer which, with respect to 50% of the Market Value of Moody's Eligible
       Assets, constitute in the aggregate no more than 5% of Market Value of
       Moody's Eligible Assets; and

           (ii) Unrated debt securities issued by an issuer which: (A) has not
       filed for bankruptcy within the past three years; (B) is current on all
       principal and interest on its fixed income obligations; (C) is current on
       all preferred stock dividends; (D) possesses a current, unqualified
       auditor's report without qualified, explanatory language and (E) in the
       aggregate do not exceed 10% of the discounted Moody's Eligible Assets;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if

               (i) the counterparty to the swap transaction has a short-term
           rating of not less than P-1 by Moody's or A-1 by S&P or, if the
           counterparty does not have a short-term rating, the counterparty's
           senior unsecured long-term debt rating is A3 or higher by Moody's or
           A+ or higher by S&P;

               (ii) the original aggregate notional amount of the interest rate
           swap transaction or transactions is not to be greater than the
           liquidation preference of the AMPS originally issued;

               (iii) the interest rate swap transaction will be marked-to-market
           daily;

               (iv) an interest rate swap that is in-the-money is discounted at
           the counterparty's corporate debt rating for the maturity of the swap
           for purposes of calculating Moody's Eligible Assets; and

               (v) an interest rate swap that is out-of-the money includes that
           negative mark-to-market amount as indebtedness for purposes of
           calculating the Preferred Shares Basic Maintenance amount;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by
       Moody's);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are rated at least P-1, (B) in the case of demand deposits,
       time deposits and overnight funds, the supporting entity is rated at
       least A2, or (C) in all other cases, the supporting entity (1) is rated
       A2 and the security matures within one month, (2) is rated A1 and the
       security matures within three months or (3) is rated at least Aa3 and the
       security matures within six months; provided, however, that for purposes
       of this definition, such instruments (other than commercial paper rated
       by S&P and not rated by Moody's) need not meet any otherwise applicable
       Moody's rating criteria; and

           (e) Cash (including, for this purpose, interest and dividends due on
       assets rated (A) Baa3 or higher by Moody's if the payment date is within
       five Business Days of the Valuation Date, (B) A2 or higher if the payment
       date is within thirty days of the Valuation Date, and (C) A1 or higher if
       the payment date is within 49 days of the relevant valuation date) and
       receivables for Moody's Eligible Assets sold if the receivable is due
       within five Business Days of the Valuation Date, and if the trades which
       generated such receivables are (A) settled through clearing house firms
       with respect to which the Corporation has received prior written
       authorization from Moody's or (B) (1) with counterparties having a
       Moody's long-term debt rating of at least Baa3 or (2) with
                                      B-21





<PAGE>


       counterparties having a Moody's Short-Term Money Market Instrument rating
       of at least P-1.

        'Moody's Real Estate Industry/ Property Sector Classification' means,
    for the purposes of determining Moody's Eligible Assets, each of the
    following Industry Classifications (as defined by the National Association
    of Real Estate Investment Trusts, 'NAREIT'):

            1. Office

            2. Industrial

            3. Mixed

            4. Shopping Centers

            5. Regional Malls

            6. Free Standing

            7. Apartments

            8. Manufactured Homes

            9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment in
    consultation with the independent auditor and/or Moody's, as necessary.

        '1933 Act' means the Securities Act of 1933, as amended.

        '1940 Act' means the Investment Company Act of 1940, as amended.

        '1940 Act Preferred Shares Asset Coverage' means asset coverage, as
    determined in accordance with Section 18(h) of the 1940 Act, of at least
    200% with respect to all outstanding senior securities of the Corporation
    which are stock, including all outstanding shares of the Series (or such
    other asset coverage as may in the future be specified in or under the 1940
    Act as the minimum asset coverage for senior securities which are stock of a
    closed-end investment company as a condition of declaring dividends on its
    common shares), determined on the basis of values calculated as of a time
    within 48 hours (not including Sundays or holidays) next preceding the time
    of such determination.

        '1940 Act Preferred Shares Asset Coverage Certificate' means the
    certificate required to be delivered by the Corporation pursuant to Section
    12(e) of these Articles Supplementary.

        'Notice of Redemption' means any notice with respect to the redemption
    of the Series pursuant to Section 3 of Part I of these Articles
    Supplementary.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Other Rating Agency' means any rating agency other than S&P or Moody's
    then providing a rating for the Series pursuant to the request of the
    Corporation.

        'Other Rating Agency Eligible Assets' means assets of the Corporation
    designated by any Other Rating Agency as eligible for inclusion in
    calculating the discounted value of the Corporation's assets in connection
    with such Other Rating Agency's rating of the Series.

        'Other Real Estate Companies' companies which generally derive at least
    50% of their revenue from real estate or has at least 50% of its assets in
    real estate, but not including REITs.

                                      B-22





<PAGE>


        'Outstanding' means, as of any date, shares of the Series theretofore
    issued by the Corporation except, without duplication, (i) any shares of the
    Series theretofore canceled, redeemed or repurchased by the Corporation, or
    delivered to the Auction Agent for cancellation or with respect to which the
    Corporation has given notice of redemption and irrevocably deposited with
    the Paying Agent sufficient funds to redeem such shares and (ii) any shares
    of the Series represented by any certificate in lieu of which a new
    certificate has been executed and delivered by the Corporation.
    Notwithstanding the foregoing, (A) for purposes of voting rights (including
    the determination of the number of shares required to constitute a quorum),
    any shares of the Series as to which the Corporation or any Affiliate is the
    Existing Holder will be disregarded and not deemed Outstanding; (B) in
    connection with any Auction, any shares of the Series as to which the
    Corporation or any person known to the Auction Agent to be an Affiliate is
    the Existing Holder will be disregarded and not deemed Outstanding; and
    (C) for purposes of determining the Preferred Shares Basic Maintenance
    Amount, shares of the Series held by the Corporation will be disregarded and
    not deemed Outstanding, but shares held by any Affiliate will be deemed
    Outstanding.

        'Paying Agent' means The Bank of New York unless and until another
    entity appointed by a resolution of the Board of Directors enters into an
    agreement with the Corporation to serve as paying agent, which paying agent
    may be the same as the Auction Agent.

        'Person' or 'Persons' means and includes an individual, a partnership,
    the corporation, a trust, a corporation, a limited liability company, an
    unincorporated association, a joint venture or other entity or a government
    or any agency or political subdivision thereof.

        'Potential Beneficial Owner or Holder' has the meaning set forth in
    Section 1 of Part II of these Articles Supplementary.

        'Preferred Shares Basic Maintenance Amount' means as of any Valuation
    Date as the dollar amount equal to the difference of:

           (i) the sum of (A) the product resulting from multiplying the number
       of shares of the Series outstanding on such date by the Liquidation
       Preference per share (plus the product of the number of shares of any
       other series of preferred shares outstanding on such date multiplied by
       the liquidation preference of such shares), plus any redemption premium
       applicable to the Series (or other preferred shares) then subject to
       redemption; plus (B) the aggregate amount of dividends that will have
       accumulated (whether or not earned or declared) for the shares of the
       Series outstanding and any other series of preferred shares outstanding
       on such date to the 30th day after such Valuation Date; plus (C) the
       aggregate amount of dividends that would accumulate on shares of the
       Series outstanding from the first Dividend Payment Date of the Valuation
       Date through the 56th day after such Valuation Date, at the Maximum Rate
       (plus the aggregate amount of dividends that would accumulate on other
       outstanding preferred shares from the first respective dividend payment
       date for such shares after the Valuation Date through the 56th day after
       such Valuation Date, at the respective maximum rates for such other
       outstanding preferred shares); plus (D) the amount of anticipated
       Corporation non-interest expenses for the 90 days subsequent to such
       Valuation Date; plus (E) the amount of the current outstanding balances
       of any indebtedness which is senior to the shares of the Series plus
       interest actually accrued together with 30 days additional interest
       on the current outstanding balances calculated at the current rate;
       plus (F) any other current liabilities payable during the 30 days
       subsequent to such Valuation Date, including, without limitation,
       indebtedness due within one year and any redemption premium due with
       respect to shares of the Series and any other outstanding series of
       preferred shares for which a Notice of Redemption or notice of
       redemption, respectively, has been given, as of such Valuation Date,
       to the extent not reflected in any of (i)(A) through (i)(E); and plus
       (G) any current liabilities as of such Valuation Date to the extent not
       reflected in any of (i)(A) through (i)(F); less

           (ii) the sum of any cash plus the value of any of the Corporation's
       assets irrevocably deposited by the Corporation for the payment of any
       (i)(B) through (i)(F) ('value,' for purposes of this clause (ii), means
       the Discounted Value of the security, except that if the

                                      B-23





<PAGE>

       security matures prior to the relevant redemption payment date and is
       either fully guaranteed by the U.S. Government or is rated at least P-1
       by Moody's and A-1 by S&P, it will be valued at its face value).

        'Preferred Shares Basic Maintenance Amount Test' means a test which is
    met if the lower of the aggregate Discounted Values of the Moody's Eligible
    Assets or the S&P Eligible Assets meets or exceeds the Preferred Shares
    Basic Maintenance Amount.

        'Preferred Shares Basic Maintenance Certificate' has the meaning set
    forth in Section 12(d) of Part I of these Articles Supplementary.

        'Pricing Service' means any of the following: Bloomberg, Bridge
    Information Services, Data Resources Inc., Interactive Data, International
    Securities Market Association, Merrill Lynch Securities Pricing Service,
    Muller Data Corp., Reuters, Standard & Poors/J.J. Kenny, Telerate, Trepp
    Pricing and Wood Gundy.

        'Rating Agency' means Moody's and S&P as long as such rating agency is
    then rating the Series.

        'Redemption Date' has the meaning set forth in Section 2(c)(ii) of
    Part II of these Articles Supplementary.

        'Redemption Default' has the meaning set forth in Section 2(c)(ii) of
    Part I of these Articles Supplementary.

        'Redemption Price' has the meaning set forth in Section 3(a)(i) of
    Part I of these Articles Supplementary.

        'Reference Rate' means, with respect to the determination of the Default
    Rate, the applicable 'AA' Composite Commercial Paper Rate (for a Dividend
    Period of fewer than 184 days) or the applicable Treasury Index Rate (for a
    Dividend Period of 184 days or more).

        'Registrar' means The Bank of New York, unless and until another entity
    appointed by a resolution of the Board of Directors enters into an agreement
    with the Corporation to serve as transfer agent.

        'REIT' or real estate investment trust, means a company dedicated to
    owning, and usually operating, income producing real estate, or to financing
    real estate.

        'S&P' means Standard & Poor's, a division of The McGraw-Hill Companies,
    Inc., or its successors at law. 'S&P Discount Factor' means, for purposes of
    determining the Discounted Value of any S&P Eligible Asset, the percentage
    determined as follows. The S&P Discount Factor for any S&P Eligible Asset
    other than the securities set forth below will be the percentage provided in
    writing by S&P:

    (a) Common Stock and Preferred Stock of REITs and Other Real Estate
Companies:

<Table>
<Caption>
                                                            DIVERSIFICATION STANDARD
                                                      -------------------------------------
                                                      LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
                                                      -------   -------   -------   -------
<S>                                                   <C>       <C>       <C>       <C>
MINIMUM NUMBER OF:
Issuers(1)                                               44        40        44        30
Real Estate Industry/Property Sectors(2)                 10         8         7         7
PERCENT OF ASSETS IN:
Largest Real Estate Industry/Property Sector             17%       25%       30%       30%
2nd Largest Real Estate Industry/Property Sector         15%       20%       25%       25%
3rd Largest Real Estate Industry/Property Sector         12%       15%       15%       15%
4th Largest Real Estate Industry/Property Sector         12%       12%       12%       12%
S&P DISCOUNT FACTOR:
common stock                                            190%      208%      223%      231%
preferred stock(3)                                      157%      167%      174%      178%
</Table>

---------

(1) Three issuers may each constitute 6% of assets and four issuers may each
    constitute 5% of assets.
                                              (footnotes continued on next page)

                                      B-24





<PAGE>


(footnotes continued from previous page)

(2) As defined by NAREIT.

(3) Applies to preferred stock of real estate companies, subject to
    diversification guidelines whereby at least 34% of the preferred assets are
    rated BB (or Moody's equivalent) or greater; at least 33% are rated B (or
    Moody's equivalent) or greater; and the balance of the preferred assets is
    rated B- (or Moody's equivalent) or is unrated. The Discount Factor for
    common stock will apply to preferred stock which is not in compliance with
    the diversification standard.

    (b) Debt Securities:

<Table>
<Caption>
                                                    DIVERSIFICATION STANDARD
                                              -------------------------------------
BOND RATING(1)                                LEVEL 1   LEVEL 2   LEVEL 3   LEVEL 4
--------------                                -------   -------   -------   -------
<S>                                           <C>       <C>       <C>       <C>
A                                              116%      117%      119%      118%
A-                                             117%      119%      120%      120%
BBB+                                           119%      121%      122%      122%
BBB                                            121%      122%      124%      124%
BBB-                                           122%      124%      126%      126%
BB+                                            127%      130%      133%      132%
BB                                             133%      137%      141%      139%
BB-                                            139%      144%      149%      147%
B+                                             152%      159%      166%      164%
B                                              163%      172%      182%      179%
B-                                             176%      188%      202%      197%
CCC+                                           198%      212%      230%      224%
CCC                                            236%      262%      295%      284%
</Table>

---------

(1) The S&P Discount Factors for debt securities will also be applied to any
    interest rate swap or cap, in which case the rating of the counterparty will
    determine the appropriate rating category.

(2) If a security is unrated by S&P but is rated by Moody's, the conversion
    chart under S&P OC Test Rating Chart will apply.

    (c) U.S. Treasury Securities, including Treasury interest-only Strips and
Treasury principal-only Strips, as set forth below:

<Table>
<S>                                                           <C>
52-week Treasury Bills*                                       102%
Two-Year Treasury Notes                                       104%
Three-Year Treasury Notes                                     108%
Five-Year Treasury Notes                                      109%
10-Year Treasury Notes                                        115%
30-Year Treasury Bonds                                        126%
</Table>

---------

* Treasury Bills with maturities of less than 52 weeks will be discounted at the
  appropriate Short-Term Money Market Instrument levels. Treasury Bills that
  mature the next day are considered cash equivalents and are valued at 100%.

Treasury Strips: Treasury interest-only Strips will apply the discount factor
for the Treasury category set forth above following the maturity of the Treasury
Strip, e.g., a Treasury interest-only Strip with a maturity of seven years will
apply the discount factor for the U.S. Treasury securities with a 10-year
maturity. Treasury principal-only Strips will apply the discount factor that is
two categories greater than its maturity, e.g., a Treasury principal-only Strip
with a maturity of seven years will apply the discount factor for U.S. Treasury
securities with a 30-year maturity.

    (d) Cash and Cash Equivalents: The S&P Discount Factor applied to Cash and
Cash Equivalents will be (A) 100% and (B) 102% for those portfolio securities
which mature in 181 to 360 calendar days.

        'S&P Eligible Assets' means the following:

           (a) Common Stock, Preferred Stock and any debt securities of REITs
       and Real Estate Companies;

           (b) Interest rate swaps entered into according to International Swap
       Dealers Association ('ISDA') standards if (i) the counterparty to the
       swap transaction has a short-term rating of not less than A-1 or, if the
       counterparty does not have a short-term rating, the counterparty's senior
       unsecured long-term debt rating is A+ or higher and (ii) the original
       aggregate notional amount of the interest rate swap transaction or

                                      B-25





<PAGE>



       transactions is not to be greater than the liquidation preference of the
       Series and any other outstanding preferred shares originally issued. The
       interest rate swap transaction will be marked-to-market daily;

           (c) U.S. Treasury Securities and Treasury Strips (as defined by S&P);

           (d) Short-Term Money Market Instruments so long as (A) such
       securities are issued by an institution, which, at the time of
       investment, is a permitted bank (including commercial paper issued by a
       corporation which complies with the applicable assumptions that follow)
       ('permitted bank' means any bank, domestic or foreign, whose commercial
       paper is rated A-1+) provided, however, that Short-Term Money Market
       Instruments with maturities of 30 days of less, invested in an
       institution rated A-1 may comprise up to 20% of eligible portfolio
       assets; and

           (e) Cash, which is any immediately available funds in U.S. dollars or
       any currency other than U.S. dollars which is a freely convertible
       currency, and Cash Equivalents, which means investments (other than Cash)
       that are one or more of the following obligations or securities:
       (i) U.S. Government Securities; (ii) certificates of deposits of,
       banker's acceptances issued by or money market accounts in any depository
       institution or trust company incorporated under the laws of the United
       States of America or any state thereof and subject to supervision and
       examination by Federal and/ or state banking authorities, so long as the
       deposits offered by such depository institution or trust company at the
       time of such investments are rated and have a rating of at least 'P-1' by
       Moody's and 'A-1+' by S&P (or, in the case of the principal depository
       institution in a holding company system whose deposits are not so rated,
       the long term debt obligations of such holding company are rated and such
       rating is at least 'A-1' by Moody's and 'A+' by S&P); (iii) commercial
       paper issued by any depositary institution or trust company incorporated
       under the laws of the United States of America or any state thereof and
       subject to supervision and examination by Federal and/or state banking
       authorities, or any corporation incorporated under the laws of the United
       States of America or any state thereof, so long as the commercial paper
       of such issuer is rated and has at the time of such investment a short
       term rating of at least 'P-1' by Moody's and 'A-1+' by S&P on its
       commercial paper; (iv) securities bearing interest or sold at a discount
       issued by any corporation incorporated under the laws of the United
       States of America or any state thereof the obligations of which at the
       time of such investment are rated and that have a credit rating of at
       least 'P-1' by Moody's and 'A-1+' by S&P either at the time of such
       investment or the making of a contractual commitment providing for such
       investment; (v) shares of any money market fund organized under the laws
       of a jurisdiction other than the United States, so long as such money
       market fund is rated and has at the time of such investment a short-term
       rating of at least 'AAAm' or 'AAAg' by S&P and 'Aaa' by Moody's and
       ownership of such investments will not cause the issuer to become engaged
       in a trade or business within the United States for U.S. Federal income
       tax purposes or subject the issuer to tax on a net income basis; and
       (vi) unleveraged overnight repurchase obligations on customary terms with
       respect to investments described in clauses (i) through (iv) above
       entered into a depository institution, trust company or corporation that
       has a short-term rating of at least 'A-1+' by S&P; provided, that (i) in
       no event will Cash Equivalents include any obligation that provides for
       payment of interest alone; (ii) Cash Equivalents referred to in clauses
       (ii) and (iii) above will mature within 183 days of issuance;
       (iii) either Moody's or S&P changes its rating system, then any ratings
       included in this definition will be deemed to be an equivalent rating in
       a successor rating category of Moody's or S&P, as the case may be;
       (iv) if either Moody's or S&P is not in the business of rating
       securities, then any ratings included in this definition will be deemed
       to be an equivalent rating from another Rating Agency; (v) Cash
       Equivalents (other than U.S. Government Securities or money market funds
       maintained by the Custodian) will not include any such investment of more
       than $100 million in any single issuer; and (vi) in no event will Cash
       Equivalents include any obligation that is not denominated in Dollars,
       any synthetic securities, any Securities with ratings containing an

                                      B-26





<PAGE>



       'r' subscript, and IOs or any POs (other than commercial paper with a
       maturity within 183 days of issuance).

       'S&P OC Test Rating Chart' means the chart set forth below:

<Table>
<Caption>
MOODY'S RATING          MAPPED S&P RATING
--------------          -----------------
<S>                     <C>
Aaa                         AA+
Aa1                         AA
Aa2                         AA-
Aa3                         A+
A1                          A
A2                          A-
A3                          BBB+
Baa1                        BBB
Baa2                        BBB-
Baa3                        BB+
Ba1                         BB-
Ba2                         B+
Ba3                         B
B1                          B-
B2                          CCC+
B3                          CCC
Caa                         CCC-
NR or below Caa             NR
</Table>

        'S&P Real Estate Industry/Property Sector Classification' means, for the
    purposes of determining S&P Eligible Assets, each of the following Industry
    Classifications (as defined by NAREIT):

            1. Office

            2. Industrial

            3. Mixed

            4. Shopping Centers

            5. Regional Malls

            6. Free Standing

            7. Apartments

            8. Manufactured Homes

            9. Diversified

           10. Lodging/Resorts

           11. Health Care

           12. Home Financing

           13. Commercial Financing

           14. Self Storage

        The Corporation will use its discretion in determining which NAREIT
    Industry Classification is applicable to a particular investment, and, when
    necessary will consult with the independent auditor and/or S&P, as
    necessary.

        'Securities Depository' means The Depository Trust Company and its
    successors and assigns or any successor securities depository selected by
    the Corporation that agrees to follow the procedures required to be followed
    by such securities depository in connection with the Series.

        'Sell Order' has the meaning set forth in Section 2(ii) of Part II of
    these Articles Supplementary.

                                      B-27





<PAGE>



        'Short-Term Money Market Instrument' means the following types of
    instruments if, on the date of purchase or other acquisition thereof by the
    Corporation, the remaining term to maturity thereof is not in excess of 180
    days:

           (i) commercial paper rated A-1 if such commercial paper matures in
       30 days or A-1+if such commercial paper matures in over 30 days;

           (ii) demand or time deposits in, and banker's acceptances and
       certificates of deposit of (A) a depository institution or trust company
       incorporated under the laws of the United States of America or any state
       thereof or the District of Columbia or (B) a United States branch office
       or agency of a foreign depository institution (provided that such branch
       office or agency is subject to banking regulation under the laws of the
       United States, any state thereof or the District of Columbia);

           (iii) overnight funds; and

           (iv) U.S. Government Securities.

        'Special Dividend Period' means a Dividend Period that is not a Standard
    Dividend Period.

        'Specific Redemption Provisions' means, with respect to any Special
    Dividend Period of more than one year, either, or any combination of (i) a
    period (a 'Non-Call Period') determined by the Board of Directors after
    consultation with the Broker-Dealers, during which the shares subject to
    such Special Dividend Period are not subject to redemption at the option of
    the Corporation and (ii) a period (a 'Premium Call Period'), consisting of a
    number of whole years as determined by the Board of Directors after
    consultation with the Broker-Dealers, during each year of which the shares
    subject to such Special Dividend Period will be redeemable at the
    Corporation's option at a price per share equal to the Liquidation
    Preference plus accumulated but unpaid dividends (whether or not earned or
    declared) plus a premium expressed as a percentage or percentages of the
    Liquidation Preference or expressed as a formula using specified variables
    as determined by the Board of Directors after consultation with the
    Broker-Dealers.

        'Standard Dividend Period' means a Dividend Period of 7 days, unless the
    day after such 7th day is not a Business Day, then the number of days ending
    on the calendar day next preceding the next Business Day (such Business Day,
    being the Dividend Payment Date).

        'Submission Deadline' means 1:00 p.m., New York City time, on any
    Auction Date or such other time on any Auction Date by which Broker-Dealers
    are required to submit Orders to the Auction Agent as specified by the
    Auction Agent from time to time.

        'Transfer Agent' means The Bank of New York, unless and until another
    entity appointed by a resolution of the Board of Directors enters into an
    agreement with the Corporation to serve as Transfer Agent.

        'Treasury Index Rate' means the average yield to maturity for actively
    traded marketable U.S. Treasury fixed interest rate securities having the
    same number of 30-day periods to maturity as the length of the applicable
    Dividend Period, determined, to the extent necessary, by linear
    interpolation based upon the yield for such securities having the next
    shorter and next longer number of 30-day periods to maturity treating all
    Dividend Periods with a length greater than the longest maturity for such
    securities as having a length equal to such longest maturity, in all cases
    based upon data set forth in the most recent weekly statistical release
    published by the Board of Governors of the Federal Reserve System (currently
    in H.15 (519)); provided, however, if the most recent such statistical
    release will not have been published during the 15 days preceding the date
    of computation, the foregoing computations will be based upon the average of
    comparable data as quoted to the Corporation by at least three recognized
    dealers in U.S. Government Securities selected by the Corporation.

        'U.S. Government Securities' means direct obligations of the United
    States or by its agencies or instrumentalities that are entitled to the full
    faith and credit of the United States

                                      B-28





<PAGE>



    and that, other than United States Treasury Bills, provide for the periodic
    payment of interest and the full payment of principal at maturity or call
    for redemption.

        'Valuation Date' means the last Business Day of each week, or such other
    date as the Corporation and Rating Agencies may agree to for purposes of
    determining the Preferred Shares Basic Maintenance Amount.

        'Voting Period' has the meaning set forth in Section 6(b) of Part I of
    these Articles Supplementary.

        'Winning Bid Rate' has the meaning set forth in Section 4(a)(iii) of
    Part II of these Articles Supplementary.

    18. Interpretation. References to sections, subsections, clauses,
sub-clauses, paragraphs and subparagraphs are to such sections, subsections,
clauses, sub-clauses, paragraphs and subparagraphs contained in this Part I or
Part II hereof, as the case may be, unless specifically identified otherwise.

                          PART II: AUCTION PROCEDURES

    1. Certain Definitions. As used in Part II of these Articles Supplementary,
the following terms will have the following meanings, unless the context
otherwise requires and all section references below are to Part II of these
Articles Supplementary except as otherwise indicated: Capitalized terms not
defined in Section 1 of Part II of these Articles Supplementary will have the
respective meanings specified in Part I of these Articles Supplementary.

        'Agent Member' means a member of or participant in the Securities
    Depository that will act on behalf of Existing Holders or Potential Holders
    of shares of the Series.

        'Available Shares of the Series' has the meaning set forth in Section
    4(a)(i) of Part II of these Articles Supplementary.

        'Existing Holder' means (a) a person who beneficially owns those shares
    of the Series listed in that person's name in the records of the Auction
    Agent or (b) the beneficial owner of those shares of the Series which are
    listed under such person's Broker-Dealer's name in the records of the
    Auction Agent, which Broker-Dealer will have signed a Master Purchaser's
    Letter.

        'Hold Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Master Purchaser's Letter' means the letter which is required to be
    executed by each prospective purchaser of shares of the Series or the
    Broker-Dealer through whom the shares will be held.

        'Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Potential Holder,' means (a) any Existing Holder who may be interested
    in acquiring additional shares of the Series or (b) any other person who may
    be interested in acquiring shares of the Series and who has signed a Master
    Purchaser's Letter or whose shares will be listed under such person's
    Broker-Dealer's name on the records of the Auction Agent which Broker-Dealer
    will have executed a Master Purchaser's Letter.

        'Sell Order' has the meaning set forth in Section 2(a)(ii) of Part II of
    these Articles Supplementary.

        'Submitted Bid Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Hold Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Submitted Order' has the meaning set forth in Section 4(a) of Part II
    of these Articles Supplementary.

                                      B-29





<PAGE>


        'Submitted Sell Order' has the meaning set forth in Section 4(a) of
    Part II of these Articles Supplementary.

        'Sufficient Clearing Orders' means that all shares of the Series are the
    subject of Submitted Hold Orders or that the number of shares of the Series
    that are the subject of Submitted Buy Orders by Potential Holders specifying
    one or more rates equal to or less than the Maximum Rate exceeds or equals
    the sum of (A) the number of shares of the Series that are subject of
    Submitted Hold/Sell Orders by Existing Holders specifying one or more rates
    higher than the Maximum Applicable Rate and (B) the number of shares of the
    Series that are subject to Submitted Sell Orders.

        'Winning Bid Rate' means the lowest rate specified in the Submitted
    Orders which, if (A) each Submitted Hold/Sell Order from Existing Holders
    specifying such lowest rate and all other Submitted Hold/Sell Orders from
    Existing Holders specifying lower rates were accepted and (B) each Submitted
    Buy Order from Potential Holders specifying such lowest rate and all other
    Submitted Buy Orders from Potential Holders specifying lower rates were
    accepted, would result in the Existing Holders described in clause (A) above
    continuing to hold an aggregate number of shares of the Series which, when
    added to the number of shares of the Series to be purchased by the Potential
    Holders described in clause (B) above and the number of shares of the Series
    subject to Submitted Hold Orders, would be equal to the number of shares of
    the Series.

    2. Orders.

    (a) On or prior to the Submission Deadline on each Auction Date for shares
of the Series:

        (i) each Beneficial Owner of shares of the Series may submit to its
    Broker-Dealer by telephone or otherwise information as to:

           (A) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner desires to continue to
       hold without regard to the Applicable Rate for such shares for the next
       succeeding Dividend Period of such shares;

           (B) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner offers to sell if the
       Applicable Rate for such shares for the next succeeding Dividend Period
       of such shares will be less than the rate per annum specified by such
       Beneficial Owner; and/or

           (C) the number of Outstanding shares, if any, of the Series held by
       such Beneficial Owner which such Beneficial Owner offers to sell without
       regard to the Applicable Rate for such shares for the next succeeding
       Dividend Period of such shares; and

        (ii) each Broker-Dealer, using lists of Potential Beneficial Owners,
    will in good faith for the purpose of conducting a competitive Auction in a
    commercially reasonable manner, contact Potential Beneficial Owners (by
    telephone or otherwise), including Persons that are not Beneficial Owners,
    on such lists to determine the number of shares, if any, of the Series which
    each such Potential Beneficial Owner offers to purchase if the Applicable
    Rate for such shares for the next succeeding Dividend Period of such shares
    will not be less than the rate per annum specified by such Potential
    Beneficial Owner.

        For the purposes hereof, the communication by a Beneficial Owner or
    Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
    Auction Agent, of information referred to in clause (i)(A), (i)(B), (i)(C)
    or (ii) of this paragraph (a) is hereinafter referred to as an 'Order' and
    collectively as 'Orders' and each Beneficial Owner and each Potential
    Beneficial Owner placing an Order with a Broker-Dealer, and such
    Broker-Dealer placing an Order with the Auction Agent, is hereinafter
    referred to as a 'Bidder' and collectively as 'Bidders'; an Order containing
    the information referred to in clause (i)(A) of this paragraph (a) is
    hereinafter referred to as a 'Hold Order' and collectively as 'Hold Orders';
    an Order containing the information referred to in clause (i)(B) or (ii) of
    this paragraph (a) is hereinafter referred to as a 'Bid' and collectively as
    'Bids'; and an Order containing the

                                      B-30





<PAGE>


    information referred to in clause (i)(C) of this paragraph (a) is
    hereinafter referred to as a 'Sell Order' and collectively as 'Sell Orders.'

    (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of the
Series subject to an Auction on any Auction Date will constitute an irrevocable
offer to sell:

        (A) the number of Outstanding shares of the Series specified in such Bid
    if the Applicable Rate for shares of the Series determined on such Auction
    Date will be less than the rate specified therein;

        (B) such number or a lesser number of Outstanding shares of the Series
    to be determined as set forth in clause (iv) of paragraph (a) of Section 5
    of this Part II if the Applicable Rate for such shares determined on such
    Auction Date will be equal to the rate specified therein; or

        (C) the number of Outstanding shares of the Series specified in such Bid
    if the rate specified therein will be higher than the Maximum Rate for such
    shares, or such number or a lesser number of Outstanding shares of the
    Series to be determined as set forth in clause (iii) of paragraph (b) of
    Section 5 of this Part II if the rate specified therein will be higher than
    the Maximum Rate for such shares and Sufficient Clearing Bids for such
    shares do not exist.

    (ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
the Series subject to an Auction on any Auction Date will constitute an
irrevocable offer to sell:

        (A) the number of Outstanding shares of the Series specified in such
    Sell Order; or

        (B) such number or a lesser number of Outstanding shares of the Series
    as set forth in clause (iii) of paragraph (b) of Section 5 of this Part II
    if Sufficient Clearing Bids for such shares do not exist;

provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of the Series will not be liable to any Person for failing to sell
such shares pursuant to a Sell Order described in the proviso to paragraph (c)
of Section 3 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 6 of this Part II or (2) such
Broker-Dealer has informed the Auction Agent pursuant to the terms of its
Broker-Dealer Agreement that, according to such Broker-Dealer's records, such
Broker-Dealer believes it is not the Existing Holder of such shares.

    (iii)A Bid by a Potential Holder of shares of the Series subject to an
Auction on any Auction Date will constitute an irrevocable offer to purchase:

        (A) the number of Outstanding shares of the Series specified in such Bid
    if the Applicable Rate for such shares determined on such Auction Date will
    be higher than the rate specified therein; or (B) such number or a lesser
    number of Outstanding shares of the Series as set forth in clause (v) of
    paragraph (a) of Section 5 of this Part II if the Applicable Rate for such
    shares determined on such Auction Date will be equal to the rate specified
    therein.

    (c) No Order for any number of shares of the Series other than whole shares
will be valid.

    3. Submission of Orders by Broker-Dealers to Auction Agent.

    (a) Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders for shares of the Series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
will specify with respect to each Order for such shares:

        (i) the name of the Bidder placing such Order (which will be the
    Broker-Dealer unless otherwise permitted by the Corporation);

        (ii) the aggregate number of shares of the Series that are the subject
    of such Order;

                                      B-31





<PAGE>



        (iii) to the extent that such Bidder is an Existing Holder of such
    shares:

           (A) the number of shares of the Series, if any, subject to any Hold
       Order of such Existing Holder;

           (B) the number of shares of the Series, if any, subject to any Bid of
       such Existing Holder and the rate specified in such Bid; and

           (C) the number of shares of the Series, if any, subject to any Sell
       Order of such Existing Holder; and

        (iv) to the extent such Bidder is a Potential Holder of such shares, the
    rate and number of such shares specified in such Potential Holder's Bid.

    (b) If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one thousandth (.001) of 1%.

    (c) If an Order or Orders covering all of the Outstanding shares of the
Series held by any Existing Holder is not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of the Series held by any Existing
Holder is not submitted to the Auction Agent prior to the Submission Deadline
for an Auction relating to a Special Dividend Period consisting of more than 91
Dividend Period days, the Auction Agent will deem a Sell Order to have been
submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of the Series held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.

    (d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding shares of
the Series subject to an Auction held by such Existing Holder, such Orders will
be considered valid in the following order of priority:

        (i) all Hold Orders for such shares will be considered valid, but only
    up to and including in the aggregate the number of Outstanding shares of the
    Series held by such Existing Holder, and if the number of shares of the
    Series subject to such Hold Orders exceeds the number of Outstanding shares
    of the Series held by such Existing Holder, the number of shares subject to
    each such Hold Order will be reduced pro rata to cover the number of
    Outstanding shares of the Series held by such Existing Holder;

        (ii) (A) any Bid for shares of the Series will be considered valid up to
    and including the excess of the number of Outstanding shares of the Series
    held by such Existing Holder over the number of shares of the Series subject
    to any Hold Orders referred to in clause (i) above;

           (B) subject to subclause (A), if more than one Bid of an Existing
       Holder for shares of the Series is submitted to the Auction Agent with
       the same rate and the number of Outstanding shares of the Series subject
       to such Bids is greater than such excess, such Bids will be considered
       valid up to and including the amount of such excess, and the number of
       shares of the Series subject to each Bid with the same rate will be
       reduced pro rata to cover the number of shares of the Series equal to
       such excess;

           (C) subject to subclauses (A) and (B), if more than one Bid of an
       Existing Holder for shares of the Series is submitted to the Auction
       Agent with different rates, such Bids will be considered valid in the
       ascending order of their respective rates up to and including the amount
       of such excess; and

           (D) in any such event, the number, if any, of such Outstanding shares
       of the Series subject to any portion of Bids considered not valid in
       whole or in part under this clause (ii) will be treated as the subject of
       a Bid for shares of the Series by or on behalf of a Potential Holder at
       the rate therein specified; and

                                      B-32





<PAGE>



        (iii) all Sell Orders for shares of the Series will be considered valid
    up to and including the excess of the number of Outstanding shares of the
    Series held by such Existing Holder over the sum of shares of the Series
    subject to valid Hold Orders referred to in clause (i) above and valid Bids
    referred to in clause (ii) above.

    (e) If more than one Bid for one or more shares of the Series is submitted
to the Auction Agent by or on behalf of any Potential Holder, each such Bid
submitted will be a separate Bid with the rate and number of shares therein
specified.

    (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, will be irrevocable.

    4. Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.

    (a) Not earlier than the Submission Deadline on each Auction Date for shares
of the Series, the Auction Agent will assemble all valid Orders submitted or
deemed submitted to it by the Broker-Dealers in respect of shares of the Series
(each such Order as submitted or deemed submitted by a Broker-Dealer being
hereinafter referred to individually as a 'Submitted Hold Order,' a 'Submitted
Bid' or a 'Submitted Sell Order,' as the case may be, or as a 'Submitted Order'
and collectively as 'Submitted Hold Orders,' 'Submitted Bids' or 'Submitted Sell
Orders,' as the case may be, or as 'Submitted Orders') and will determine for
the Series:

        (i) the excess of the number of Outstanding shares of the Series over
    the number of Outstanding shares of the Series subject to Submitted Hold
    Orders (such excess being hereinafter referred to as the 'Available Shares
    of the Series');

        (ii) from the Submitted Orders for shares of the Series whether:

           (A) the number of Outstanding shares of the Series subject to
       Submitted Bids of Potential Holders specifying one or more rates equal to
       or lower than the Maximum Rate (for all Dividend Periods) for shares of
       the Series; exceeds or is equal to the sum of

           (B) the number of Outstanding shares of the Series subject to
       Submitted Bids of Existing Holders specifying one or more rates higher
       than the Maximum Rate (for all Dividend Periods) for shares of the
       Series; and

           (C) the number of Outstanding shares of the Series subject to
       Submitted Sell Orders(in the event such excess or such equality exists
       (other than because the number of shares of the Series in subclauses (B)
       and (C) above is zero because all of the Outstanding shares of the Series
       are subject to Submitted Hold Orders), such Submitted Bids in subclause
       (A) above being hereinafter referred to collectively as 'Sufficient
       Clearing Bids' for shares of the Series); and

        (iii) if Sufficient Clearing Bids for shares of the Series exist, the
    lowest rate specified in such Submitted Bids (the 'Winning Bid Rate' for
    shares of the Series) which if:

           (A) (I) each such Submitted Bid of Existing Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Existing Holders
       specifying lower rates were rejected, thus entitling such Existing
       Holders to continue to hold the shares of the Series that are subject to
       such Submitted Bids; and

           (B) (I) each such Submitted Bid of Potential Holders specifying such
       lowest rate and (II) all other such Submitted Bids of Potential Holders
       specifying lower rates were accepted; would result in such Existing
       Holders described in subclause (A) above continuing to hold an aggregate
       number of Outstanding shares of the Series which, when added to the
       number of Outstanding shares of the Series to be purchased by such
       Potential Holders described in subclause (B) above, would equal not less
       than the Available Shares of the Series.

    (b) Promptly after the Auction Agent has made the determinations pursuant to
paragraph (a)of this Section 4, the Auction Agent will advise the Corporation of
the Maximum Rate for shares of the Series for which an Auction is being held on
the Auction Date and, based on such

                                      B-33





<PAGE>



determination, the Applicable Rate for shares of the Series for the next
succeeding Dividend Period thereof as follows:

        (i) if Sufficient Clearing Bids for shares of the Series exist, that the
    Applicable Rate for all shares of the Series for the next succeeding
    Dividend Period thereof will be equal to the Winning Bid Rate for shares of
    the Series so determined;

        (ii) if Sufficient Clearing Bids for shares of the Series do not exist
    (other than because all of the Outstanding shares of the Series are subject
    to Submitted Hold Orders), that the Applicable Rate for all shares of the
    Series for the next succeeding Dividend Period thereof will be equal to the
    Maximum Rate for shares of the Series; or

        (iii) if all of the Outstanding shares of the Series are subject to
    Submitted Hold Orders, that the Applicable Rate for all shares of the Series
    for the next succeeding Dividend Period thereof will be the All Hold Rate.

    5. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation. Existing Holders will continue to hold the shares of the Series that
are subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 4 of this Part II, the Submitted Bids and
Submitted Sell Orders will be accepted or rejected by the Auction Agent and the
Auction Agent will take such other action as set forth below:

        (a) If Sufficient Clearing Bids for shares of the Series have been made,
    all Submitted Sell Orders with respect to shares of the Series will be
    accepted and, subject to the provisions of paragraphs (d) and (e) of this
    Section 5, Submitted Bids with respect to shares of the Series will be
    accepted or rejected as follows in the following order of priority and all
    other Submitted Bids with respect to shares of the Series will be rejected:

           (i) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is higher than the Winning Bid Rate for shares
       of the Series will be accepted, thus requiring each such Existing Holder
       to sell the shares of the Series subject to such Submitted Bids;

           (ii) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       the Series will be rejected, thus entitling each such Existing Holder to
       continue to hold the shares of the Series subject to such Submitted Bids;

           (iii)Potential Holders' Submitted Bids for shares of the Series
       specifying any rate that is lower than the Winning Bid Rate for shares of
       the Series will be accepted;

           (iv) each Existing Holder's Submitted Bid for shares of the Series
       specifying a rate that is equal to the Winning Bid Rate for shares of the
       Series will be rejected, thus entitling such Existing Holder to continue
       to hold shares of the Series subject to such Submitted Bid, unless the
       number of Outstanding shares of the Series subject to all such Submitted
       Bids will be greater than the number of shares of the Series ('remaining
       shares') in the excess of the Available Shares of the Series over the
       number of shares of the Series subject to Submitted Bids described in
       clauses (ii) and (iii) of this paragraph (a), in which event such
       Submitted Bid of such Existing Holder will be rejected in part, and such
       Existing Holder will be entitled to continue to hold shares of the Series
       subject to such Submitted Bid, but only in an amount equal to the shares
       of the Series obtained by multiplying the number of remaining shares by a
       fraction, the numerator of which will be the number of Outstanding shares
       of the Series held by such Existing Holder subject to such Submitted Bid
       and the denominator of which will be the aggregate number of Outstanding
       shares of the Series subject to such Submitted Bids made by all such
       Existing Holders that specified a rate equal to the Winning Bid Rate for
       shares of the Series; and

           (v) each Potential Holder's Submitted Bid for shares of the Series
       specifying a rate that is equal to the Winning Bid Rate for shares of the
       Series will be accepted but only in an amount equal to the number of
       shares of the Series obtained by multiplying the number of shares in the
       excess of the Available Shares of the Series over the number of

                                      B-34





<PAGE>



       shares of the Series subject to Submitted Bids described in clauses (ii)
       through (iv) of this paragraph (a) by a fraction, the numerator of which
       will be the number of Outstanding shares of the Series subject to such
       Submitted Bid and the denominator of which will be the aggregate number
       of Outstanding shares of the Series subject to such Submitted Bids made
       by all such Potential Holders that specified a rate equal to the Winning
       Bid Rate for shares of the Series.

        (b) If Sufficient Clearing Bids for shares of the Series have not been
    made (other than because all of the Outstanding shares of the Series are
    subject to Submitted Hold Orders), subject to the provisions of paragraph
    (d) of this Section 5, Submitted Orders for shares of the Series will be
    accepted or rejected as follows in the following order of priority and all
    other Submitted Bids for shares of the Series will be rejected:

           (i) Existing Holders' Submitted Bids for shares of the Series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of the Series will be rejected, thus entitling such Existing
       Holders to continue to hold the shares of the Series subject to such
       Submitted Bids;

           (ii) Potential Holders' Submitted Bids for shares of the Series
       specifying any rate that is equal to or lower than the Maximum Rate for
       shares of the Series will be accepted; and

           (iii) Each Existing Holder's Submitted Bid for shares of the Series
       specifying any rate that is higher than the Maximum Rate for shares of
       the Series and the Submitted Sell Orders for shares of the Series of each
       Existing Holder will be accepted, thus entitling each Existing Holder
       that submitted or on whose behalf was submitted any such Submitted Bid or
       Submitted Sell Order to sell the shares of the Series subject to such
       Submitted Bid or Submitted Sell Order, but in both cases only in an
       amount equal to the number of shares of the Series obtained by
       multiplying the number of shares of the Series subject to Submitted Bids
       described in clause (ii) of this paragraph (b) by a fraction, the
       numerator of which will be the number of Outstanding shares of the Series
       held by such Existing Holder subject to such Submitted Bid or Submitted
       Sell Order and the denominator of which will be the aggregate number of
       Outstanding shares of the Series subject to all such Submitted Bids and
       Submitted Sell Orders.

        (c) If all of the Outstanding shares of the Series are subject to
    Submitted Hold Orders, all Submitted Bids for shares of the Series will be
    rejected.

        (d) If, as a result of the procedures described in clause (iv) or (v) of
    paragraph (a) or clause (iii) of paragraph (b) of this Section 5, any
    Existing Holder would be entitled or required to sell, or any Potential
    Holder would be entitled or required to purchase, a fraction of a share of
    the Series on any Auction Date, the Auction Agent will, in such manner as it
    will determine in its sole discretion, round up or down the number of shares
    of the Series to be purchased or sold by any Existing Holder or Potential
    Holder on such Auction Date as a result of such procedures so that the
    number of shares so purchased or sold by each Existing Holder or Potential
    Holder on such Auction Date will be whole shares of the Series.

        (e) If, as a result of the procedures described in clause (v) of
    paragraph (a) of this Section 5 any Potential Holder would be entitled or
    required to purchase less than a whole share of the Series on any Auction
    Date, the Auction Agent will, in such manner as it will determine in its
    sole discretion, allocate shares of the Series for purchase among Potential
    Holders so that only whole shares of the Series are purchased on such
    Auction Date as a result of such procedures by any Potential Holder, even if
    such allocation results in one or more Potential Holders not purchasing
    shares of the Series on such Auction Date.

        (f) Based on the results of each Auction for shares of the Series, the
    Auction Agent will determine the aggregate number of shares of the Series to
    be purchased and the aggregate number of shares of the Series to be sold by
    Potential Holders and Existing Holders and, with respect to each Potential
    Holder and Existing Holder, to the extent that such aggregate number of
    shares to be purchased and such aggregate number of shares to be sold
    differ,

                                      B-35





<PAGE>



    determine to which other Potential Holder(s) or Existing Holder(s) they will
    deliver, or from which other Potential Holder(s) or Existing Holder(s) they
    will receive, as the case may be, shares of the Series. Notwithstanding any
    provision of the Auction Procedures or the Settlement Procedures to the
    contrary, in the event an Existing Holder or Beneficial Owner of shares of
    the Series with respect to whom a Broker-Dealer submitted a Bid to the
    Auction Agent for such shares that was accepted in whole or in part, or
    submitted or is deemed to have submitted a Sell Order for such shares that
    was accepted in whole or in part, fails to instruct its Agent Member to
    deliver such shares against payment therefor, partial deliveries of shares
    of the Series that have been made in respect of Potential Holders' or
    Potential Beneficial Owners' Submitted Bids for shares of the Series that
    have been accepted in whole or in part will constitute good delivery to such
    Potential Holders and Potential Beneficial Owners.

        (g) Neither the Corporation nor the Auction Agent nor any affiliate of
    either will have any responsibility or liability with respect to the failure
    of an Existing Holder, a Potential Holder, a Beneficial Owner, a Potential
    Beneficial Owner or its respective Agent Member to deliver any shares of the
    Series or to pay for shares of the Series sold or purchased pursuant to the
    Auction Procedures or otherwise.

    6. Transfer of AMPS. Unless otherwise permitted by the Corporation, a
Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of shares of the Series only in whole shares and only pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the procedures described
in this Part II or to a Broker-Dealer; provided, however, that (a) a sale,
transfer or other disposition of shares of the Series from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as the holder
of such shares to that Broker-Dealer or another customer of that Broker-Dealer
will not be deemed to be a sale, transfer or other disposition for purposes of
this Section 6 if such Broker-Dealer remains the Existing Holder of the shares
so sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other Person, if permitted by the Corporation)
to whom such transfer is made will advise the Auction Agent of such transfer.

                         [Remainder of page left blank]

                                      B-36





<PAGE>



    IN WITNESS WHEREOF, COHEN & STEERS QUALITY INCOME REALTY FUND, INC. has
caused these presents to be signed in its name and on its behalf by its Vice
President and witnessed by its Assistant Secretary as of this  day of  , 2004.

WITNESS:

By:  ..............................
   Name: Lawrence B. Stoller
   Title: Assistant Secretary

                                          COHEN & STEERS QUALITY
                                          INCOME REALTY FUND, INC.

                                          By: .................................
                                            Name: Adam Derechin
                                            Title: Vice President

    THE UNDERSIGNED, Vice President of the COHEN & STEERS QUALITY INCOME REALTY
FUND, INC., who executed on behalf of the Corporation the foregoing Articles
Supplementary hereby acknowledges the foregoing Articles Supplementary to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information, and belief that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.

                                          By: .................................
                                            Name: Adam Derechin
                                            Title: Vice President
                                       B-37




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2D
<SEQUENCE>3
<FILENAME>ex99-2dii.txt
<DESCRIPTION>EXHIBIT 2(D)(II)
<TEXT>


<PAGE>

                                                                Exhibit 2(d)(ii)


<TABLE>
<CAPTION>
CERTIFICATE NUMBER                                              NUMBER OF SHARES
------------------                                              ----------------
<S>                                                                   <C>
         1                                                            3,760
</TABLE>

                 COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                             a Maryland corporation
                Series M7 Taxable Auction Market Preferred Shares
                            $.001 Par Value Per Share
                    $25,000 Liquidation Preference Per Share

                                                           CUSIP NO.
                                                                    ------------

     This certifies that Cede & Co. is the owner of 3,760 fully paid and
non-assessable Series M7 Taxable Auction Market Preferred Shares, par value
$.001 per share, $25,000 liquidation preference per share, of Cohen & Steers
Quality Income Realty Fund, Inc. (the "Fund") transferable only on the books of
the Fund by the holder thereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate is not valid
unless countersigned by the transfer agent and registrar.

     IN WITNESS WHEREOF, the Fund has caused this Certificate to be signed by
its duly authorized officers this 19th day of November 2004.

THE BANK OF NEW YORK                     COHEN & STEERS QUALITY
As Transfer Agent and Registrar          INCOME REALTY FUND, INC.


By:                                      By:
    ----------------------------------       -----------------------------------
    Authorized Signature                     Name: Martin Cohen
                                             Title: President


                                         By:
                                             -----------------------------------
                                             Name: Robert H. Steers
                                             Title: Secretary




<PAGE>


                                  TRANSFER FORM

     FOR VALUE RECEIVED, ____________________________ hereby sells, assigns and
transfers unto _________ ______ Series M7 Taxable Auction Market Preferred
Shares represented by this Certificate, and does hereby irrevocably constitute
and appoint ___________________________ attorney to transfer said Shares on the
books of the within named Fund with full power of substitution in the premises.

Dated:                        ,
       -----------------------  ------

     In presence of:


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

     Series M7 Taxable Auction Market Preferred Shares evidenced by this
Certificate may be sold, transferred or otherwise disposed of only pursuant to
the provisions of the Fund's Articles Supplementary Creating and Fixing the
Rights of Series M7 Taxable Auction Market Preferred Shares, a copy of which may
be obtained at the office of the State Department of Assessments and Taxation of
Maryland.

     The Fund will furnish information about the restrictions on transferability
to any stockholder upon request and without charge. Any such request should be
addressed to the Secretary of the Fund.

     The Fund will furnish to any stockholder on request and without charge a
full statement of the designations, and any preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the stock of each
class authorized to be issued, the differences in the relative rights and
preferences between shares of any series of any authorized preferred or special
class to the extent they have been set, and the authority of the Board of
Directors to classify unissued shares and to set the relative rights and
preference thereof and of any subsequent series of such preferred or special
classes. Any such request should be addressed to the Secretary of the Fund.

     Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent
for registration of transfer, exchange, or payment, and any certificate issued
is registered in the name of Cede & Co. or in such other name as is requested by
an authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2H
<SEQUENCE>4
<FILENAME>ex99-2h.txt
<DESCRIPTION>EXHIBIT 2(H)
<TEXT>


<PAGE>


                                                                    Exhibit 2(h)

                 Cohen & Steers Quality Income Realty Fund, Inc.
                            (a Maryland corporation)

                Taxable Auction Market Preferred Shares ("AMPS")
                       [___] Shares [___]% AMPS, Series M7
                    Liquidation Preference $25,000 per share

                               PURCHASE AGREEMENT

                                                             November [__], 2004

Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Citigroup Global Markets Inc.
A.G. Edwards & Sons, Inc.
UBS Securities LLC
Wachovia Capital Markets, LLC

4 World Financial Center
New York, New York 10080

Ladies and Gentlemen:

          Cohen & Steers Quality Income Realty Fund, Inc., a Maryland
corporation (the "Fund"), proposes, upon the terms and conditions set forth
herein, to issue and sell an aggregate of [____] shares of its Taxable Auction
Market Preferred Shares, Series M7, with a liquidation preference of $25,000 per
share (the "AMPS"). The AMPS will be authorized by, and subject to the terms and
conditions of, the Articles of Incorporation of the Fund, as amended through
January 15, 2002 (the "Charter"), in the form filed as an exhibit to the
Registration Statement referred to in the second following paragraph of this
Agreement, as the same may be amended from time to time. The Fund and the Fund's
investment manager, Cohen & Steers Capital Management, Inc., a New York
corporation ("CSCM" or the "Investment Manager") each confirms its agreement
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch is acting as representative (in such capacity, the "Representative"), with
respect to the issue and sale by the Fund and the purchase by the Underwriters,
acting severally and not jointly, of the respective number of AMPS set forth in
said Schedule A.

          The Fund understands that the Underwriters propose to make a public
offering of the AMPS as soon as the Representative deems advisable after this
Agreement has been executed and delivered. The Fund has filed with the
Securities and Exchange Commission (the "Commission") a registration statement
on Form N-2 (No. 333-119361 and No. 811-10481) covering the registration of the
AMPS under the Securities Act of 1933, as amended (the "1933 Act"), including
the related preliminary prospectus or prospectuses, and a notification on Form
N-8A of registration (the "1940 Act Notification") of the Fund as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and the rules and regulations of the Commission under the 1933 Act and the 1940
Act (the "Rules and Regulations"). Promptly after execution and delivery of this
Agreement, the Fund will either (i) prepare and file a prospectus in accordance
with the provisions of Rule 430A ("Rule 430A") of the Rules and Regulations and
paragraph (c) or (h) of Rule 497 ("Rule 497") of the Rules and Regulations or
(ii) if the Fund has elected to rely upon Rule 434 ("Rule 434") of the Rules and
Regulations, prepare and file a term




<PAGE>


sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
497. The information included in any such prospectus or in any such Term Sheet,
as the case may be, that was omitted from such registration statement at the
time it became effective but that is deemed to be part of such registration
statement at the time it became effective, if applicable, (a) pursuant to
paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b)
pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information."
Each prospectus used before such registration statement became effective, and
any prospectus that omitted, as applicable, the Rule 430A Information or the
Rule 434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, including in each case any Statement
of Additional Information incorporated therein by reference, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
prospectus in the form first furnished to the Underwriters for use in connection
with the offering of the AMPS, including the Statement of Additional Information
incorporated therein by reference, is herein called the "Prospectus." If Rule
434 is relied on, the term "Prospectus" shall refer to the preliminary
prospectus dated November [________], 2004 together with the Term Sheet and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any Term
Sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").

          All references in this Agreement to financial statements and schedules
and other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all reference in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document under the Securities Exchange Act of 1934, as amended (the "1934
Act"), which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectus, as the case may be.

          SECTION 1. Representations and Warranties.

          (a) Representations and Warranties by the Fund and the Investment
Manager. The Fund and the Investment Manager jointly and severally represent and
warrant to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof and agree with each Underwriter, as follows:

               (i) Compliance with Registration Requirements. Each of the
          Registration Statement and any Rule 462(b) Registration Statement has
          become effective under the 1933 Act and no stop order suspending the
          effectiveness of the Registration Statement or any Rule 462(b)
          Registration Statement has been issued under the 1933 Act, or order of
          suspension or revocation of registration pursuant to Section 8(e) of
          the 1940 Act, and no proceedings for any such purpose have been
          instituted or are pending or, to the knowledge of the Fund or the
          Investment Manager, are contemplated by the Commission, and any
          request on the part of the Commission for additional information has
          been complied with.

               At the respective times the Registration Statement, any Rule
          462(b) Registration Statement and any post-effective amendments
          thereto became effective and at the Closing Time, the Registration
          Statement, the Rule 462(b) Registration Statement, the notification of
          Form N-8A and any amendments and supplements thereto complied and will
          comply in all material


                                        2




<PAGE>


          respects with the requirements of the 1933 Act, the 1940 Act and the
          Rules and Regulations and did not and will not contain an untrue
          statement of a material fact or omit to state a material fact required
          to be stated therein or necessary to make the statements therein not
          misleading. Neither the Prospectus nor any amendments or supplements
          thereto, at the time the Prospectus or any such amendment or
          supplement was issued and at the Closing Time, included or will
          include an untrue statement of a material fact or omitted or will omit
          to state a material fact necessary in order to make the statements
          therein, in the light of the circumstances under which they were made,
          not misleading (except that this representation and warranty does not
          apply to statements in or omissions from the Registration Statements
          or the Prospectus made in reliance upon and in conformity with
          information relating to the Underwriters furnished to the Fund by or
          on behalf of the Underwriters expressly for use therein). If Rule 434
          is used, the Fund will comply with the requirements of Rule 434 and
          the Prospectus shall not be "materially different", as such term is
          used in Rule 434, from the prospectus included in the Registration
          Statement at the time it became effective.

               Each preliminary prospectus and the prospectus filed as part of
          the Registration Statement as originally filed or as part of any
          amendment thereto, or filed pursuant to Rule 497 under the 1933 Act,
          complied when so filed in all material respects with the Rules and
          Regulations and each preliminary prospectus and the Prospectus
          delivered to the Underwriters for use in connection with this offering
          was identical to the electronically transmitted copies thereof filed
          with the Commission pursuant to EDGAR, except to the extent permitted
          by Regulation S-T.

               If a Rule 462(b) Registration Statement is required in connection
          with the offering and sale of the AMPS, the Fund has complied or will
          comply with the requirements of Rule 111 under the 1933 Act
          Regulations relating to the payment of filing fees thereof.

               (ii) Independent Registered Public Accounting Firm. The
          Independent Registered Public Accounting Firm, PricewaterhouseCoopers
          LLP, who has audited and certified or shall audit and certify the
          December 31, 2003 financial statements included or incorporated by
          reference in the Registration Statement and the Prospectus (or any
          amendment or supplement to either of them) is an independent
          registered public accounting firm as required by the 1933 Act, the
          1940 Act and the Rules and Regulations.

               (iii) Financial Statements. The financial statements, together
          with related schedules and notes, included or incorporated by
          reference in the Registration Statement and the Prospectus (and any
          amendment or supplement to either of them), present fairly the
          financial position, results of operations and changes in financial
          position of the Fund on the basis stated or incorporated by reference
          in the Registration Statement and the Prospectus at the respective
          dates or for the respective periods to which they apply; such
          statements and related schedules and notes have been prepared in
          accordance with generally accepted accounting principles consistently
          applied throughout the periods involved, except as disclosed therein;
          and the other financial and statistical information and data included
          in the Registration Statement and the Prospectus (and any amendment or
          supplement to either of them) are accurately presented and prepared on
          a basis consistent with such financial statements and the books and
          records of the Fund.

               (iv) No Material Adverse Change. Since the respective dates as of
          which information is given in the Registration Statement and the
          Prospectus, except as otherwise stated therein, (A) there has been no
          material adverse change in the condition, financial or otherwise, or
          in the earnings, business affairs or business prospects (other than as
          a result of a change in the financial markets generally) of the Fund,
          whether or not arising in the ordinary course of business (a "Material
          Adverse Effect"), (B) there have been no transactions entered into by
          the Fund, other


                                        3




<PAGE>


          than those in the ordinary course of business, which are material with
          respect to the Fund, and (C) there has been no dividend or
          distribution of any kind declared, paid or made by the Fund on any
          class of its capital stock.

               (v) Good Standing of the Fund. The Fund has been duly organized
          and is validly existing as a corporation in good standing under the
          laws of the State of Maryland and has the corporate power and
          authority to own, lease and operate its properties and to conduct its
          business as described in the Prospectus and to enter into and perform
          its obligations under this Agreement; and the Fund is duly qualified
          as a foreign corporation to transact business and is in good standing
          in each other jurisdiction in which such qualification is required,
          whether by reason of the ownership or leasing of property or the
          conduct of business, except where the failure so to qualify or to be
          in good standing would not result in a Material Adverse Effect.

               (vi) No Subsidiaries. The Fund has no subsidiaries.

               (vii) Investment Company Status. The Fund is duly registered with
          the Commission under the 1940 Act as a closed-end non-diversified
          management investment company, and to the Fund's knowledge, no order
          of suspension or revocation of such registration has been issued or
          proceedings therefor initiated or threatened by the Commission.

               (viii) Officers and Directors. No person is serving or acting as
          an officer, director or investment manager of the Fund except in
          accordance with the provisions of the 1940 Act and the Rules and
          Regulations and the Investment Advisers Act of 1940, as amended (the
          "Advisers Act"), and the rules and regulations of the Commission
          promulgated under the Advisers Act (the "Advisers Act Rules and
          Regulations"). Except as disclosed in the Registration Statement and
          the Prospectus (or any amendment or supplement to either of them), no
          director of the Fund is an "interested person" (as defined in the 1940
          Act) of the Fund or an "affiliated person" (as defined in the 1940
          Act) of any Underwriter listed in Schedule A hereto.

               (ix) Capitalization. The authorized, issued and outstanding
          shares of common stock of the Fund is as set forth in the Prospectus
          as of the date thereof under the caption "Description of Common
          Shares." All issued and outstanding common shares of the Fund have
          been duly authorized and validly issued and are fully paid and
          non-assessable, and have been offered and sold or exchanged by the
          Fund in compliance with all applicable laws (including, without
          limitation, federal and state securities laws); none of the
          outstanding shares of common shares of the Fund was issued in
          violation of the preemptive or other similar rights of any
          securityholder of the Fund.

               (x) Authorization and Description of AMPS. The AMPS to be
          purchased by the Underwriters from the Fund have been duly authorized
          for issuance and sale to the Underwriters pursuant to this Agreement
          and, when issued and delivered by the Fund pursuant to this Agreement
          against payment of the consideration set forth herein, will be validly
          issued and fully paid and non-assessable. The AMPS conform to all
          statements relating thereto contained in the Prospectus and such
          description conforms to the rights of holders of AMPS set forth in the
          Charter and other documents defining the same; no holder of the AMPS
          will be subject to personal liability by reason of being such a
          holder; and the issuance of the AMPS is not subject to the preemptive
          or other similar rights of any securityholder of the Fund.

               (xi) Absence of Defaults and Conflicts. The Fund is not in
          violation of its Charter or by-laws, or in default in the performance
          or observance of any obligation, agreement, covenant or condition
          contained in any contract, indenture, mortgage, deed of trust, loan or
          credit agreement, note, lease or other agreement or instrument to
          which it is a party or by which it may be bound, or to which any of
          the property or assets of the Fund is subject (collectively,
          "Agreements and


                                        4




<PAGE>


          Instruments") except for such violations or defaults that would not
          result in a Material Adverse Effect; and the execution, delivery and
          performance of this Agreement, the Investment Management Agreement,
          the Administration Agreement, the Sub-Administration Agreement, the
          Custodian Agreement, the Transfer Agent and Service Agreement and the
          Auction Agency Agreement referred to in the Registration Statement (as
          used herein, the "Management Agreement," the "Administration
          Agreement," the "Sub-Administration Agreement," the "Custodian
          Agreement," the "Transfer Agency Agreement" and the "Auction Agency
          Agreement," respectively) and the consummation of the transactions
          contemplated herein and in the Registration Statement (including the
          issuance and sale of the AMPS and the use of the proceeds from the
          sale of the AMPS as described in the Prospectus under the caption "Use
          of Proceeds") and compliance by the Fund with its obligations
          hereunder have been duly authorized by all necessary corporate action
          and do not and will not, whether with or without the giving of notice
          or passage of time or both, conflict with or constitute a breach of,
          or default or Repayment Event (as defined below) under, or result in
          the creation or imposition of any lien, charge or encumbrance upon any
          property or assets of the Fund pursuant to, the Agreements and
          Instruments (except for such conflicts, breaches or defaults or liens,
          charges or encumbrances that would not result in a Material Adverse
          Effect), nor will such action result in any violation of the
          provisions of the Charter or by-laws of the Fund or any applicable
          law, statute, rule, regulation, judgment, order, writ or decree of any
          government, government instrumentality or court, domestic or foreign,
          having jurisdiction over the Fund or any of its assets, properties or
          operations. As used herein, a "Repayment Event" means any event or
          condition which gives the holder of any note, debenture or other
          evidence of indebtedness (or any person acting on such holder's
          behalf) the right to require the repurchase, redemption or repayment
          of all or a portion of such indebtedness by the Fund.

               (xii) Absence of Proceedings. There is no action, suit,
          proceeding, inquiry or investigation before or brought by any court or
          governmental agency or body, domestic or foreign, now pending, or, to
          the knowledge of the Fund or the Investment Manager, threatened,
          against or affecting the Fund, which is required to be disclosed in
          the Registration Statement (other than as disclosed therein), or which
          might reasonably be expected to result in a Material Adverse Effect,
          or which might reasonably be expected to materially and adversely
          affect the properties or assets of the Fund or the consummation of the
          transactions contemplated in this Agreement or the performance by the
          Fund of its obligations hereunder. The aggregate of all pending legal
          or governmental proceedings to which the Fund is a party or of which
          any of its property or assets is the subject which are not described
          in the Registration Statement, including ordinary routine litigation
          incidental to the business, could not reasonably be expected to result
          in a Material Adverse Effect.

               (xiii) Accuracy of Exhibits. There are no contracts or documents
          which are required to be described in the Registration Statement or
          the Prospectus or to be filed as exhibits thereto by the 1933 Act, the
          1940 Act or by the Rules and Regulations which have not been so
          described and filed as required.

               (xiv) Absence of Further Requirements. No filing with, or
          authorization, approval, consent, license, order, registration,
          qualification or decree of, any court or governmental authority or
          agency is necessary or required for the performance by the Fund of its
          obligations hereunder, in connection with the offering, issuance or
          sale of the AMPS hereunder or the consummation of the transactions
          contemplated by this Agreement, except such as have been already
          obtained or as may be required under the 1933 Act, the 1940 Act, the
          1934 Act, or state securities laws.


                                        5




<PAGE>


               (xv) Possession of Licenses and Permits. The Fund possesses such
          permits, licenses, approvals, consents and other authorizations
          (collectively, "Governmental Licenses") issued by the appropriate
          federal, state, local or foreign regulatory agencies or bodies
          necessary to operate its properties and to conduct the business as
          contemplated in the Prospectus; the Fund is in compliance with the
          terms and conditions of all such Governmental Licenses, except where
          the failure so to comply would not, singly or in the aggregate, have a
          Material Adverse Effect; all of the Governmental Licenses are valid
          and in full force and effect, except when the invalidity of such
          Governmental Licenses or the failure of such Governmental Licenses to
          be in full force and effect would not have a Material Adverse Effect;
          and the Fund has not received any notice of proceedings relating to
          the revocation or modification of any such Governmental Licenses
          which, singly or in the aggregate, if the subject of an unfavorable
          decision, ruling or finding, would result in a Material Adverse
          Effect.

               (xvi) Advertisements. Any advertising, sales literature or other
          promotional material (including "prospectus wrappers," "broker kits,"
          "road show slides" and "road show scripts") authorized in writing by
          or prepared by the Fund or the Investment Manager used in connection
          with the public offering of the AMPS (collectively, "sales material")
          does not contain an untrue statement of a material fact or omit to
          state a material fact required to be stated therein or necessary to
          make the statements therein not misleading. Moreover, all sales
          material complied and will comply in all material respects with the
          applicable requirements of the 1933 Act, the 1940 Act, the Rules and
          Regulations and the rules and interpretations of the National
          Association of Securities Dealers, Inc. ("NASD").

               (xvii) Subchapter M. The Fund intends to direct the investment of
          the proceeds of the offering described in the Registration Statement
          in such a manner as to comply with the requirements of Subchapter M of
          the Internal Revenue Code of 1986, as amended ("Subchapter M of the
          Code" and the "Code," respectively), and intends to qualify as a
          regulated investment company under Subchapter M of the Code.

               (xviii) Distribution of Offering Materials. The Fund has not
          distributed and, prior to the later to occur of (A) the Closing Time
          and (B) completion of the distribution of the AMPS, will not
          distribute any offering material in connection with the offering and
          sale of the AMPS other than the Registration Statement, a preliminary
          prospectus, the Prospectus or other materials, if any, permitted by
          the 1933 Act or the 1940 Act or the Rules and Regulations.

               (xix) Accounting Controls. The Fund maintains a system of
          internal accounting controls sufficient to provide reasonable
          assurances that (A) transactions are executed in accordance with
          management's general or specific authorization and with the applicable
          requirements of the 1940 Act, the Rules and Regulations and the Code;
          (B) transactions are recorded as necessary to permit preparation of
          financial statements in conformity with generally accepted accounting
          principles and to maintain accountability for assets and to maintain
          compliance with the books and records requirements under the 1940 Act
          and the Rules and Regulations; (C) access to assets is permitted only
          in accordance with the management's general or specific authorization;
          and (D) the recorded accountability for assets is compared with
          existing assets at reasonable intervals and appropriate action is
          taken with respect to any differences.

               (xx) Absence of Undisclosed Payments. To the Fund's knowledge,
          neither the Fund nor any employee or agent of the Fund has made any
          payment of funds of the Fund or received or retained any funds, which
          payment, receipt or retention of funds is of a character required to
          be disclosed in the Prospectus.

               (xxi) Material Agreements. This Agreement, the Management
          Agreement, the Administration Agreement, the Sub-Administration
          Agreement, the Custodian Agreement, the


                                        6




<PAGE>


          Transfer Agency Agreement and the Auction Agency Agreement have each
          been duly authorized by all requisite action on the part of the Fund,
          executed and delivered by the Fund, as of the dates noted therein and
          each complies with all applicable provisions of the 1940 Act. Assuming
          due authorization, execution and delivery by the other parties thereto
          with respect to the Management Agreement, the Administration
          Agreement, the Sub-Administration Agreement, the Custodian Agreement,
          the Transfer Agency Agreement and the Auction Agency Agreement, each
          of the Management Agreement, the Administration Agreement, the
          Sub-Administration Agreement, the Custodian Agreement, the Transfer
          Agency Agreement and the Auction Agency Agreement constitutes a valid
          and binding agreement of the Fund, enforceable in accordance with its
          terms, except as affected by bankruptcy, insolvency, fraudulent
          conveyance, reorganization, moratorium and other similar laws relating
          to or affecting creditors' rights generally, general equitable
          principles (whether considered in a proceeding in equity or at law).

               (xxii) Registration Rights. There are no persons with
          registration rights or other similar rights to have any securities
          registered pursuant to the Registration Statement or otherwise
          registered by the Fund under the 1933 Act.

               (xxiii) NYSE Listing. The Fund's shares of common stock are duly
          listed on the New York Stock Exchange ("NYSE").

               (xxiv) Ratings. The AMPS have been, or prior to the Closing Date
          will be, assigned a rating of "Aaa" by Moody's Investors Service, Inc.
          ("Moody's") and "AAA" by Standard & Poor's Rating Services ("S&P").

               (xxv) Leverage. The Fund has no liability for borrowed money,
          including under any reverse repurchase agreement.

          (b) Representations and Warranties by the Investment Manager. The
Investment Manager represents and warrants to each Underwriter as of the date
hereof, as of the Closing Time referred to in Section 2(c) hereof as follows:

               (i) Good Standing of the Investment Manager. The Investment
          Manager has been duly organized and is validly existing and in good
          standing as a corporation under the laws of the State of New York with
          full corporate power and authority to own, lease and operate its
          properties and to conduct its business as described in the Prospectus
          and is duly qualified as a foreign corporation to transact business
          and is in good standing in each other jurisdiction in which such
          qualification is required except where the failure so to register or
          to qualify does not have a material adverse effect on the condition
          (financial or other), business, business prospects, properties, net
          assets or results of operations of the Investment Manager to perform
          its obligations under this Agreement and the Management Agreement.

               (ii) Investment Manager Status. The Investment Manager is duly
          registered and in good standing with the Commission as an investment
          adviser under the Advisers Act, and is not prohibited by the Advisers
          Act or the 1940 Act, or the rules and regulations under such acts,
          from acting under the Management Agreement for the Fund as
          contemplated by the Prospectus.

               (iii) Description of Investment Manager. The description of the
          Investment Manager in the Registration Statement and the Prospectus
          (and any amendment or supplement to either of them) complied and
          comply in all material respects with the provisions of the 1933 Act,
          the 1940 Act, the Advisers Act, the Rules and Regulations and the
          Advisers Act Rules and Regulations and is true and correct and does
          not contain any untrue statement of a material fact or omit to state
          any material fact required to be stated therein or necessary in order
          to make the statements therein, in light of the circumstances under
          which they were made, not misleading.


                                        7




<PAGE>


               (iv) Capitalization. The Investment Manager has the financial
          resources available to it necessary for the performance of its
          services and obligations as contemplated in the Prospectus, this
          Agreement and under the Management Agreement.

               (v) Authorization of Agreements; Absence of Defaults and
          Conflicts. This Agreement and the Management Agreement have each been
          duly authorized, executed and delivered by the Investment Manager, and
          the Management Agreement constitutes a valid and binding obligation of
          the Investment Manager, enforceable in accordance with its terms,
          except as affected by bankruptcy, insolvency, fraudulent conveyance,
          reorganization, moratorium and other similar laws relating to or
          affecting creditors' rights generally and general equitable principles
          (whether considered in a proceeding in equity or at law); and neither
          the execution and delivery of this Agreement or the Management
          Agreement nor the performance by the Investment Manager of its
          obligations hereunder or thereunder will conflict with, or result in a
          breach of any of the terms and provisions of, or constitute, with or
          without the giving of notice or lapse of time or both, a default
          under, any agreement or instrument to which the Investment Manager is
          a party or by which it is bound, the certificate of incorporation, the
          by-laws or other organizational documents of the Investment Manager,
          or to the Investment Manager's knowledge, by any law, order, decree,
          rule or regulation applicable to it of any jurisdiction, court,
          federal or state regulatory body, administrative agency or other
          governmental body, stock exchange or securities association having
          jurisdiction over the Investment Manager or its respective properties
          or operations; and no consent, approval, authorization or order of any
          court or governmental authority or agency is required for the
          consummation by the Investment Manager of the transactions
          contemplated by this Agreement or the Management Agreement, except as
          have been obtained or may be required under the 1933 Act, the 1940
          Act, the 1934 Act or state securities laws.

               (vi) No Material Adverse Change. Since the respective dates as of
          which information is given in the Registration Statement and the
          Prospectus, except as otherwise stated therein, there has not occurred
          any event which should reasonably be expected to have a material
          adverse effect on the ability of the Investment Manager to perform its
          obligations under this Agreement and the Management Agreement.

               (vii) Absence of Proceedings. There is no action, suit,
          proceeding, inquiry or investigation before or brought by any court or
          governmental agency or body, domestic or foreign, now pending, or, to
          the knowledge of the Investment Manager, threatened against or
          affecting the Investment Manager or any "affiliated person" of the
          Investment Manager (as such term is defined in the 1940 Act) or any
          partners, directors, officers or employees of the foregoing, whether
          or not arising in the ordinary course of business, which might
          reasonably be expected to result in any material adverse change in the
          condition, financial or otherwise, or earnings, business affairs or
          business prospects of the Investment Manager, materially and adversely
          affect the properties or assets of the Investment Manager or
          materially impair or adversely affect the ability of the Investment
          Manager to function as an investment manager or perform its
          obligations under the Management Agreement, or which is required to be
          disclosed in the Registration Statement and the Prospectus.

               (viii) Absence of Violation or Default. The Investment Manager is
          not in violation of its certificate of incorporation, by-laws or other
          organizational documents or in default under any agreement, indenture
          or instrument except for such violations or defaults that would not
          result in a material adverse change in the condition, financial or
          otherwise, or in the earnings, business affairs or business prospects
          of the Investment Manager or the Fund.

          (c) Officer's Certificates. Any certificate signed by any officer of
the Fund or the Investment Manager delivered to the Representative or to counsel
for the Underwriters shall be deemed a


                                        8




<PAGE>


representation and warranty by the Fund or the Investment Manager, as the case
may be, to each Underwriter as to the matters covered thereby.

          SECTION 2. Sale and Delivery to Underwriters; Closing.

          (a) AMPS. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Fund
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Fund, at the
price per share set forth in Schedule B, the number of AMPS set forth in
Schedule A opposite the name of such Underwriter, plus any additional number of
AMPS which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.

          (b) Commission. The Fund agrees to pay to the Underwriters a
commission set forth in Schedule B as compensation to the Underwriters for their
commitments under this Agreement.

          (c) Payment. Payment of the purchase price for, and delivery of
certificates for, the AMPS shall be made at the offices of Simpson Thacher &
Bartlett LLP, 425 Lexington Avenue, New York, New York 10017, or at such other
place as shall be agreed upon by the Representative and the Fund, at 10:00 A.M.
(Eastern time) on the business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later than
ten business days after such date as shall be agreed upon by the Representative
and the Fund (such time and date of payment and delivery being herein called
"Closing Time").

          Payment shall be made to the Fund by wire transfer of immediately
available funds to a bank account designated by the Fund, against delivery to
the Representative for the respective accounts of the Underwriters of
certificates for the AMPS to be purchased by them. It is understood that each
Underwriter has authorized the Representative, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the AMPS
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the AMPS to be purchased by any Underwriter
whose funds have not been received by the Closing Time but such payment shall
not relieve such Underwriter from its obligations hereunder.

          (d) Denominations; Registration. Certificates for the AMPS shall be in
such denominations and registered in such names as the Representative may
request in writing at least one full business day before the Closing Time. The
certificates for the AMPS will be made available for examination and packaging
by the Representative in the City of New York not later than 10:00 A.M. (Eastern
time) on the business day prior to the Closing Time.

          SECTION 3. Covenants.

          (a) The Fund and the Investment Manager, jointly and severally,
covenant with each Underwriter as follows:

               (i) Compliance with Securities Regulations and Commission
          Requests. The Fund, subject to Section 3(a)(ii), will comply with the
          requirements of Rule 430A or Rule 434, as applicable, and will notify
          the Representatives immediately, and confirm the notice in writing,
          (i) when any post-effective amendment to the Registration Statement
          shall become effective, or any supplement to the Prospectus or any
          amended Prospectus shall have been filed, (ii) of the receipt of any
          comments from the Commission, (iii) of any request by the Commission
          for any amendment to the Registration Statement or any amendment or
          supplement to the Prospectus or for additional information, and (iv)
          of the issuance by the Commission of any stop order suspending the
          effectiveness of the Registration Statement or of any order preventing
          or suspending the use of any preliminary prospectus, or of the
          suspension of the qualification of the


                                        9




<PAGE>


          AMPS for offering or sale in any jurisdiction, or of the initiation or
          threatening of any proceedings for any of such purposes. The Fund will
          promptly effect the filings necessary pursuant to Rule 497 and will
          take such steps as it deems necessary to ascertain promptly whether
          the form of prospectus transmitted for filing under Rule 497 was
          received for filing by the Commission and, in the event that it was
          not, it will promptly file such prospectus. The Fund will make every
          reasonable effort to prevent the issuance of any stop order, or order
          of suspension or revocation of registration pursuant to Section 8(e)
          of the 1940 Act, and, if any such stop order or order of suspension or
          revocation of registration is issued, to obtain the lifting thereof at
          the earliest possible moment.

               (ii) Filing of Amendments. The Fund will give the Representative
          notice of its intention to file or prepare any amendment to the
          Registration Statement (including any filing under Rule 462(b)), any
          Term Sheet or any amendment, supplement or revision to either the
          prospectus included in the Registration Statement at the time it
          became effective or to the Prospectus, will furnish the Representative
          with copies of any such documents a reasonable amount of time prior to
          such proposed filing or use, as the case may be, and will not file or
          use any such document to which the Representative or counsel for the
          Underwriters shall object.

               (iii) Delivery of Registration Statements. The Fund has furnished
          or will deliver to the Representative and counsel for the
          Underwriters, without charge, signed copies of the Registration
          Statement as originally filed and of each amendment thereto (including
          exhibits filed therewith or incorporated by reference therein) and
          signed copies of all consents and certificates of experts, and will
          also deliver to the Representative, without charge, a conformed copy
          of the Registration Statement as originally filed and of each
          amendment thereto (without exhibits) for each of the Underwriters. The
          copies of the Registration Statement and each amendment thereto
          furnished to the Underwriters will be identical to the electronically
          transmitted copies thereof filed with the Commission pursuant to
          EDGAR, except to the extent permitted by Regulation S-T.

               (iv) Delivery of Prospectuses. The Fund has delivered to each
          Underwriter, without charge, as many copies of each preliminary
          prospectus as such Underwriter reasonably requested, and the Fund
          hereby consents to the use of such copies for purposes permitted by
          the 1933 Act prior to the date of the Prospectus. The Fund will
          furnish to each Underwriter, without charge, during the period when in
          the opinion of counsel for the Underwriter the Prospectus is required
          under the 1933 Act to be delivered in connection with sales by any
          Underwriter or dealer or the 1934 Act, such number of copies of the
          Prospectus (as amended or supplemented) as such Underwriter may
          reasonably request. The Prospectus and any amendments or supplements
          thereto furnished to the Underwriters will be identical to the
          electronically transmitted copies thereof filed with the Commission
          pursuant to EDGAR, except to the extent permitted by Regulation S-T.

               (v) Continued Compliance with Securities Laws. If at any time
          when a prospectus is required by the 1933 Act to be delivered in
          connection with sales of the AMPS, any event shall occur or condition
          shall exist as a result of which it is necessary, in the opinion of
          counsel for the Underwriters or for the Fund, to amend the
          Registration Statement or amend or supplement the Prospectus in order
          that the Prospectus will not include any untrue statements of a
          material fact or omit to state a material fact necessary in order to
          make the statements therein not misleading in the light of the
          circumstances existing at the time it is delivered to a purchaser, or
          if it shall be necessary, in the opinion of such counsel, at any such
          time to amend the Registration Statement or amend or supplement the
          Prospectus in order to comply with the requirements of the 1933 Act or
          the Rules and Regulations, the Fund will promptly prepare and file
          with the Commission, subject to Section 3(a)(ii), such amendment or
          supplement as may be necessary to correct such


                                       10




<PAGE>


          statement or omission or to make the Registration Statement or the
          Prospectus comply with such requirements, and the Fund will furnish to
          the Underwriters such number of copies of such amendment or supplement
          as the Underwriters may reasonably request.

               (vi) Blue Sky Qualifications. The Fund will use its best efforts,
          in cooperation with the Underwriters, to qualify the AMPS for offering
          and sale under the applicable securities laws of such states and other
          jurisdictions of the United States as the Representative may designate
          and to maintain such qualifications in effect for a period of not less
          than one year from the later of the effective date of the Registration
          Statement and any Rule 462(b) Registration Statement; provided,
          however, that the Fund shall not be obligated to file any general
          consent to service of process or to qualify as a foreign corporation
          or as a dealer in AMPS in any jurisdiction in which it is not so
          qualified or to subject itself to taxation in respect of doing
          business in any jurisdiction in which it is not otherwise so subject.
          In each jurisdiction in which the AMPS have been so qualified, the
          Fund will file such statements and reports as may be required by the
          laws of such jurisdiction to continue such qualification in effect for
          a period of not less than one year from the effective date of the
          Registration Statement and any Rule 462(b) Registration Statement.

               (vii) Rule 158. The Fund will timely file such reports pursuant
          to the 1934 Act as are necessary in order to make generally available
          to its securityholders as soon as practicable an earnings statement
          for the purposes of, and to provide the benefits contemplated by, the
          last paragraph of Section 11(a) of the 1933 Act.

               (viii) Use of Proceeds. The Fund will use the net proceeds
          received by it from the sale of the AMPS in the manner specified in
          the Prospectus under "Use of Proceeds."

               (ix) Reporting Requirements. The Fund, during the period when the
          Prospectus is required to be delivered under the 1933 Act or the 1934
          Act, will file all documents required to be filed with the Commission
          pursuant to the 1940 Act and the 1934 Act within the time periods
          required by the 1940 Act and the Rules and Regulations and the 1934
          Act and the rules and regulations of the Commission thereunder,
          respectively.

               (x) Subchapter M. The Fund will comply with the requirements of
          Subchapter M of the Code to qualify as a regulated investment company
          under the Code.

               (xi) No Manipulation of Market for AMPS. The Fund will not (a)
          take, directly or indirectly, any action designed to cause or to
          result in, or that might reasonably be expected to constitute, the
          stabilization or manipulation of the price of any security of the Fund
          to facilitate the sale or resale of the AMPS, and (b) until the
          Closing Date, or the Date of Delivery, if any, (i) sell, bid for or
          purchase the AMPS or pay any person any compensation for soliciting
          purchases of the AMPS or (ii) pay or agree to pay to any person any
          compensation for soliciting another to purchase any other Shares of
          the Fund.

               (xii) Rule 462(b) Registration Statement. If the Fund elects to
          rely upon Rule 462(b), the Fund shall file a Rule 462(b) Registration
          Statement with the Commission in compliance with Rule 462(b) by 10:00
          P.M., Washington, D.C. time, on the date of this Agreement, and the
          Fund shall at the time of filing either pay to the Commission the
          filing fee for the Rule 462(b) Registration Statement or give
          irrevocable instructions for the payment of such fee pursuant to Rule
          111(b) under the 1933 Act.

               (xiii) Accountant's Certificate. The Fund will furnish to the
          Underwriters, on the date on which delivery is made to the Rating
          Agencies, the Accountant's Certificate (as defined in the Charter)
          corresponding to the Certificate of Dividend Coverage and Certificate
          of Eligible Asset Coverage (as defined in the Charter) for the first
          Valuation Date (as defined in the Charter)


                                       11




<PAGE>


          following the Closing Time for which an Accountant's Certificate is
          delivered to the Rating Agencies.

          (b) Except as provided in this Agreement, the Fund will not sell,
contract to sell or otherwise dispose of any of its preferred shares of
beneficial interest of the same series as the AMPS or any securities convertible
into or exercisable or exchangeable for its preferred shares of beneficial
interest of the same series as the AMPS, or grant any options or warrants to
purchase its preferred shares of beneficial interest of the same series as the
AMPS, for a period of 180 days after the date of the Prospectus, without the
prior written consent of Merrill Lynch.

          SECTION 4. Payment of Expenses.

          (a) Expenses. The Fund will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the AMPS, (iii) the preparation, issuance and delivery of the certificates
for the AMPS to the Underwriters, including any stock or other transfer taxes
and any stamp or other duties payable upon the sale, issuance or delivery of the
AMPS to the Underwriters, (iv) the fees and disbursements of the Fund's counsel,
accountants and other advisors, (v) the qualification of the AMPS under
securities laws in accordance with the provisions of Section 3(a)(vi) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus,
Prospectus and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriters of copies of the Blue Sky Survey and
any supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the AMPS, (ix) the fees and expenses incurred in connection with
the rating of the AMPS and (x) the printing of any sales material.

          (b) Termination of Agreement. If this Agreement is terminated by the
Representative in accordance with the provisions of Section 5 or Section 9(a)
hereof, the Fund and the Investment Manager, jointly and severally, agree that
they shall reimburse the Underwriters for all of their out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Underwriters.

          SECTION 5. Conditions of Underwriters' Obligations.

          The obligations of the several Underwriters hereunder are subject to
the accuracy of the representations and warranties of the Fund and the
Investment Manager contained in Section 1 hereof or in certificates of any
officer of the Fund or the Investment Manager delivered pursuant to the
provisions hereof, to the performance by the Fund and the Investment Manager of
their respective covenants and other obligations hereunder, and to the following
further conditions:

          (a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act, no notice or
order pursuant to Section 8(e) of the 1940 Act shall have been issued, and no
proceedings with respect to either shall have been initiated or threatened by
the Commission, and any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
counsel to the Underwriters. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 497 (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of


                                       12




<PAGE>


Rule 430A) or, if the Fund has elected to rely upon Rule 434, a Term Sheet shall
have been filed with the Commission in accordance with Rule 497.

          (b) Opinion of Counsel for Fund and the Investment Manager. At Closing
Time, the Representative shall have received the favorable opinions, dated as of
Closing Time, of Simpson Thacher & Bartlett LLP, counsel for the Fund, and of
Lawrence B. Stoller, Esq., internal counsel for the Investment Manager, in form
and substance satisfactory to counsel for the Underwriters, together with signed
or reproduced copies of such letters for each of the other Underwriters
substantially to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the Underwriters may reasonably request. Insofar as the
opinions expressed above relate to or are dependant upon matters governed by
Maryland law, Simpson Thacher & Bartlett LLP will be permitted to rely on the
opinion of Venable LLP.

          (c) Opinion of Counsel for Underwriters. At Closing Time, the
Representative shall have received the favorable opinion, dated as of Closing
Time, of Clifford Chance US LLP, counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
with respect to the matters set forth in clauses (A) (1), (3) through (7),
inclusive and (11) (solely as to the information in the Prospectus under
"Description of AMPS") of Exhibit A hereto. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of the State of New York and the federal law of the United States, upon the
opinions of counsel satisfactory to the Representative. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Fund and
certificates of public officials.

          (d) Officers' Certificates. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, whether or not arising in the ordinary course of
business, and the Representative shall have received a certificate of a duly
authorized officer of the Fund and of the chief financial or chief accounting
officer of the Fund and of the President or a Vice President or Managing
Director of the Investment Manager, dated as of Closing Time, to the effect that
(i) there has been no such material adverse change, (ii) the representations and
warranties in Sections 1(a) and (b) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time, (iii) each
of the Fund and the Investment Manager, respectively, has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
at or prior to Closing Time, (iv) with respect to the Investment Manager only,
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Investment Manager, whether or not arising in the ordinary course of business
and (v) to the knowledge of such officers, no stop order suspending the
effectiveness of the Registration Statement, or order of suspension or
revocation of registration pursuant to Section 8(e) of the 1940 Act, has been
issued and no proceedings for any such purpose have been instituted or are
pending or are contemplated by the Commission.

          (e) Independent Registered Public Accounting Firm's Comfort Letter. At
the time of the execution of this Agreement, the Representatives shall have
received from PricewaterhouseCoopers LLP a letter dated such date, in form and
substance satisfactory to the Representatives, together with signed or
reproduced copies of such letter for each of the other Underwriters containing
statements and information to the effect that:

               (i) They are an independent registered public accounting firm
          with respect to the Fund within the meaning of the 1933 Act and 1940
          Act, and the applicable rules and regulations thereunder adopted by
          the Commission;

               (ii) In their opinion, the financial statements of the Fund
          audited by them and included in the Registration Statement comply as
          to form in all material respects with the applicable


                                       13




<PAGE>


          accounting requirements of the 1933 Act and 1940 Act and the related
          rules and regulations adopted by the Commission;

               (iii) On the basis of procedures (but not an audit in accordance
          with the standards of the Public Accounting Oversight Board (United
          States)) consisting of:

               a.   Reading the minutes of meetings of the Board of Directors of
                    the Fund as set forth in the minute books through a
                    specified date not more than three business days prior to
                    the date of delivery of such letter;

               b.   Performing procedures specified by the American Institute of
                    Certified Public Accountants for a review of interim
                    financial information as described in SAS 100, Interim
                    Financial Information, on the unaudited financial statements
                    of the Fund included in the Registration Statement and
                    reading the unaudited interim financial data for the period
                    from the date of the latest statement of assets and
                    liabilities included in the Registration Statement to the
                    date of the latest available interim financial data; and

               c.   Making inquiries of certain officials of the Fund who have
                    responsibility for financial and accounting matters
                    regarding changes in the capital stock, net assets or long
                    term liabilities of the Fund as compared with the amounts
                    shown in the latest balance sheet included in the
                    Registration Statement or for the period from the date of
                    the latest income statement included in the Registration
                    Statement to a specified date not more than three business
                    days prior to the delivery of such letter.

          Nothing has come to their attention as a result of the foregoing
          procedures that caused them to believe that:

               d.   The unaudited interim financial statements, included in the
                    Registration Statement, do not comply as to form in all
                    material respects with the applicable accounting
                    requirements of the 1933 Act, the 1940 Act and the Rules and
                    Regulations;

               e.   Any material modifications should be made to the unaudited
                    interim financial statements, included in the Registration
                    Statement, for them to be in conformity with generally
                    accepted accounting principles;

               f.   At the date of the latest available interim financial data
                    and at a specified date not more than three business days
                    prior to the date of delivery of such letter, there were any
                    changes in the total assets, total liabilities, net assets
                    and common shares outstanding of the Fund as compared with
                    the amounts shown in the latest balance sheet included in
                    the Registration Statement.

               (iv) The letter shall also state that the information set forth
          under the captions "Prospectus Summary - The Fund," "Prospectus
          Summary - Asset Maintenance," "Financial Highlights," "The Fund,"
          "Capitalization (Unaudited)" and "Description of AMPS - Rating Agency
          Guidelines" which is expressed in dollars (or percentages derived from
          such dollar amounts) and has been obtained from accounting records
          which are subject to controls over financial reporting or which has
          been derived directly from such accounting records by analysis or
          computation, is in agreement with such records or computations made
          therefrom, and such other procedures as the Representative may request
          and PricewaterhouseCoopers LLP are willing to perform and report upon.


                                       14




<PAGE>


          (f) Bring-down Comfort Letter. At Closing Time, the Representative
shall have received from PricewaterhouseCoopers LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.

          (g) Rating. The Fund shall have delivered and you shall have received
evidence satisfactory to you that the AMPS are rated 'Aaa' by Moody's and 'AAA'
by S&P as of the Closing Date, and there shall not have been given any notice of
any intended or potential downgrading, or of any review for a potential
downgrading, in the rating accorded to the AMPS or any other securities issued
by the Fund, by Moody's or by S&P.

          (h) Asset Coverage. As of the Closing Date and assuming the receipt of
the net proceeds from the sale of the AMPS, the 1940 Act Preferred Shares Asset
Coverage and the Preferred Shares Basic Maintenance Amount (each as defined in
the Charter) each will be met.

          (i) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the AMPS as herein contemplated, or in order
to evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Fund and the Investment Manager in connection with the organization
and registration of the Fund under the 1940 Act and the issuance and sale of the
AMPS as herein contemplated shall be satisfactory in form and substance to the
Representative and counsel for the Underwriters.

          (j) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representative by notice to the Fund at any
time at or prior to Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4 and
except that Sections 1, 6, 7, 8 and 13 shall survive any such termination and
remain in full force and effect.

          SECTION 6. Indemnification.

          (a) Indemnification of Underwriters. The Fund and the Investment
Manager, jointly and severally, agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, as follows:

               (i) against any and all loss, liability, claim, damage and
          expense whatsoever, as incurred, arising out of any untrue statement
          or alleged untrue statement of a material fact contained in the
          Registration Statement (or any amendment thereto), including the Rule
          430A Information and the Rule 434 Information, if applicable, or the
          omission or alleged omission therefrom of a material fact required to
          be stated therein or necessary to make the statements therein not
          misleading or arising out of any untrue statement or alleged untrue
          statement of a material fact included in any preliminary prospectus or
          the Prospectus (or any amendment or supplement thereto), or the
          omission or alleged omission therefrom of a material fact necessary in
          order to make the statements therein, in the light of the
          circumstances under which they were made, not misleading;

               (ii) against any and all loss, liability, claim, damage and
          expense whatsoever, as incurred, to the extent of the aggregate amount
          paid in settlement of any litigation, or any investigation or
          proceeding by any governmental agency or body, commenced or
          threatened, or of any claim whatsoever based upon any such untrue
          statement or omission, or any such alleged untrue statement or
          omission; provided that (subject to Section 6(e) below) any such
          settlement is effected with the written consent of the Fund; and


                                       15




<PAGE>


               (iii) against any and all expense whatsoever, as incurred
          (including the fees and disbursements of counsel chosen by Merrill
          Lynch), reasonably incurred in investigating, preparing or defending
          against any litigation, or any investigation or proceeding by any
          governmental agency or body, commenced or threatened, or any claim
          whatsoever based upon any such untrue statement or omission, or any
          such alleged untrue statement or omission, to the extent that any such
          expense is not paid under (i) or (ii) above;

provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Fund or the
Investment Manager by any Underwriter through Merrill Lynch expressly for use in
the Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); provided,
however, that the indemnification contained in this paragraph (a) with respect
to any preliminary prospectus shall not inure to the benefit of any Underwriter
(or to the benefit of any person controlling such Underwriter) on account of any
such loss, claim, damage, liability or expense arising from the sale of the AMPS
by such Underwriter to any person if the Fund sustains the burden of proof that
a copy of the Prospectus has not been delivered or sent by the Underwriters as
required to such person within the time required by the 1933 Act and the Rules
and Regulations, and the untrue statement or alleged untrue statement or
omission or alleged omission of a material fact contained in such preliminary
prospectus was corrected in such Prospectus.

          (b) Indemnification of Fund, Investment Manager, Directors and
Officers. Each Underwriter severally agrees to indemnify and hold harmless the
Fund and the Investment Manager, their respective directors, each of the Fund's
officers who signed the Registration Statement, and each person, if any, who
controls the Fund or the Investment Manager within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Fund or the Investment
Manager by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).

          (c) Indemnification for Marketing Materials. In addition to the
foregoing indemnification, the Fund and the Investment Manager also, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act, against any and all loss, liability,
claim, damage and expense described in the indemnity contained in Section 6(a),
as limited by the proviso set forth therein, with respect to any sales material.

          (d) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Fund and the Investment
Manager. An indemnifying party may participate at its own expense in the


                                       16




<PAGE>


defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.

          (e) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.

          SECTION 7. Contribution.

          If the indemnification provided for in Section 6 hereof is for any
reason unavailable to or insufficient to hold harmless an indemnified party in
respect of any losses, liabilities, claims, damages or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
of such losses, liabilities, claims, damages and expenses incurred by such
indemnified party, as incurred, (i) in such proportion as is appropriate to
reflect the relative benefits received by the Fund and the Investment Manager on
the one hand and the Underwriters on the other hand from the offering of the
AMPS pursuant to this Agreement or (ii) if the allocation provided by clause (i)
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Fund and the Investment Manager on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.

          The relative benefits received by the Fund and the Investment Manager
on the one hand and the Underwriters on the other hand in connection with the
offering of the AMPS pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
AMPS pursuant to this Agreement (before deducting expenses) received by the Fund
and the total underwriting discount received by the Underwriters (whether from
the Fund or otherwise), in each case as set forth on the cover of the
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the AMPS as set
forth on such cover.

          The relative fault of the Fund and the Investment Manager on the one
hand and the Underwriters on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Fund or the Investment Manager or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.


                                       17




<PAGE>


          The Fund, the Investment Manager and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.

          Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the AMPS underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.

          No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.

          For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Fund and each director of the Investment Manager,
respectively, each officer of the Fund who signed the Registration Statement,
and each person, if any, who controls the Fund or the Investment Manager, within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Fund and the Investment Manager,
respectively. The Underwriters' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Shares set forth
opposite their respective names in Schedule A hereto and not joint.

          SECTION 8. Representations, Warranties and Agreements to Survive
Delivery.

          All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Fund or the Investment Manager
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or
controlling person, or by or on behalf of the Fund or the Investment Manager,
and shall survive delivery of the AMPS to the Underwriters.

          SECTION 9. Termination of Agreement.

          (a) Termination; General. The Representative may terminate this
Agreement, by notice to the Fund, at any time at or prior to Closing Time (i) if
there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Fund or the Investment
Manager, whether or not arising in the ordinary course of business, or (ii) if
there has occurred any material adverse change in the financial markets in the
United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representative, impracticable or
inadvisable to market the AMPS or to enforce contracts for the sale of the AMPS,
or (iii) if trading in the shares of common stock of the Fund has been suspended
or materially limited by the Commission or the NYSE, or if trading generally on
the American Stock Exchange or the NYSE or in the Nasdaq National Market has
been suspended or materially limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for


                                       18




<PAGE>


prices have been required, by any of said exchanges or by such system or by
order of the Commission, the NASD or any other governmental authority, or a
material disruption has occurred in commercial banking or securities settlement
or clearance services in the United States, or (iv) if a banking moratorium has
been declared by either Federal or New York authorities.

          (b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7, 8 and 13 shall survive such termination and remain in full force and
effect.

          SECTION 10. Default by One or More of the Underwriters.

          If one or more of the Underwriters shall fail at Closing Time or a
Date of Delivery to purchase the AMPS which it or they are obligated to purchase
under this Agreement (the "Defaulted AMPS"), the Representative shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted AMPS in such amounts as may be agreed upon and
upon the terms herein set forth; if, however, the Representative shall not have
completed such arrangements within such 24-hour period, then:

          (a) if the number of Defaulted AMPS does not exceed 10% of the number
of AMPS to be purchased on such date, each of the non-defaulting Underwriters
shall be obligated, severally and not jointly, to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or

          (b) if the number of Defaulted AMPS exceeds 10% of the number of AMPS
to be purchased on such date, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriter.

          No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.

          In the event of any such default which does not result in a
termination of this Agreement, either the Representative or the Fund shall have
the right to postpone Closing Time for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or Prospectus
or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.

          SECTION 11. Tax Disclosure.

          Notwithstanding any other provision of this Agreement, from the
commencement of discussions with respect to the transactions contemplated
hereby, the Fund and the Investment Manager (and each employee, representative
or other agent of the Fund) may disclose to any and all persons, without
limitation of any kind, the tax treatment and tax structure (as such terms are
used in Sections 6011, 6111 and 6112 of the U.S. Code and the Treasury
Regulations promulgated thereunder) of the transactions contemplated by this
Agreement and all materials of any kind (including opinions or other tax
analyses) that are provided relating to such tax treatment and tax structure.

          SECTION 12. Notices.

          All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed to the
Representative, c/o Merrill Lynch & Co., 4 World Financial Center, New York, New
York 10080, attention of Equity Capital Markets; and notices to the Fund or the
Investment Manager shall be directed, as appropriate, to the office of Cohen &
Steers Capital Management, Inc. at 757 Third Avenue, New York, New York 10017,
Attention: Robert H. Steers.


                                       19




<PAGE>


          SECTION 13. Parties.

          This Agreement shall each inure to the benefit of and be binding upon
the Underwriters, the Fund, the Investment Manager and their respective partners
and successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Fund, the Investment Manager and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 and their heirs and legal Representative, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the Underwriters, the Fund, the
Investment Manager and their respective partners and successors, and said
controlling persons and officers, directors and their heirs and legal
Representative, and for the benefit of no other person, firm or corporation. No
purchaser of Shares from any Underwriter shall be deemed to be a successor by
reason merely of such purchase.

          SECTION 14. GOVERNING LAW AND TIME.

          THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED IN SAID STATE. UNLESS OTHERWISE EXPLICITLY PROVIDED, SPECIFIED TIMES
OF DAY REFER TO NEW YORK CITY TIME.

          SECTION 15. Effect of Headings.

          The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.


                                       20




<PAGE>


          If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Underwriters, the Fund and the Investment Manager in accordance with its
terms.

                                      Very truly yours,

                                      Cohen & Steers Quality Income Realty Fund,
                                         Inc.


                                      By:
                                          --------------------------------------
                                          Name:
                                          Title:


                                      Cohen & Steers Capital Management, Inc.


                                      By:
                                          --------------------------------------
                                          Name:
                                          Title:

CONFIRMED AND ACCEPTED,
   as of the date first above written:

MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED


By: MERRILL LYNCH, PIERCE, FENNER & SMITH
    INCORPORATED


By:
    -------------------------------
    Name:
    Authorized Signatory

For itself and as
Representative of the
other Underwriters named
in Schedule A hereto.


                                       21




<PAGE>


                                   SCHEDULE A

<TABLE>
<CAPTION>
                                                  Number of
           Name of Underwriter             Shares - Series M7 AMPS
           -------------------             -----------------------
<S>                                        <C>
Merrill Lynch, Pierce, Fenner & Smith
            Incorporated ...............

Citigroup Global Markets Inc.

A.G. Edwards & Sons, Inc.

UBS Securities LLC

Wachovia Capital Markets, LLC

   Total ...............................
</TABLE>


                                     Sch A-1




<PAGE>


                                   SCHEDULE B

                 COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
                       [___] Shares [___]% AMPS, Series M7
                    Liquidation Preference $25,000 per share

          1. The initial public offering price per share for the AMPS,
determined as provided in said Section 2, shall be $25,000.

          2. The purchase price per share for the AMPS to be paid by the several
Underwriters shall be $24,750, such discount from the initial public offering
price representing the commission to be paid to the Underwriters for their
commitment hereunder of $250.

          3. The initial dividend rate on the AMPS, Series M7 shall be [___]%
per annum.


                                     Sch B-1




<PAGE>


                                                                       Exhibit A

               FORM OF OPINION OF FUND'S AND INVESTMENT MANAGER'S
                       COUNSEL TO BE DELIVERED PURSUANT TO
                                  SECTION 5(b)

With respect to the Fund:

     1.   The Fund (A) has been duly incorporated and is validly existing and in
          good standing as a corporation under the laws of the State of Maryland
          with full corporate power and authority to conduct its business as
          described in the Registration Statement and the Prospectus and to
          enter into and perform its obligations under the Purchase Agreement,
          and (B) is duly registered and qualified to conduct its business and
          is in good standing in the State of New York (which is the only
          jurisdiction identified by management of the Fund to us in which the
          Fund owns or leases property or operates or conducts its business);

     2.   The statements made in the Prospectus under the captions "Description
          of Common Shares," insofar as they purport to constitute summaries of
          the terms of the Fund's capital stock, constitute accurate summaries
          of the terms of the Fund's capital stock in all material respects;

     3.   All outstanding shares of capital stock of the Fund have been duly
          authorized and validly issued by the Fund, and are fully paid and
          nonassessable;

     4.   The Shares have been duly authorized and, when issued and delivered to
          the Underwriters against payment therefor in accordance with the terms
          of the Purchase Agreement, will be validly issued by the Fund, fully
          paid and nonassessable. There are no preemptive rights under federal
          or New York law or under the Maryland General Corporation Law to
          subscribe for or purchase shares of the Fund's capital stock. There
          are no preemptive or other rights to subscribe for or to purchase, nor
          any restriction upon the issuance, voting or, transfer of, any shares
          of the Fund's capital stock pursuant to the Fund's Charter or Bylaws
          except for certain transfer restrictions with respect to the Shares
          and with respect to other series of Taxable Auction Market Preferred
          Shares ("AMPS") and certain restrictions on the future issuance of
          shares of capital stock set forth in the Articles Supplementary and in
          the articles supplementary establishing the terms of the other series
          of AMPS;

     5.   The form of the certificates for the Shares conforms to the
          requirements of the Maryland General Corporation Law;

     6.   The Registration Statement and all post-effective amendments, if any,
          have become effective under the 1933 Act and, to our knowledge, no
          stop order suspending the effectiveness of the Registration Statement
          or order pursuant to Section 8(e) of the 1940 Act has been issued and
          no proceedings for that purpose are pending before or threatened by
          the Commission; and any required filing of the Prospectus pursuant to
          Rule 497 of the 1933 Act Rules and Regulations has been made in
          accordance with Rule 497;

     7.   (A) The Purchase Agreement and each of the Advisory Agreement dated as
          of February 25, 2002 between the Fund and the Investment Manager (the
          "Advisory Agreement"), the Administration Agreement dated as of
          February 25, 2002 between the Fund and the Investment Manager (the
          "Administration Agreement"), the Master Custodian Agreement dated as
          of March 9, 2001 and effective with respect to Fund as of February 15,
          2002 between the Fund and State Street Bank and Trust Company (the
          "Custodian Agreement"), the agreement dated as of March 12, 2001 and


                                       A-1




<PAGE>


          effective with respect to Fund as of February 22, 2002 between the
          Fund and State Street Bank and Trust Company (the "Sub-Administration
          Agreement"), and the Auction Agency Agreement, dated as of September
          15, 2003, between the Fund and The Bank of New York (the "Auction
          Agency Agreement"; collectively with the Advisory Agreement,
          Administration Agreement, Custodian Agreement and Sub-Administration
          Agreement, the "Fund Agreements") have been duly authorized, executed
          and delivered by the Fund and (B) the Advisory Agreement, assuming
          that the Advisory Agreement is the valid and legally binding
          obligation of the other parties thereto, is a valid and legally
          binding agreement of the Fund, enforceable against the Fund in
          accordance with its terms, subject to (i) the effects of bankruptcy,
          insolvency, fraudulent conveyance, reorganization, moratorium and
          other similar laws relating to or affecting creditors' rights
          generally, (ii) to general equitable principles (whether considered in
          a proceeding in equity or at law) and (iii) an implied covenant of
          good faith and fair dealing, and except as the enforceability thereof
          may be limited by considerations of public policy;

     8.   The issue and sale of the Shares by the Fund and the compliance by the
          Fund with the provisions of the Purchase Agreement and the Fund
          Agreements will not breach or result in a default under or result in
          the creation or imposition of any lien, charge, or encumbrance upon
          any property or assets of the Fund pursuant to any indenture,
          mortgage, deed of trust, loan agreement or other agreement or
          instrument filed or incorporated by reference as an exhibit to the
          Registration Statement, nor will such action violate the Charter,
          Articles Supplementary or Bylaws of the Fund or any federal or New
          York statute or any rule or regulation thereunder or the Maryland
          General Corporation Law or order known to us issued pursuant to any
          federal or New York statute or the Maryland General Corporation Law by
          any New York or Maryland court or governmental agency or body having
          jurisdiction over the Fund or any of its properties;

     9.   No consent, approval, authorization, order, registration, filing or
          qualification of or with any federal or New York governmental agency
          or body or any Maryland governmental agency or body acting pursuant to
          the Maryland General Corporation Law or, to our knowledge, any federal
          or New York court or any Maryland court acting pursuant to the
          Maryland General Corporation Law is required for the issue and sale of
          the Shares by the Fund and the compliance by the Fund with all of the
          provisions of the Purchase Agreement and the Fund Agreements, except
          for the registration with the Commission under the 1940 Act of the
          Fund as an investment company which has occurred and the registration
          of the Shares under the 1933 Act and under the 1940 Act pursuant to
          the Registration Statement, which has been filed and has become
          effective, and such consents, approvals, authorizations,
          registrations, filings or qualifications as have been made or as may
          be required under state securities or Blue Sky laws in connection with
          the purchase and distribution of the Shares by the Underwriters;

     10.  To our knowledge, (A) other than as described or contemplated in the
          Registration Statement or Prospectus, there are no legal or
          governmental proceedings pending or threatened against the Fund, or to
          which the Fund or any of its properties is subject, and (B) there are
          no agreements, contracts, indentures, leases or other instruments that
          are required to be described in the Registration Statement or the
          Prospectus or to be filed as an exhibit to the Registration Statement
          that are not described or filed as required, as the case may be;

     11.  The statements made in the Prospectus under the captions "Management
          of the Fund," "Description of Common Shares," "Description of AMPS,"
          "The Auction" and in the Registration Statement under Item 29
          (Indemnification), insofar as they purport to constitute summaries of
          the terms of the Maryland General Corporation Law or any federal
          statutes, rules and regulations thereunder or contracts and other
          documents, constitute accurate summaries of the terms of such
          statutes, rules and regulations or contracts and other documents in
          all material respects;


                                       A-2




<PAGE>


     12.  The statements made in the Prospectus and Statement of Additional
          Information under the captions "U.S. Federal Taxation," insofar as
          they purport to constitute summaries of matters of United States
          federal tax law and regulations or legal conclusions with respect
          thereto, constitute accurate summaries of the matters described
          therein in all material respects;

     13.  Each of the Fund Agreements complies as to form with all applicable
          provisions of the 1940 Act, the Investment Advisers Act of 1940, as
          amended (the "Advisers Act") and the rules and regulations under the
          1940 Act and the Advisers Act;

     14.  The Fund has been duly registered with the Commission under the 1940
          Act and the rules and regulations under the 1940 Act (the "1940 Act
          Rules and Regulations") as a closed-end, non-diversified management
          investment company and, to our knowledge, no order of suspension or
          revocation of such registration under the 1940 Act and the 1940 Act
          Rules and Regulations has been issued or proceedings therefor
          initiated or threatened by the Commission; the provisions of the
          Charter, Articles Supplementary and Bylaws do not violate the
          provisions of the 1940 Act or the 1940 Act Rules and Regulations; and
          the provisions of the Charter, Articles Supplementary and the Bylaws
          and the investment policies and restrictions described in the
          Registration Statement and the Prospectus under the captions
          "Investment Objectives and Policies" and "Risk Factors" and
          "Investment Restrictions" (in the Prospectus and the Statement of
          Additional Information incorporated by reference therein) comply in
          all material respects with the requirements of the 1940 Act and the
          applicable 1940 Act Rules and Regulations; and

     15.  Except as described in the Prospectus, there are no outstanding
          options, warrants or other rights calling for the issuance of, and we
          do not know of any commitment, plan or arrangement to issue (other
          than in connection with the reinvestment of dividends) any shares of
          capital stock of the Fund or any security convertible into or
          exchangeable or exercisable for shares of capital stock of the Fund or
          to otherwise register such securities for sale.

          Insofar as the opinions expressed herein relate to or are dependent
upon matters governed by the laws of the State of Maryland, we have relied upon
the opinion of Venable LLP.

          We have not independently verified the accuracy, completeness or
fairness of the statements made or included in the Registration Statement or the
Prospectus and take no responsibility therefor, except as and to the extent set
forth in paragraphs 2, 11 and 12 above. In the course of the preparation by the
Fund of the Registration Statement and the Prospectus, we participated in
conferences with certain officers and employees of the Fund and the Investment
Manager, with representatives of PricewaterhouseCoopers LLP and with counsel to
the Investment Manager. Based upon our examination of the Registration Statement
and the Prospectus, our investigations made in connection with the preparation
of the Registration Statement and the Prospectus and our participation in the
conferences referred to above, (i) we are of the opinion that the Registration
Statement, as of its effective date, and the Prospectus, as of its date complied
as to form in all material respects with the requirements of the 1933 Act and
the 1940 Act and the applicable rules and regulations of the Commission
thereunder, except that in each case we express no opinion with respect to the
financial statements or other financial data contained or incorporated by
reference in the Registration Statement or the Prospectus, and (ii) we have no
reason to believe that the Registration Statement, at the time the Registration
Statement became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading or that the Prospectus as of
November [__], 2004 contained, or as of the date hereof contains, any untrue
statement of a material fact, or as of November [__], 2004 omitted, or as of the
date hereof omits, to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that in each case we express no belief with respect
to the financial


                                       A-3




<PAGE>


statements or other financial data contained or incorporated by reference in the
Registration Statement or the Prospectus.

With respect to the Investment Manager:

     1.   The Investment Manager (A) has been duly incorporated and is validly
          existing as a corporation under the laws of the State of New York with
          full corporate power and authority to conduct its business as
          described in the Registration Statement and the Prospectus and (B) is
          duly registered and qualified to conduct its business and is in good
          standing in the State of New York (which is the only jurisdiction in
          which the Investment Manager owns or leases property or operates or
          conducts its business).

     2.   The Investment Manager is duly registered with the Commission as an
          investment adviser under the Investment Advisers Act of 1940, as
          amended (the "Advisers Act") and is not prohibited by the Advisers
          Act, the rules and regulations under the Advisers Act (the "Advisers
          Act Rules and Regulations"), the 1940 Act or the rules and regulations
          under the 1940 Act from acting under the Advisory Agreement dated as
          of June 24, 2003 between the Fund and the Investment Manager (the
          "Advisory Agreement"), for the Fund as contemplated by the Prospectus;
          and to my knowledge, no order of suspension or revocation of such
          registration under the Advisers Act and the Advisers Act Rules and
          Regulations has been issued and no proceedings for that purpose are
          pending before or threatened by the Commission;

     3.   Each of the Purchase Agreement and the Advisory Agreement has been
          duly authorized, executed and delivered by the Investment Manager and,
          the Advisory Agreement, assuming that the Advisory Agreement is the
          valid and legally binding agreement of the other parties thereto, is a
          valid and legally binding agreement of the Investment Manager,
          enforceable against the Investment Manager in accordance with its
          terms subject to (i) the effects of bankruptcy, insolvency, fraudulent
          conveyance, reorganization, moratorium and other similar laws relating
          to or affecting creditors' rights generally, (ii) by general equitable
          principles (whether considered in a proceeding in equity or at law)
          and (iii) an implied covenant of good faith and fair dealing, and
          except as the enforceability thereof may by limited by considerations
          of public policy;

     4.   Neither the execution, delivery or performance of the Purchase
          Agreement or the Advisory Agreement by the Investment Manager or
          compliance by the Investment Manager with the provisions of the
          Purchase Agreement or the Advisory Agreement nor consummation by the
          Investment Manager of the transactions contemplated hereby and thereby
          will breach or result in a default under any indenture, mortgage, deed
          of trust, loan agreement or other agreement or instrument to which the
          Investment Manager is a party or by which its properties are bound
          except where breach or default would not reasonably be expected to
          have a material adverse effect on the ability of the Investment
          Manager to perform its obligations under the Purchase Agreement and
          the Advisory Agreement, nor will such action violate the charter or
          by-laws of the Investment Manager or any federal or New York statute
          or any rules or regulations thereunder or order known to me issued
          pursuant to any federal or New York statute by any court or
          governmental agency or body having jurisdiction over the Investment
          Manager or any of its properties;

     5.   No consent, approval, authorization, order, registration, filing or
          qualification of or with any federal or New York governmental agency
          or body or, to my knowledge, any federal or New York court is required
          on the part of the Investment Manager for the execution, delivery and
          performance by the Investment Manager of the Purchase Agreement and
          the Advisory


                                       A-4




<PAGE>


          Agreement, except such consents, approvals, authorizations, orders,
          registrations, filings or qualifications as have been obtained or made
          prior to the date hereof;

     6.   To my knowledge, there are no legal or governmental proceedings
          pending or threatened against the Investment Manager, or to which the
          Investment Manager or any of its properties is subject, which are
          required to be described in the Registration Statement or Prospectus
          that are not described as required or which may reasonably be expected
          to involve a prospective material adverse change in the ability of the
          Investment Manager to perform its obligations under the Purchase
          Agreement and the Advisory Agreement.

          I have not independently verified the accuracy, completeness or
fairness of the statements made or included in the Registration Statement or the
Prospectus and take no responsibility therefor. In the course of the preparation
by the Fund of the Registration Statement and the Prospectus, I participated in
conferences with certain officers and employees of the Fund and the Investment
Manager, with representatives of PricewaterhouseCoopers LLP and with counsel to
the Fund. Based upon my examination of the Registration Statement and the
Prospectus, my investigations made in connection with the preparation of the
Registration Statement and the Prospectus and my participation in the
conferences referred to above, I have no reason to believe that the Registration
Statement, at the time the Registration Statement became effective, contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein not
misleading or that the Prospectus contains any untrue statement of material fact
or omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, except I express no belief with respect to the financial statements
or other financial data contained or incorporated by reference in the
Registration Statement or the Prospectus.


                                       A-5

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2K
<SEQUENCE>5
<FILENAME>ex99-2kiv.txt
<DESCRIPTION>EXHIBIT 2(K)(IV)
<TEXT>


<PAGE>


                                                                Exhibit 2(k)(iv)

                 COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

                                   ----------

                            AUCTION AGENCY AGREEMENT

                         dated as of November ___, 2004

                                    Relating

                   to Auction Market Preferred Shares (AMPS),

                                    Series M7

                                       of

                 COHEN & STEERS QUALITY INCOME REALTY FUND, INC.

                                   ----------

                              THE BANK OF NEW YORK
                                as Auction Agent




<PAGE>


     This Auction Agency Agreement (this "Agreement"), dated as of November ___,
2004, is between COHEN & STEERS QUALITY INCOME REALTY FUND, INC. (the "Fund")
and The Bank of New York, a New York banking corporation.

     The Fund proposes to issue one series of preferred shares, par value $.001
per share, designated Series M7 Taxable Auction Market Preferred Shares,
liquidation preference $25,000 per share (the "AMPS"), pursuant to the Fund's
Articles Supplementary (as defined below).

     The Fund desires that The Bank of New York perform certain duties as agent
in connection with each Auction (as defined below) of AMPS (in such capacity,
the "Auction Agent"), and as the transfer agent, registrar, dividend paying
agent and redemption agent with respect to the AMPS (in such capacity, the
"Paying Agent"), upon the terms and conditions of this Agreement, and the Fund
hereby appoints The Bank of New York as said Auction Agent and Paying Agent in
accordance with those terms and conditions (hereinafter generally referred to as
the "Auction Agent," except in Sections 3 and 4 below).

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Fund and the Auction Agent agree as follows:

I.   DEFINITIONS AND RULES OF CONSTRUCTION.

     1.1 Terms Defined by Reference to the Articles Supplementary.

     Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary.

     1.2 Certain Defined Terms.

     As used herein, the following terms shall have the following meanings,
unless the context otherwise requires:

          (a) "Agent Member" of any Person shall mean such Person's agent member
of a participant in the Securities Depository that will act on behalf of a
Bidder.

          (b) "Articles Supplementary" shall mean the Articles Supplementary
dated November ___, 2004 specifying the powers, preferences and rights of the
AMPS attached as Exhibit B to the Statement of Additional Information relating
to the AMPS dated November ___, 2004.

          (c) "Auction" shall have the meaning specified in Section 2.1 hereof.

          (d) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Part II of the Articles Supplementary.

          (e) "Authorized Officer" shall mean each Vice President, Assistant
Vice President and Assistant Treasurer of the Auction Agent and every other
officer or employee of the Auction Agent designated as an "Authorized Officer"
for purposes hereof in a written communication from the Auction Agent to the
Fund.

          (f) "Broker-Dealer Agreement" shall mean each agreement between the
Auction Agent and a broker-dealer substantially in the form attached hereto as
Exhibit A.




<PAGE>


          (g) "Closing" shall mean the date the Fund consummates the
transactions for the issuance and sale of the AMPS.

          (h) "Fund Officer" shall mean the Chairman, the President, each Vice
President (whether or not designated by a number or word or words added before
or after the title "Vice President"), the Secretary, the Treasurer, each
Assistant Secretary and each Assistant Treasurer of the Fund and every other
officer or employee of the Fund designated as a "Fund Officer" for purposes
hereof in a written notice from the Fund to the Auction Agent.

          (i) "Holder" shall be a holder of record of one or more AMPS, listed
as such in the share register maintained by the Paying Agent pursuant to Section
4.6 hereof.

          (j) "Interest Equivalent" means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an equivalent
interest-bearing security.

     1.3 Rules of Construction.

     Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

II.  THE AUCTION.

     2.1 Purpose; Incorporation by Reference of Auction Procedures.

          (a) The Articles Supplementary provides that the Applicable Rate on
the AMPS for each Dividend Period therefor after the initial Dividend Period
shall be the rate per annum that a commercial bank, trust company or other
financial institution appointed by the Fund advises results from the
implementation of the Auction Procedures. The Board of Directors of the Fund has
adopted a resolution appointing The Bank of New York as Auction Agent for
purposes of the Auction Procedures. The Auction Agent hereby accepts such
appointment and agrees that, on each Auction Date, it shall follow the
procedures set forth in this Section 2 and the Auction Procedures for the
purpose of determining the Applicable Rate for the AMPS for the next Dividend
Period. Each periodic operation of such procedures is hereinafter referred to as
an "Auction."

          (b) All of the provisions contained in the Auction Procedures are
incorporated herein by reference in their entirety and shall be deemed to be a
part hereof to the same extent as if such provisions were set forth fully
herein.


                                        2




<PAGE>


     2.2 Preparation for Each Auction; Maintenance of Registry of Existing
Holders.

          (a) As of the date hereof, the Fund shall provide the Auction Agent
with a list of the Broker-Dealers previously approved by the Auction Agent and
shall cause to be delivered to the Auction Agent for execution by the Auction
Agent a Broker-Dealer Agreement signed by each such Broker-Dealer. The Auction
Agent shall keep such list current and accurate based upon information provided
to it by Broker-Dealers and shall indicate thereon, or on a separate list, the
identity of each Existing Holder, if any, whose most recent Order was submitted
by a Broker-Dealer on such list and resulted in such Existing Holder continuing
to hold or purchase AMPS. Not later than five Business Days prior to any Auction
Date for which any change in such list of Broker-Dealers is to be effective, the
Fund shall notify the Auction Agent in writing of such change and, if any such
change is the addition of a Broker-Dealer to such list, the Fund shall cause to
be delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement signed by such Broker-Dealer. The Auction Agent shall
have entered into a Broker-Dealer Agreement with each Broker-Dealer prior to the
participation of any such Broker-Dealer in any Auction.

          (b) The provisions contained in Section 4 of Part I of the Articles
Supplementary concerning Special Dividend Periods and the notification of a
Special Dividend Period will be followed by the Fund and, to the extent
applicable, the Auction Agent, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.

          (c) The Applicable Percentage and the Applicable Spread on the date of
the Agreement are those rates as determined by the Fund and provided to the
Auction Agent on the date even herewith. If there is any change in the credit
rating of AMPS by the rating agency (or substitute or successor rating agencies)
referred to in the definition of "Applicable Percentage" and "Applicable Spread"
resulting in any change in the Applicable Percentage or Applicable Spread for
AMPS after the date given herewith, the Fund shall notify the Auction Agent in
writing of such change in the Applicable Percentage or Applicable Spread prior
to 12:00 Noon on the Business Day prior to the next Auction Date for any series
of AMPS succeeding such change. In determining the Maximum Rate for any series
of AMPS on any Auction Date as set forth in 2.5(a)(i) hereof, the Auction Agent
shall be entitled to rely on the last Applicable Percentage and Applicable
Spread for AMPS of which it has most recently received notice from the Fund (or,
in the absence of such notice, the percentage or spread determined by reference
to the definition of Applicable Percentage and Applicable Spread, respectively).

          (d) (i) On each Auction Date, the Auction Agent shall determine the
dividend rate and the Maximum Rate. If any Treasury Index Rate is not quoted on
an interest or bond equivalent, as the case may be, basis, the Auction Agent
shall convert the quoted rate to the interest or bond equivalent thereof as set
forth in the definition of such rate in the Articles Supplementary if the rate
obtained by the Auction Agent is quoted on a discount basis, or if such rate is
quoted on a basis other than an interest or bond equivalent or discount basis
the Auction Agent shall convert the quoted rate to an interest or bond
equivalent rate after consultation with the Fund as to the method of such
conversion.

               (ii) If any LIBOR Rate is to be determined by reference to
Moneyline's Telerate Page 3750 or by rate quotations provided by LIBOR
Dealer(s), as the case may be, and Moneyline's Telerate Page 3750 is unavailable
or the LIBOR Dealer(s) fail to provide rate quotations, as the case may be (as
described in the Articles Supplementary), then the Auction Agent shall
immediately notify the Fund so that the Fund can determine whether to select a
Substitute LIBOR Dealer(s) to provide such rate quotation(s) not being supplied.


                                        3




<PAGE>


               (iii) If any Treasury Index Rate is to be based on rates supplied
by U.S. Government Securities Dealers and one or more of the U.S. Government
Securities Dealers shall not provide a quotation for the determination of such
Treasury Index Rate, the Auction Agent shall immediately notify the Fund so that
the Fund can determine whether to select a substitute U.S. Government Securities
Dealer or substitute U.S. Government Securities Dealers to provide the quotation
or quotations not being supplied by any U.S. Government Securities Dealer or
U.S. Government Securities Dealers. The Fund shall promptly advise the Auction
Agent of any such selection.

          (e) (i) The Auction Agent shall maintain a current registry of the
Existing Holders of the AMPS based upon information provided to it by
Broker-Dealers for purposes of each individual Auction. The Fund shall use
commercially reasonable efforts to provide or cause to be provided to the
Auction Agent within ten Business Days following the date of the Closing a list
of the initial Existing Holders of AMPS, and the Broker-Dealer of each such
Existing Holder through which such Existing Holder purchased such shares. The
Auction Agent may conclusively rely upon, as evidence of the identities of the
Existing Holders, such list, the results of each Auction and notices from any
Existing Holder, the Agent Member of any Existing Holder or the Broker-Dealer of
any Existing Holder with respect to such Existing Holder's transfer of any AMPS
to another Person.

               (ii) In the event of any partial redemption of AMPS, upon notice
in writing by the Fund to the Auction Agent of such partial redemption, the
Auction Agent promptly shall request the Securities Depository to notify the
Auction Agent in writing of the identities of the Agent Members (and the
respective numbers of shares) from the accounts of which shares have been called
for redemption and the person or department at such Agent Member to contact
regarding such redemption. At least two Business Days prior to the Auction
preceding the date of redemption, the Auction Agent shall request each Agent
Member so identified to disclose to the Auction Agent (upon selection by such
Agent Member of the Existing Holders whose shares are to be redeemed) the number
of AMPS of each such Existing Holder, if any, to be redeemed by the Fund,
provided that the Auction Agent has been furnished with the name and telephone
number of a person or department at such Agent Member from which it is to
request such information. In the absence of receiving any such information with
respect to an Existing Holder, from such Existing Holder's Agent Member or
otherwise, the Auction Agent may continue to treat such Existing Holder as
having ownership of the number of AMPS shown in the Auction Agent's registry of
Existing Holders.

               (iii) The Auction Agent shall register a transfer of the
ownership of AMPS from an Existing Holder to another Existing Holder, or to
another Person if permitted by the Fund, only if (A) such transfer is made
pursuant to an Auction or (B) if such transfer is made other than pursuant to an
Auction, the Auction Agent has been notified of such transfer in writing, in a
notice substantially in the form of Exhibit A-3 to the Broker-Dealer Agreement,
by such Existing Holder or by the Agent Member of such Existing Holder. The
Auction Agent is not required to accept any notice of transfer delivered for an
Auction unless it is received by the Auction Agent by 3:00 p.m. on the Business
Day next preceding the Auction Date. The Auction Agent shall rescind a transfer
made on the registry of the Existing Holders of any AMPS if the Auction Agent
has been notified in writing, in a notice substantially in the form of Exhibit
A-4 to the Broker-Dealer Agreement, by the Agent Member or the Broker-Dealer of
any Person that (i) purchased any AMPS and the seller failed to deliver such
shares or (ii) sold any AMPS and the purchaser failed to make payment to such
Person upon delivery to the purchaser of such shares.

          (f) The Auction Agent may, but shall not be obligated to, request that
the Broker Dealers, as set forth in Section 3.2(b) of the Broker-Dealer
Agreements, provide the Auction Agent with a list of their respective customers
that such Broker-Dealers believe are Beneficial Owners of AMPS. The Auction
Agent shall keep confidential any such information and shall not disclose any
such information


                                        4




<PAGE>


so provided to any Person other than the relevant Broker-Dealer and the Fund;
provided, however, that the Auction Agent reserves the right and is authorized
to disclose any such information if (a) it is ordered to do so by a court of
competent jurisdiction or a regulatory body, judicial or quasi-judicial agency
or authority having the authority to compel such disclosure, (b) it is advised
by its counsel that its failure to do so would be unlawful or (c) failure to do
so would expose the Auction Agent to loss, liability, claim, damage or expense
for which it has not received indemnity or security satisfactory to it.

     2.3 Auction Schedule.

     The Auction Agent shall normally conduct Auctions every 28 days after the
first Auction, in the case of the AMPS, in accordance with the schedule set
forth below. Such schedule may be changed by the Auction Agent with the consent
of the Fund, which consent shall not be withheld unreasonably. The Auction Agent
shall give notice of any such change to each Broker-Dealer. Such notice shall be
received prior to the first Auction Date on which any such change shall be
effective.

<TABLE>
<CAPTION>
Time                         Event
----                         -----
<S>                          <C>
By 9:30 am.                  Auction Agent shall advise the Fund and the
                             Broker-Dealers of Maximum Rate as set forth in
                             Section 2.2(c)(i) hereof.

9:30 a.m. - 1:00 p.m.        Auction Agent shall assemble information
                             communicated to it by Broker-Dealers as provided in
                             Section 3(a) of Part II of the Articles
                             Supplementary. Submission deadline is 1:00 p.m.

Not earlier than 1:00 p.m.   Auction Agent shall make determinations pursuant to
                             Section 4(a) of Part II of the Articles
                             Supplementary.

By approximately 3:30 p.m.   Auction Agent shall advise the Fund of the results
                             of the Auction as provided in Section 4(b) of Part
                             II of the Articles Supplementary.

                             Submitted Bid Orders and Submitted Sell Orders will
                             be accepted and rejected in whole or in part and
                             AMPS will be allocated as provided in Section 5 of
                             Part II of the Articles Supplementary. Auction
                             Agent shall give notice of the Auction results as
                             set forth in Section 2.4 hereof.
</TABLE>

     The Auction Agent will follow the Bond Market Association's Market Practice
U.S. Holiday Recommendations for shortened trading days for the bond markets
(the "BMA Recommendation") unless the Auction Agent is instructed otherwise. In
the event of a BMA Recommendation on an Auction Date, the Submission Deadline
will be 11:30 a.m., instead of 1:00 p.m., and as a result the notice set forth
in Section 2.4 will occur earlier.

     2.4 Notice of Auction Results.

     On each Auction Date, the Auction Agent shall notify Broker-Dealers of the
results of the Auction held on such date by telephone or other electronic means
acceptable to the parties.

     2.5 Broker-Dealers.

          (a) Not later than 12:00 noon on each Auction Date, the Fund shall pay
to the Auction Agent in Federal Funds or similar same-day funds an amount in
cash equal to (i) in the case of any


                                        5




<PAGE>


Auction Date immediately preceding a 28 day Dividend Period, the product of (A)
a fraction the numerator of which is the number of days in such Dividend Period
(calculated by counting the first day of such Dividend Period but excluding the
last day thereof) and the denominator of which is 360, times (B) 1/4 of 1%,
times (C) $25,000 times (D) the sum of the aggregate number of outstanding AMPS
for which the Auction is conducted and (ii) in the case of any Special Dividend
Period, the amount determined by mutual consent of the Fund and the
Broker-Dealers pursuant to Section 3.5 of the Broker-Dealer Agreements. The
Auction Agent shall apply such moneys as set forth in Section 3.5 of the
Broker-Dealer Agreements and shall thereafter remit to the Fund any remaining
funds paid to the Auction Agent pursuant to this Section 2.5(a).

          (b) The Fund shall not designate any Person to act as a Broker-Dealer,
or permit an Existing Holder or a Potential Beneficial Owner to participate in
Auctions through any Person other than a Broker-Dealer, without the prior
written approval of the Auction Agent, which approval shall not be withheld
unreasonably. The Fund may designate an Affiliate or Merrill Lynch, Pierce,
Fenner & Smith Incorporated to act as a Broker-Dealer.

          (c) The Auction Agent shall terminate any Broker-Dealer Agreement as
set forth therein if so directed in writing by the Fund.

          (d) Subject to Section 2.5(b) hereof, the Auction Agent from time to
time shall enter into such Broker-Dealer Agreements as the Fund shall request in
writing.

          (e) The Auction Agent shall maintain a list of Broker-Dealers.

     2.6 Ownership of AMPS and Submission of Bids by the Fund and Its
Affiliates.

     Neither the Fund nor any Affiliate of the Fund may submit any Sell Order or
Bid, directly or indirectly, in any Auction, except that an Affiliate of the
Fund that is a Broker-Dealer may submit a Sell Order or Bid on behalf of a
Beneficial Owner or a Potential Beneficial Owner. The Fund shall notify the
Auction Agent in writing if the Fund or, to the best of the Fund's knowledge,
any Affiliate of the Fund becomes a Beneficial Owner of any AMPS. Any AMPS
redeemed, purchased or otherwise acquired (i) by the Fund shall not be reissued,
except in accordance with the requirements of the Securities Act of 1933, as
amended ("Securities Act") or (ii) by its Affiliates shall not be transferred
(other than to the Fund). The Auction Agent shall have no duty or liability with
respect to enforcement of this Section 2.6.

     2.7 Access to and Maintenance of Auction Records.

     The Auction Agent shall afford to the Fund, its agents, independent public
accountants and counsel, access at reasonable times during normal business hours
to review and make extracts or copies (at the Fund's sole cost and expense) of
all books, records, documents and other information concerning the conduct and
results of Auctions, provided that any such agent, accountant or counsel shall
furnish the Auction Agent with a letter from the Fund requesting that the
Auction Agent afford such person access at least one Business Day prior to the
date of such access. The Auction Agent shall maintain records relating to any
Auction for a period of at least two years after such Auction (unless requested
in writing by the Fund to maintain such records for such longer period not in
excess of four years, then for such longer period), and such records, in
reasonable detail, shall accurately and fairly reflect the actions taken by the
Auction Agent hereunder. The Fund agrees to keep confidential any information
regarding the customers of any Broker-Dealer received from the Auction Agent in
connection with this Agreement or any Auction, and shall not disclose such
information or permit the disclosure of such information without the prior
written consent of the applicable Broker-Dealer to anyone except such agent,
accountant or


                                        6




<PAGE>


counsel engaged to audit or review the results of Auctions as permitted by this
Section 2.7. The Fund reserves the right to disclose any such information if it
is advised by its counsel that its failure to do so would (i) be unlawful or
(ii) expose it to liability, unless the Broker-Dealer shall have offered
indemnification satisfactory to the Fund. Any such agent, accountant or counsel,
before having access to such information, shall agree to keep such information
confidential and not to disclose such information or permit disclosure of such
information without the prior written consent of the applicable Broker-Dealer,
provided that such agent, accountant or counsel may reserve the right to
disclose any such information if it is advised by its counsel that its failure
to do so would (i) be unlawful or (ii) expose it to liability, unless the
Broker-Dealer shall have offered indemnification satisfactory to such agent,
accountant or counsel. The Auction Agent shall have no responsibility for, and
shall have no liability in connection with, the Fund's performance of its duties
under this Section 2.7.

III. THE AUCTION AGENT AS PAYING AGENT.

     3.1 The Paying Agent.

     The Board of Directors of the Fund has adopted a resolution appointing The
Bank of New York as Auction Agent and Paying Agent. The Paying Agent hereby
accepts such appointment and agrees to act in accordance with its standard
procedures and the provisions of the Articles Supplementary which are specified
herein with respect to the AMPS and as set forth in this Section 3.

     3.2 The Fund's Notices to the Paying Agent.

     Whenever any AMPS are to be redeemed, the Fund promptly shall deliver to
the Paying Agent a Notice of Redemption, which will be mailed by the Paying
Agent to each Holder at least five Business Days prior to the date such Notice
of Redemption is required to be mailed pursuant to the Articles Supplementary.
The Paying Agent shall have no responsibility to confirm or verify the accuracy
of any such Notice.

     3.3 The Fund to Provide Funds for Dividends and Redemptions.

          (a) Not later than 12:00 noon on each Dividend Payment Date, the Fund
shall deposit with the Paying Agent an aggregate amount of Federal Funds or
similar same-day funds equal to the declared dividends to be paid to Holders on
such Dividend Payment Date, and shall give the Paying Agent irrevocable written
instructions to apply such funds to the payment of such dividends on such
Dividend Payment Date.

          (b) If the Fund shall give a Notice of Redemption, then by noon of the
date fixed for redemption, the Fund shall deposit in trust with the Paying Agent
an aggregate amount of Federal Funds or similar same-day funds sufficient to
redeem such AMPS called for redemption and shall give the Paying Agent
irrevocable written instructions and authority to pay the redemption price to
the Holders of AMPS called for redemption upon surrender of the certificate or
certificates therefor.

     3.4 Disbursing Dividends and Redemption Price.

     After receipt of the Federal Funds or similar same-day funds and
instructions from the Fund described in Section 3.3 above, the Paying Agent
shall pay to the Holders (or former Holders) entitled thereto (i) on each
Dividend Payment Date, dividends on the AMPS, and (ii) on any date fixed for
redemption, the redemption price of any shares of AMPS called for redemption.
The amount of dividends for any Dividend Period to be paid by the Paying Agent
to Holders will be determined by the Fund as set


                                        7




<PAGE>


forth in Section 2 of Part I of the Articles Supplementary. The redemption price
to be paid by the Paying Agent to the Holders of any shares of AMPS called for
redemption will be determined as set forth in Section 3 of Part I of the
Articles Supplementary. The Paying Agent shall have no duty to determine the
redemption price and may rely on the amount thereof set forth in the Notice of
Redemption.

IV.  THE PAYING AGENT AS TRANSFER AGENT AND REGISTRAR.

     4.1 Original Issue of Share Certificates.

     On the Date of Original Issue of the AMPS, one certificate for the series
of AMPS shall be issued by the Fund and registered in the name of Cede & Co., as
nominee of the Securities Depository, and countersigned by the Paying Agent.

     4.2 Registration of Transfer or Exchange of Shares.

     Except as provided in this Section 4.2, the AMPS shall be registered solely
in the name of the Securities Depository or its nominee. If the Securities
Depository shall give notice of its intention to resign as such, and if the Fund
shall not have selected a substitute Securities Depository acceptable to the
Paying Agent prior to such resignation, then upon such resignation the AMPS, at
the Fund's request, may be registered for transfer or exchange, and a new
certificate thereupon shall be issued in the name of the designated transferee
or transferees, upon surrender of the old certificate in form deemed by the
Paying Agent to be properly endorsed for transfer with (a) all necessary
endorsers' signatures guaranteed in such manner and form and by such guarantor
as the Paying Agent may reasonably require, (b) such assurances as the Paying
Agent shall deem necessary or appropriate to evidence the genuineness and
effectiveness of each necessary endorsement and (c) satisfactory evidence of
compliance with all applicable laws relating to the collection of taxes in
connection with any registration of transfer or exchange or funds necessary for
the payment of such taxes. If the certificate for the AMPS is not held by the
Securities Depository or its nominee, payments upon transfer of shares in an
Auction shall be made in Federal Funds or similar same-day funds to the Auction
Agent against delivery of certificates therefor.

     4.3 Removal of Legend.

     Any request for removal of a legend indicating a restriction on transfer
from a certificate evidencing AMPS shall be accompanied by an opinion of counsel
stating that such legend may be removed and such shares may be transferred free
of the restriction described in such legend, said opinion to be delivered under
cover of a letter from a Fund Officer authorizing the Paying Agent to remove the
legend on the basis of said opinion.

     4.4 Lost, Stolen or Destroyed Shares Certificates.

     The Paying Agent shall issue and register a replacement certificate for a
certificate represented to have been lost, stolen or destroyed, upon the
fulfillment of such requirements as shall be deemed appropriate by the Fund and
by the Paying Agent, subject at all times to provisions of law, the Articles
Supplementary governing such matters and resolutions adopted by the Fund with
respect to lost, stolen or destroyed securities. The Paying Agent may issue a
new certificate in exchange for and upon the cancellation of a mutilated
certificate. Any request by the Fund to the Paying Agent to issue a replacement
or new certificate pursuant to this Section 4.4 shall be deemed to be a
representation and warranty by the Fund to the Paying Agent that such issuance
will comply with provisions of applicable law and the Articles Supplementary and
resolutions of the Fund.


                                        8




<PAGE>


     4.5 Disposition of Canceled Certificates: Record Retention.

     The Paying Agent shall retain stock certificates which have been canceled
in transfer or in exchange and accompanying documentation in accordance with
applicable rules and regulations of the Securities and Exchange Commission (the
"Commission") for at least two calendar years from the date of such
cancellation. The Paying Agent, upon written request by the Fund, shall afford
to the Fund, its agents and counsel access at reasonable times during normal
business hours to review and make extracts or copies (at the Fund's sole cost
and expense) of such certificates and accompanying documentation. Upon written
request by the Fund at any time within the six month period commencing
immediately after the expiration of this two-year period, the Paying Agent shall
deliver to the Fund the canceled certificates and accompanying documentation.
The Fund, at its expense, shall retain such records for a minimum additional
period of at least four calendar years from the date of delivery of the records
to the Fund and shall make such records available during this period at any
time, or from time to time, for reasonable periodic, special, or other
examinations by representatives of the Commission. The Fund also shall undertake
to furnish to the Commission, upon demand, either at its principal office or at
any regional office, complete, correct and current hard copies of any and all
such records.

     4.6 Stock Register.

     The Paying Agent shall maintain the stock register, which shall contain a
list of the Holders, the number of shares held by each Holder and the address of
each Holder. The Paying Agent shall record in the stock register any change of
address of a Holder upon written notice by such Holder. In case of any written
request or demand for the inspection of the share register or any other books of
the Fund in the possession of the Paying Agent, the Paying Agent will notify the
Fund and secure instructions as to permitting or refusing such inspection. The
Paying Agent reserves the right, however, to exhibit the stock register or other
records to any person in case it is advised by its counsel that its failure to
do so would (i) be unlawful or (ii) expose it to liability, unless the Fund
shall have offered indemnification satisfactory to the Paying Agent.

     4.7 Return of Funds.

     Any funds deposited with the Paying Agent by the Fund for any reason (other
than for the payment of amounts due to the Paying Agent) under this Agreement,
including for the payment of dividends or the redemption of AMPS, that remain
with the Paying Agent after 12 months shall be repaid to the Fund upon written
request by the Fund.

V.   REPRESENTATIONS AND WARRANTIES.

     5.1 Representations and Warranties of the Fund.

     The Fund represents and warrants to the Auction Agent that:

               (i) the Fund is duly organized and is validly existing as a
corporation under the laws of the State of Maryland, and has full power to
execute and deliver this Agreement and to authorize, create and issue the AMPS;

               (ii) the Fund is registered with the Commission under the 1940
Act as a closed-end, non-diversified, management investment company;


                                        9



<PAGE>


               (iii) this Agreement has been duly and validly authorized,
executed and delivered by the Fund and constitutes the legal, valid and binding
obligation of the Fund, enforceable against the Fund in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equitable principles;

               (iv) the form of the certificate evidencing the AMPS complies
with all applicable laws of the State of Maryland;

               (v) the AMPS have been duly and validly authorized by the Fund
and, upon completion of the initial sale of the AMPS and receipt of payment
therefor, will be validly issued by the Fund, fully paid and nonassessable;

               (vi) at the time of the offering of the AMPS, the shares offered
will be registered under the Securities Act and no further action by or before
any governmental body or authority of the United States or of any state thereof
is required in connection with the execution and delivery of this Agreement or
will be required in connection with the issuance of shares of the AMPS, except
such action as required by applicable state securities laws;

               (vii) the execution and delivery of this Agreement and the
issuance and delivery of the AMPS do not and will not conflict with, violate, or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, the Articles of Incorporation, any order or decree of any court
or public authority having jurisdiction over the Fund, or any mortgage,
indenture, contract, agreement or undertaking to which the Fund is a party or by
which it is bound; and

               (viii) no taxes are payable upon or in respect of the execution
of this Agreement or will be payable upon or in respect of the issuance of the
AMPS.

     5.2 Representations and Warranties of the Auction Agent.

     The Auction Agent represents and warrants to the Fund that:

               (i) the Auction Agent is duly organized and is validly existing
as a banking corporation in good standing under the laws of the State of New
York and has the corporate power to enter into and perform its obligations under
this Agreement; and

               (ii) this Agreement has been duly and validly authorized,
executed and delivered by the Auction Agent and constitutes the legal, valid and
binding obligation of the Auction Agent, enforceable against the Auction Agent
in accordance with its terms, subject to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting creditors'
rights and to general equitable principles.

VI.  THE AUCTION AGENT.

     6.1 Duties and Responsibilities.

          (a) The Auction Agent is acting solely as agent for the Fund hereunder
and owes no fiduciary duties to any Person.


                                       10




<PAGE>


          (b) The Auction Agent undertakes to perform such duties and only such
duties as are set forth specifically in this Agreement, and no implied covenants
or obligations shall be read into this Agreement against the Auction Agent.

          (c) In the absence of willful misconduct or gross negligence on its
part, the Auction Agent shall not be liable for any action taken, suffered or
omitted by it or for any error of judgment made by it in the performance of its
duties under this Agreement.

          (d) In no event shall the Auction Agent be liable for special,
punitive, indirect or consequential loss or damage of any kind whatsoever
(including, but not limited to, lost profits), even if the Auction Agent has
been advised of the likelihood of such loss or damage and regardless of the form
of action.

     6.2 Rights of the Auction Agent.

          (a) The Auction Agent may conclusively rely upon, and shall be fully
protected in acting or refraining from acting upon, any communication authorized
hereby and any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document reasonably
believed by it to be genuine. The Auction Agent shall not be liable for acting
or refraining from acting upon any telephone communication authorized hereby
which the Auction Agent reasonably believes in good faith to have been given by
the Fund or by a Broker-Dealer. The Auction Agent may record telephone
communications with the Fund or with the Broker-Dealers or with both.

          (b) The Auction Agent may consult with counsel of its choice, and the
advice of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reasonable reliance thereon.

          (c) The Auction Agent shall not be required to advance, expend or risk
its own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder. The Auction Agent shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Fund.

          (d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and, in the
absence of willful misconduct or gross negligence on the part of any such agent
or attorney, shall not be responsible for the conduct on the part of any such
agent or attorney appointed by it with due care.

          (e) The Auction Agent shall not be liable for any error of judgment
made in good faith unless the Auction Agent shall have been grossly negligent in
ascertaining the pertinent facts necessary to make such judgment. In no event
shall the Auction Agent be liable for special, indirect or consequential loss or
damages of any kind whatsoever (including, but not limited to, loss of profits),
even if the Auction Agent has been advised of the likelihood of such loss or
damages and regardless of the form of action, except in the event of willful
misconduct or gross negligence on the part of the Auction Agent.

          (f) The Auction Agent shall not be required to and shall make no
representations and have no responsibilities as to the validity, accuracy, value
or genuineness of any signatures or endorsements, other than its own. The
Auction Agent makes no representations as to and shall have no liability with
respect to the correctness of the recitals in, or the validity, accuracy or
adequacy of this


                                       11




<PAGE>


Agreement, any Broker-Dealer Agreement, any offering material used in connection
with the offer and sale of the AMPS or any other agreement or instrument
executed in connection with the transactions contemplated herein or in any
thereof. The Auction Agent shall have no obligation or liability in respect of
the registration or exemption therefrom of the AMPS under federal or state
securities laws in respect of the sufficiency or the conformity of any transfer
of the AMPS pursuant to the terms of the Auction Agency Agreement, any Broker
Dealer Agreement, or any other document contemplated thereby or related thereto.

          (g) Whenever in the administration of the provisions of this Agreement
the Auction Agent shall deem it necessary or desirable that a matter be proved
or established prior to taking or suffering any action to be taken hereunder,
such matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of gross negligence or willful misconduct on the
part of the Auction Agent, be deemed to be conclusively proved and established
by a certificate signed by the Fund or the Broker-Dealer, and delivered to the
Auction Agent and such certificate, in the absence of gross negligence or
willful misconduct on the part of the Auction Agent, shall be full warrant to
the Auction Agent for any action taken or omitted by it under the provisions of
this Agreement upon the faith thereof.

          (h) The Auction Agent shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, entitlement order,
approval or other paper or document furnished by Fund or the Broker-Dealer,
except to the extent that such failure to investigate would be deemed grossly
negligent.

          (i) Any corporation into which the Auction Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Auction Agent shall be
a party, or any corporation succeeding to the Dealing and Trading business of
the Auction Agent shall be the successor of the Auction Agent hereunder, with
the consent of the Fund but without the execution of filing any paper with any
party hereto or any further act on the part of any of the parties hereto, except
where any instrument of transfer or assignment is required by law to effect such
succession, anything herein to the contrary notwithstanding.

     6.3 Compensation, Expenses and Indemnification.

          (a) The Fund shall pay to the Auction Agent from time to time
reasonable compensation for all services rendered by it under this Agreement and
under the Broker-Dealer Agreements as shall be set forth in a separate writing
signed by the Fund and the Auction Agent, subject to adjustments if the AMPS no
longer are held of record by the Securities Depository or its nominee or if
there shall be such other change as shall increase or decrease materially the
Auction Agent's obligations hereunder or under the Broker-Dealer Agreements.

          (b) The Fund shall reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of this Agreement and of the
Broker-Dealer Agreements (including the reasonable compensation, expenses and
disbursements of its agents and counsel), except any expense, disbursement or
advance attributable to its gross negligence or willful misconduct.

          (c) The Fund shall indemnify the Auction Agent and its officers,
directors, employees and agents for, and hold it harmless against, any loss,
liability or expense incurred without gross negligence or willful misconduct on
the part of the Auction Agent arising out of or in connection with its agency
under this Agreement and under the Broker-Dealer Agreements, including the costs
and expenses


                                       12




<PAGE>


of defending itself against any claim of liability in connection with its
exercise or performance of any of its duties hereunder and thereunder, except
such as may result from its gross negligence or willful misconduct.

     6.4 Force Majeure

          The Auction Agent shall not be responsible for or liable for any
failure or delay in the performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
reasonable control, including, without limitation, acts of God; earthquakes;
fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots;
acts of terrorism; interruptions, loss or malfunctions of utilities; computer
(hardware or software) or communications services; accidents; labor disputes;
acts of civil or military authority or governmental actions; it being understood
that the Auction Agent shall use reasonable efforts which are consistent with
accepted practices in the banking industry to resume performance as soon as
practicable under the circumstances.

VII. MISCELLANEOUS.

     7.1 Term of Agreement.

          (a) The term of this Agreement is unlimited unless it shall be
terminated as provided in this Section 7.1. The Fund may terminate this
Agreement at any time by so notifying the Auction Agent in writing, provided
that, if any AMPS remain outstanding, the Fund shall have entered into an
agreement with a successor auction agent. The Auction Agent may terminate this
Agreement upon prior notice to the Fund on the date specified in such notice,
which date shall be no earlier than 60 days after delivery of such notice. The
Auction Agent may resign after 30 days following the delivery of notice to the
Fund that the Auction Agent has not been paid amounts due to it. If the Auction
Agent terminates this Agreement while any AMPS remains outstanding, the Fund
shall use its best efforts to enter into an agreement with a successor auction
agent containing substantially the same terms and conditions as this Agreement.

          (b) Except as otherwise provided in this Section 7.1(b), the
respective rights and duties of the Fund and the Auction Agent under this
Agreement shall cease upon termination of this Agreement. The Fund's
representations, warranties, covenants and obligations to the Auction Agent
under Sections 5.1 and 6.3 hereof shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall (i) resign as Auction
Agent under the Broker-Dealer Agreements, (ii) at the Fund's written request,
deliver promptly to the Fund copies of all books and records maintained by it in
connection with its duties hereunder, and (iii) at the written request of the
Fund, transfer promptly to the Fund or to any successor auction agent any funds
deposited by the Fund with the Auction Agent (whether in its capacity as Auction
Agent or as Paying Agent) pursuant to this Agreement which have not been
distributed previously by the Auction Agent in accordance with this Agreement.

     7.2 Communications.

     Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with Auctions (other than those expressly required to be in writing),
all notices, requests and other communications to any party hereunder shall be
in writing (including telecopy or similar writing) and shall be given to such
party at its address or telecopier number set forth below:


                                       13




<PAGE>


<TABLE>
<S>                        <C>
If to the Fund,            Cohen & Steers Quality Income Realty Fund, Inc.
addressed to:              Attn: Robert H. Steers
                           757 Third Avenue
                           New York, New York 10017
                           Telecopier No.: (212) 832-3232
                           Telephone No.: (212) 832-3622

If to the Auction Agent,   The Bank of New York
addressed to:              Corporate Trust Department
                           101 Barclay Street, Floor 7W
                           New York, New York 10286

                           Phone (212) 815-3450
                           Facsimile: (212) 815-3440
</TABLE>

or such other address or telecopier number as such parry hereafter may specify
for such purpose by notice to the other party. Each such notice, request or
communication shall be effective when delivered at the address specified herein.
Communications shall be given on behalf of the Fund by a Fund Officer and on
behalf of the Auction Agent by an Authorized Officer.

     7.3 Entire Agreement.

     This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof, except for written
agreements relating to the compensation of the Auction Agent.

     7.4 Benefits.

     Nothing herein, express or implied, shall give to any Person, other than
the Fund, the Auction Agent and their respective successors and assigns, any
benefit of any legal or equitable right, remedy or claim hereunder.

     7.5 Amendment; Waiver.

          (a) This Agreement shall not be deemed or construed to be modified,
amended, rescinded, canceled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged. The Fund shall notify the Auction Agent in writing of any change in the
Articles Supplementary prior to the effective date of any such change. If any
such change in the Articles Supplementary materially increases the Auction
Agent's obligations hereunder, the Fund shall obtain the written consent of the
Auction Agent prior to the effective date of such change.

          (b) Failure of either party hereto to exercise any right or remedy
hereunder in the event of a breach hereof by the other party shall not
constitute a waiver of any such right or remedy with respect to any subsequent
breach.


                                       14




<PAGE>


     7.6 Successors and Assigns.

     This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of the
Fund and the Auction Agent. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other party, which consent shall
not be withheld unreasonably.

     7.7 Severability.

     If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.

     7.8 Execution in Counterparts.

     This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.

     7.9 Governing Law.

     This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in said state.

     7.10 Jurisdiction.

     The parties agree that all actions and proceedings arising out of this
Auction Agency Agreement or any of the transactions contemplated hereby shall be
brought in the County of New York, and, in connection with any such action or
proceeding, submit to the jurisdiction of, and venue in, such County. Each of
the parties hereto also irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim arising out of this Agreement or the
transactions contemplated hereby.

                            [Signature pages follow]


                                       15




<PAGE>


     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.

                                        COHEN & STEERS QUALITY INCOME
                                           REALTY FUND, INC.


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                        THE BANK OF NEW YORK, As Auction Agent


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                       16




<PAGE>


                                                                       EXHIBIT A

                         MASTER BROKER-DEALER AGREEMENT

                                     between

                              THE BANK OF NEW YORK

                                       and

                                   ----------

                        dated as of ______________, 2004

                                   Relating to

                      Preferred Shares ("Preferred Shares")

                                       of

                 EACH OF THE COHEN & STEERS FUNDS LISTED HEREIN

                                   ----------




<PAGE>


                         MASTER BROKER-DEALER AGREEMENT

     Broker-Dealer Agreement dated as of _________, 2004, is between The Bank of
New York, a New York banking corporation (the "Auction Agent") (not in its
individual capacity, but solely as agent of the registered investment companies,
which are Maryland corporations, listed in Exhibit A-1 hereto, as the same may
be amended from time to time (individually, a "Fund", and together, the "Funds,"
unless indicated otherwise), pursuant to authority granted to it in the various
Auction Agency Agreements between each of the Funds and the Auction Agent (the
"Auction Agency Agreements") and _________________ (together with its successors
and assigns, "BD").

     The Funds have duly authorized and issued, or intend to issue different
series of shares of Auction Rate Cumulative Preferred Shares, in the case of the
of Cohen & Steers Advantage Income Realty Fund, Inc., Taxable Auction Market
Preferred Shares (the "AMPS) or other auction market preferred stock in the case
of the Funds, all with a par value of $.001 per share and a liquidation
preference of $25,000 per share (together, the "Preferred Shares"), pursuant to
the Funds' Articles Supplementary (as defined below).

     The Funds' Articles Supplementary provides that for each subsequent
Dividend Period of Preferred Shares then outstanding, the Applicable Rate for
each series of Preferred Shares for each subsequent Dividend Period shall be
equal to the rate per annum that results from an Auction for Outstanding shares
of each Series on the respective Auction Date therefor next preceding the period
from and after the Date of Original Issue to and including the last day of the
initial Dividend Period. The Boards of Directors of the Funds have adopted
resolutions appointing The Bank of New York as Auction Agent for purposes of the
Auction Procedures, and pursuant to Section 2.5 of the Auction Agency
Agreements, the Funds have requested and directed the Auction Agent to execute
and deliver this Agreement.

     The Auction Procedures require the participation of one or more
Broker-Dealers.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Auction Agent and BD agree as follows:

I.   DEFINITIONS AND RULES OF CONSTRUCTION.

     1.1 Terms Defined by Reference to the Articles Supplementary.

     Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of each Fund.

     1.2 Terms Defined Herein.

     As used herein, the following terms shall have the following meanings,
unless the context otherwise requires:

          (a) "Articles Supplementary" shall mean the Articles Supplementary for
Preferred Shares of each of the Funds specifying the powers, preferences and
rights of the Preferred Shares filed in the office of the State Department of
Assessments and Taxation of Maryland.

          (b) "Auction" shall have the meaning specified in Section 2.1 of the
Auction Agency Agreement.


                                       A-1




<PAGE>


          (c) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Part II of the Articles Supplementary.

          (d) "Authorized Officer" of the Auction Agent shall mean each Vice
President, Assistant Vice President and Assistant Treasurer of the Auction Agent
and every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes of this Agreement in a written communication
to BD.

          (e) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.

          (f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.

     1.3 Rules of Construction.

     Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

II.  NOTIFICATION OF DIVIDEND.

     The provisions contained in Section 4 of Part I of the Articles
Supplementary concerning the notification of a Special Dividend Period will be
followed by the Auction Agent and BD, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.

III. THE AUCTION.

     3.1 Purpose; Incorporation by Reference of Auction Procedures.

          (a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of Preferred Shares, for each Dividend Period.
Each periodic operation of such procedures is hereinafter referred to as an
"Auction."

          (b) All of the provisions contained in the Auction Procedures are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.


                                       A-2




<PAGE>


          (c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in Section 17 of Part I of the Articles
Supplementary may execute a Broker-Dealer Agreement and participate as
Broker-Dealers in Auctions.

          (d) BD and other Broker-Dealers may participate in Auctions for their
own accounts. However, the Fund, by notice to BD and all other Broker Dealers,
may prohibit all Broker-Dealers from submitting Bids in Auctions for their own
accounts, provided that Broker-Dealers may continue to submit Hold Orders and
Sell Orders.

     3.2 Preparation for Each Auction.

          (a) Not later than 9:30 A.M. on each Auction Date for the Preferred
Shares, the Auction Agent shall advise BD by telephone or other electronic means
of communication acceptable to the parties of the Maximum Rate in effect on such
Auction Date.

          (b) The Auction Agent from time to time may, but shall not be
obligated to, request BD to provide it with a list of the respective customers
BD believes are Beneficial Owners of shares of each series of Preferred Shares.
BD shall comply with any such request, and the Auction Agent shall keep
confidential any such information, including information received as to the
identity of Bidders in any Auction, and shall not disclose any such information
so provided to any Person other than a Fund; and such information shall not be
used by the Auction Agent or its officers, employees, agents or representatives
for any purpose other than such purposes as are described herein; provided,
however, that the Auction Agent reserves the right and is authorized to disclose
any such information if (a) it is ordered to do so by a court of competent
jurisdiction or a regulatory body, judicial or quasi-judicial agency or
authority having the authority to compel such disclosure, (b) it is advised by
its counsel that its failure to do so would be unlawful or (c) failure to do so
would expose the Auction Agent to loss, liability, claim, damage or expense for
which it has not received indemnity or security satisfactory to it. In the event
that the Auction Agent is required to disclose information in accordance with
the foregoing sentence, it shall provide written notice of such requirement to
BD as promptly as practicable. The Auction Agent shall, subject to the terms of
the Auction Agency Agreement, transmit any list of customers BD believes are
Beneficial Owners of shares of each series of Preferred Shares and information
related thereto only to its officers, employees, agents or representatives who
need to know such information for the purposes of acting in accordance with this
Agreement, and the Auction Agent shall prevent the transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.

     3.3 Auction Schedule; Method of Submission of Orders.

          (a) The Funds and the Auction Agent shall conduct Auctions for each
series of Preferred Shares in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of the
Fund, which consent shall not be withheld unreasonably. The Auction Agent shall
give notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.


                                       A-3




<PAGE>


<TABLE>
<CAPTION>
Time                          Event
----                          -----
<S>                           <C>
By 9:30 A.M.                  Auction Agent advises the Funds and the
                              Broker-Dealers of the Maximum Rate as set forth in
                              Section 3.2(a) hereof.

9:30 A.M. - 1:00 P.M.         Auction Agent assembles information communicated
                              to it by Broker-Dealers as provided in Section
                              3(a) of Part II of the Articles Supplementary.
                              Submission Deadline is 1:00 P.M.

Not earlier than 1:00 P.M.    Auction Agent makes determinations pursuant to
                              Section 4(a) of Part II of the Articles
                              Supplementary.

By approximately 3:30 P.M.    Auction Agent advises the Funds of the results of
                              the Auction as provided in Section 4(b) of Part II
                              of the Articles Supplementary.

                              Submitted Bids and Submitted Sell Orders will be
                              accepted and rejected in whole or in part and
                              shares of Preferred Shares are allocated as
                              provided in Section 5 of Part II of the Articles
                              Supplementary.

                              Auction Agent shall give notice of the Auction
                              results as set forth in Section 3.4(a) hereof.
</TABLE>

     The Auction Agent will follow the Bond Market Association's Market Practice
U.S. Holiday Recommendations for shortened trading days for the bond markets
(the "BMA Recommendation") unless the Auction Agent is instructed otherwise. In
the event of a BMA Recommendation on an Auction Date, the Submission Deadline
will be 11:30 a.m., instead of 1:00 p.m., and as a result the notice set forth
in Section 3.3 will occur earlier.

          (b) BD agrees to maintain a list of Potential Beneficial Owners and to
contact the Potential Beneficial Owners on such list on or prior to each Auction
Date for the purposes set forth in Section 2 of Part II of the Articles
Supplementary.

          (c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit A-2. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.

          (d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit A-3, of transfers of shares
of any series of Preferred Shares, made through BD by an Existing Holder to
another Person other than pursuant to an Auction, and (ii) a written notice,
substantially in the form attached hereto as Exhibit A-4, of the failure of
Preferred Shares to be transferred to or by any Person that purchased or sold
shares of any series of Preferred Shares through BD pursuant to an Auction. The
Auction Agent is not required to accept any notice delivered pursuant to the
terms of the foregoing sentence with respect to an Auction unless it is received
by the Auction Agent by 3:00 P.M. on the Business Day next preceding the
applicable Auction Date.

     3.4 Notice of Auction Results.

          (a) On each Auction Date, the Auction Agent shall notify BD by
telephone or other electronic means acceptable to the parties. On the Business
Day next succeeding such Auction Date, the


                                       A-4




<PAGE>


Auction Agent shall notify BD in writing of the disposition of all Orders
submitted by BD in the Auction held on such Auction Date.

          (b) BD shall notify each Beneficial Owner, Potential Beneficial Owner,
Existing Holder or Potential Holder on whose behalf BD has submitted an Order,
and take such other action as is required of BD.

     If any Beneficial Owner or Existing Holder selling shares of any series of
Preferred Shares in an Auction fails to deliver such shares, the Broker-Dealer
of any Person that was to have purchased shares of any series of Preferred
Shares in such Auction may deliver to such Person a number of whole shares of
the series of Preferred Shares that is less than the number of shares that
otherwise was to be purchased by such Person. In such event, the number of
shares of the series of Preferred Shares to be so delivered shall be determined
by such Broker-Dealer. Delivery of such lesser number of shares shall constitute
good delivery. Upon the occurrence of any such failure to deliver shares, such
Broker-Dealer shall deliver to the Auction Agent the notice required by Section
3.3(d)(ii) hereof. Notwithstanding the foregoing terms of this Section 3.4(b),
any delivery or non-delivery of shares of any series of Preferred Shares which
represents any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the terms
of Section 3.3(d) hereof. The Auction Agent shall have no duty or liability with
respect to enforcement of this Section 3.4(b).

     3.5 Service Charge to be Paid to BD.

     On the Business Day next succeeding each Auction Date, the Auction Agent
shall pay to BD from moneys received from the Funds an amount equal to: (a) in
the case of any Auction Date immediately preceding a Dividend Period of less
than one year, the product of (i) a fraction the numerator of which is the
number of days in such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and the denominator of
which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of
(A) the aggregate number of shares of any series of Preferred Shares placed by
BD in the applicable Auction that were (x) the subject of a Submitted Bid of a
Beneficial Owner submitted by BD and continued to be held as a result of such
submission and (y) the subject of a Submitted Bid of a Potential Beneficial
Owner submitted by BD and were purchased as a result of such submission plus (B)
the aggregate number of shares of any series of Preferred Shares subject to
valid Hold Orders (determined in accordance with Section 2 of Part II of the
Articles Supplementary) submitted to the Auction Agent by BD plus (C) the number
of shares of any series of Preferred Shares deemed to be subject to Hold Orders
by Beneficial Owners pursuant to Section 2 of Part II of the Articles
Supplementary that were acquired by BD for its own account or were acquired by
such Beneficial Owners through BD; and (b) in the case of any Auction Date
immediately preceding a Special Dividend Period of one year or longer, that
amount as mutually agreed upon by the Funds and BD, based on the selling
concession that would be applicable to an underwriting of fixed or variable rate
Preferred Shares with a similar final maturity or variable rate dividend period,
at the commencement of such Special Dividend Period.

     For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of Preferred Shares through
BD transfers those shares to another Person other than pursuant to an Auction,
then the Broker-Dealer for the shares so transferred shall continue to be BD,
provided, however, that if the transfer was effected by, or if the transferee
is, a Broker-Dealer other than BD, then such Broker-Dealer shall be the
Broker-Dealer for such shares.


                                       A-5




<PAGE>


IV.  MISCELLANEOUS.

     4.1 Termination.

     Any party may terminate this Agreement at any time upon five days' prior
written notice to the other party; provided, however, that if the Broker-Dealer
is Merrill Lynch, Pierce, Fenner & Smith Incorporated neither Merrill Lynch,
Pierce, Fenner & Smith Incorporated nor the Auction Agent may terminate this
Agreement without first obtaining the prior written consent of the Fund to such
termination, which consent shall not be withheld unreasonably. This Agreement
shall automatically terminate upon the redemption of all outstanding Preferred
Shares or upon termination of the Auction Agent Agreement.

     4.2 Force Majeure

     Neither party to this Agreement shall be responsible or liable for any
failure or delay in the performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
reasonable control, including, without limitation, acts of God; earthquakes;
fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots;
acts of terrorism; interruptions, loss or malfunctions or utilities; computer
(hardware or software) or communications services; accidents; labor disputes;
acts of civil or military authority or governmental actions; it being understood
that the parties shall use reasonable efforts which are consistent with accepted
practices in the banking industry to resume performance as soon as practicable
under the circumstances.

     4.3 Participant in Securities Depository; Payment of Dividends in Same-Day
Funds.

          (a) BD is, and shall remain for the term of this Agreement, a member
of, or a participant in, the Securities Depository (or an affiliate of such a
member or participant).

          (b) BD represents that it (or if BD does not act as Agent Member, one
of its affiliates) shall make all dividend payments on the shares of any series
of Preferred Shares available in same-day funds on each Dividend Payment Date to
customers that use BD (or its affiliate) as Agent Member.

     4.4 Agent Member.

     At the date hereof, BD is a participant of the Securities Depository.

     4.5 Communications.

     Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with the Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party hereunder
shall be in writing (including telecopy or similar writing) and shall be given
to such party at its address or telecopier number set forth below:


                                       A-6




<PAGE>


<TABLE>
<S>                         <C>
If to the Auction Agent,    The Bank of New York
addressed to:               Corporate Trust Administration
                            101 Barclay Street, Floor 7W
                            New York, New York 10286
                            Attention: Dealing and Trading Group - Auction Desk
                            Telephone No.: (212) 815-3450
                            Facsimile No.: (212) 815-3440
</TABLE>

If to the BD,
addressed to:

     or such other address or telecopier number as such party hereafter may
     specify for such purpose by notice to the other party. Each such notice,
     request or communication shall be effective when delivered at the address
     specified herein. Communications shall be given on behalf of BD by a BD
     Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
     record telephone communications with the Auction Agent.

     4.6 Entire Agreement.

     This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof.

     4.7 Benefits.

     Nothing in this Agreement, express or implied, shall give to any person,
other than the Funds, the Auction Agent and BD and their respective successors
and permitted assigns, any benefit of any legal or equitable right, remedy or
claim under this Agreement.

     4.8 Amendment; Waiver.

          (a) This Agreement shall not be deemed or construed to be modified,
     amended, rescinded, canceled or waived, in whole or in part, except by a
     written instrument signed by a duly authorized representative of the party
     to be charged.

          (b) Failure of either party to this Agreement to exercise any right or
     remedy hereunder in the event of a breach of this Agreement by the other
     party shall not constitute a waiver of any such right or remedy with
     respect to any subsequent breach.

     4.9 Successors and Assigns.

     This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of BD
and the Auction Agent. This Agreement may not be assigned by either party hereto
absent the prior written consent of the other party.


                                       A-7




<PAGE>


     4.10 Severability.

     If any clause, provision or section of this Agreement shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any
remaining clause, provision or section hereof.

     4.11 Execution in Counterparts.

     This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.

     4.12 Governing Law.

     This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in said state.

     4.13 Jurisdiction.

     The parties agree that all actions and proceedings arising out of this
Broker-Dealer Agreement or any of the transactions contemplated hereby shall be
brought in the County of New York, and, in connection with any such action or
proceeding, submit to the jurisdiction of, and venue in, such County. Each of
the parties hereto also irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim arising out of this Agreement or the
transactions contemplated hereby.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.

                                        THE BANK OF NEW YORK, As Auction Agent


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:

                                        [INSERT NAME OF BD]


                                        By:
                                            ------------------------------------
                                            Name:
                                            Title:


                                       A-8




<PAGE>


                                                                     EXHIBIT A-1

                                  LIST OF FUNDS

                           (revised November __, 2004)

Cohen & Steers Advantage Income Realty Fund, Inc.

Cohen & Steers Premium Income Realty Fund, Inc.

Cohen & Steers Quality Income Realty Fund, Inc.

Cohen & Steers REIT and Preferred Income Fund, Inc.

Cohen & Steers REIT and Utility Income Fund, Inc.

Cohen & Steers Select Utility Fund, Inc.


                                       A-9



<PAGE>


                                                                     EXHIBIT A-2

                              THE BANK OF NEW YORK
                                AUCTION BID FORM

Submit To:                                            Issue:
The Bank of New York
Corporate Trust Administration                        --------------------------
101 Barclay Street, Floor 7W
New York, New York 10286                              ----------------------
Attention: Dealing and Trading Group -
Auction Desk
Telephone No.: (212) 815-3450
Facsimile No.: (212) 815-3440
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:

Name of Bidder:
                -------------------------

                                BENEFICIAL OWNER

Shares of Series now held                    HOLD
                          ----------------        ---------------------
                                             BID at rate of
                                                            --------------------
                                             SELL
                                                  ---------------------

                           POTENTIAL BENEFICIAL OWNER

                                                # of shares of Series
                                                                      ----------
                                                BID at rate of            Notes:
                                                               ----------

     (1)  If submitting more than one Bid for one Bidder, use additional Auction
          Bid Forms.

     (2)  If one or more Bids covering in the aggregate more than the number of
          outstanding shares held by any Beneficial Owner are submitted, such
          bid shall be considered valid in the order of priority set forth in
          the Auction Procedures on the above issue.

     (3)  A Hold or Sell Order may be placed only by a Beneficial Owner covering
          a number of shares not greater than the number of shares currently
          held.

     (4)  Potential Beneficial Owners may make only Bids, each of which must
          specify a rate. If more than one Bid is submitted on behalf of any
          Potential Beneficial Owner, each Bid submitted shall be a separate Bid
          with the rate specified.

     (5)  Bids may contain no more than three figures to the right of the
          decimal point (.001 of 1%). Fractions will not be accepted.

     (6)  An Order must be submitted in whole shares of Preferred Shares with an
          aggregate liquidation preference of $25,000.


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

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

     Authorized Signature
                          ----------------------------


                                      A-10




<PAGE>


                                                                     EXHIBIT A-3

     (Note: To be used only for transfers made other than pursuant to an
Auction)

                                  TRANSFER FORM

     Re:
         -----------------------------------------------------------------------
          ("Preferred Shares")

We are (check one):

     [_] the Existing Holder named below;

     [_] the Broker-Dealer for such Existing Holder; or

     [_] the Agent Member for such Existing Holder.

     We hereby notify you that such Beneficial Owner has transferred _________
Series ___ Preferred Shares to __________________________________




                                                  ------------------------------
                                                  (Name of Existing Holder)

                                                  ------------------------------
                                                  (Name of Broker-Dealer)

                                                  ------------------------------
                                                  (Name of Agent Member)


By:
    ----------------------------
    Printed Name:
    Title:


                                      A-11




<PAGE>


                                                                     EXHIBIT A-4

          (Note: To be used only for failures to deliver or to pay for
                  Preferred Shares sold pursuant to an Auction)

                         NOTICE OF A FAILURE TO DELIVER

     We are a Broker-Dealer for _____________________ (the "Purchaser"), which
purchased _______ Series ___ Preferred Shares of ________________________ in the
Auction held on ____________________ from the seller of such shares.

     We hereby notify you that (check one):

___ the Seller failed to deliver such shares to the Purchaser.

___ the Purchaser failed to make payment to the Seller upon delivery of such
shares.

                                             Name:
                                                   -----------------------------


                                             By:
                                                 -------------------------------
                                                 Printed Name:
                                                 Title:


                                      A-12




<PAGE>


                                                                       EXHIBIT B

  (Note: To be used only for transfers made other than pursuant to an Auction)

                                  TRANSFER FORM

     Re: COHEN & STEERS QUALITY INCOME REALTY FUND, INC.
         Auction Market Preferred Shares ("AMPS")

We are (check one):

     [_] the Existing Holder named below;

     [_] the Broker-Dealer for such Existing Holder; or

     [_] the Agent Member for such Existing Holder.

     We hereby notify you that such Beneficial Owner has transferred ___________
Series [_] AMPS to ________________________________.



                                                  ------------------------------
                                                  (Name of Existing Holder)

                                                  ------------------------------
                                                  (Name of Broker-Dealer)

                                                  ------------------------------
                                                  (Name of Agent Member)


By:
    ----------------------------
    Printed Name:
    Title:


                                      B-1




<PAGE>


                                                                       EXHIBIT C

          (Note: To be used only for failures to deliver or to pay for
                        AMPS sold pursuant to an Auction)

                         NOTICE OF A FAILURE TO DELIVER

     We are a Broker-Dealer for ___________________ (the "Purchaser"), which
purchased ________ Series [_] AMPS of COHEN & STEERS QUALITY INCOME REALTY
FUND, INC. in the Auction held on _____________________ from the seller of such
shares.

     We hereby notify you that (check one):

     [_] the Seller failed to deliver such shares to the Purchaser.

     [_] the Purchaser failed to make payment to the Seller upon delivery of
such shares.


                                             Name:
                                                   -----------------------------
                                                   (Name of Broker-Dealer)


                                             By:
                                                   -----------------------------
                                                   Printed Name:
                                                   Title:


                                      C-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2K
<SEQUENCE>6
<FILENAME>ex99-2kv.txt
<DESCRIPTION>EXHIBIT 2(K)(V)
<TEXT>


<PAGE>

                                                               Exhibit 2(k)(v)

                     FORM OF MASTER BROKER-DEALER AGREEMENT

                                     between

                              THE BANK OF NEW YORK

                                       and

                               __________________

                            dated as of ______, 2004

                                   Relating to

                      Preferred Shares ("Preferred Shares")

                                       of

                 EACH OF THE COHEN & STEERS FUNDS LISTED HEREIN

                                   ----------




<PAGE>


                         MASTER BROKER-DEALER AGREEMENT

     Broker-Dealer Agreement dated as of __________, 2004, is between The Bank
of New York, a New York banking corporation (the "Auction Agent") (not in its
individual capacity, but solely as agent of the registered investment companies,
which are Maryland corporations, listed in Exhibit A hereto, as the same may be
amended from time to time (individually, a "Fund", and together, the "Funds,"
unless indicated otherwise), pursuant to authority granted to it in the various
Auction Agency Agreements between each of the Funds and the Auction Agent (the
"Auction Agency Agreements") and ____________ (together with its successors and
assigns, "BD").

     The Funds have duly authorized and issued, or intend to issue different
series of shares of Auction Rate Cumulative Preferred Shares, in the case of the
Cohen & Steers Advantage Income Realty Fund, Inc., Taxable Auction Market
Preferred Shares (the "AMPS) or other auction market preferred stock in the case
of the Funds, all with a par value of $.001 per share and a liquidation
preference of $25,000 per share (together, the "Preferred Shares"), pursuant to
the Funds' Articles Supplementary (as defined below).

     The Funds' Articles Supplementary provides that for each subsequent
Dividend Period of Preferred Shares then outstanding, the Applicable Rate for
each series of Preferred Shares for each subsequent Dividend Period shall be
equal to the rate per annum that results from an Auction for Outstanding shares
of each Series on the respective Auction Date therefor next preceding the period
from and after the Date of Original Issue to and including the last day of the
initial Dividend Period. The Boards of Directors of the Funds have adopted
resolutions appointing The Bank of New York as Auction Agent for purposes of the
Auction Procedures, and pursuant to Section 2.5 of the Auction Agency
Agreements, the Funds have requested and directed the Auction Agent to execute
and deliver this Agreement.

     The Auction Procedures require the participation of one or more
Broker-Dealers.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Auction Agent and BD agree as follows:

I.   DEFINITIONS AND RULES OF CONSTRUCTION.

     1.1  Terms Defined by Reference to the Articles Supplementary.

     Capitalized terms not defined herein shall have the respective meanings
specified in the Articles Supplementary of each Fund.

     1.2  Terms Defined Herein.

     As used herein, the following terms shall have the following meanings,
unless the context otherwise requires:

          (a) "Articles Supplementary" shall mean the Articles Supplementary for
Preferred Shares of each of the Funds specifying the powers, preferences and
rights of the Preferred Shares filed in the office of the State Department of
Assessments and Taxation of Maryland.

          (b) "Auction" shall have the meaning specified in Section 2.1 of the
Auction Agency Agreement.

          (c) "Auction Procedures" shall mean the Auction Procedures that are
set forth in Part II of the Articles Supplementary.


                                       2




<PAGE>


          (d) "Authorized Officer" of the Auction Agent shall mean each Vice
President, Assistant Vice President and Assistant Treasurer of the Auction Agent
and every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes of this Agreement in a written communication
to BD.

          (e) "BD Officer" shall mean each officer or employee of BD designated
as a "BD Officer" for purposes of this Agreement in a communication to the
Auction Agent.

          (f) "Broker-Dealer Agreement" shall mean this Agreement and any
substantially similar agreement between the Auction Agent and a Broker-Dealer.

     1.3  Rules of Construction.

     Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of this Agreement:

          (a) Words importing the singular number shall include the plural
number and vice versa.

          (b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement, nor shall they
affect its meaning, construction or effect.

          (c) The words "hereof," "herein," "hereto," and other words of similar
import refer to this Agreement as a whole.

          (d) All references herein to a particular time of day shall be to New
York City time.

II.  NOTIFICATION OF DIVIDEND.

     The provisions contained in Section 4 of Part I of the Articles
Supplementary concerning the notification of a Special Dividend Period will be
followed by the Auction Agent and BD, and the provisions contained therein are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.

III. THE AUCTION.

     3.1  Purpose; Incorporation by Reference of Auction Procedures.

          (a) On each Auction Date, the provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of determining the
Applicable Rate for each series of Preferred Shares, for each Dividend Period.
Each periodic operation of such procedures is hereinafter referred to as an
"Auction."

          (b) All of the provisions contained in the Auction Procedures are
incorporated herein by reference in their entirety and shall be deemed to be a
part of this Agreement to the same extent as if such provisions were set forth
fully herein.

          (c) BD agrees to act as, and assumes the obligations of and
limitations and restrictions placed upon, a Broker-Dealer under this Agreement.
BD understands that other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in Section 17 of Part I of the Articles
Supplementary may execute a Broker-Dealer Agreement and participate as
Broker-Dealers in Auctions.


                                       3




<PAGE>


          (d) BD and other Broker-Dealers may participate in Auctions for their
own accounts. However, the Fund, by notice to BD and all other Broker Dealers,
may prohibit all Broker-Dealers from submitting Bids in Auctions for their own
accounts, provided that Broker-Dealers may continue to submit Hold Orders and
Sell Orders.

     3.2  Preparation for Each Auction.

          (a) Not later than 9:30 A.M. on each Auction Date for the Preferred
Shares, the Auction Agent shall advise BD by telephone or other electronic means
of communication acceptable to the parties of the Maximum Rate in effect on such
Auction Date.

          (b) The Auction Agent from time to time may, but shall not be
obligated to, request BD to provide it with a list of the respective customers
BD believes are Beneficial Owners of shares of each series of Preferred Shares.
BD shall comply with any such request, and the Auction Agent shall keep
confidential any such information, including information received as to the
identity of Bidders in any Auction, and shall not disclose any such information
so provided to any Person other than a Fund; and such information shall not be
used by the Auction Agent or its officers, employees, agents or representatives
for any purpose other than such purposes as are described herein; provided,
however, that the Auction Agent reserves the right and is authorized to disclose
any such information if (a) it is ordered to do so by a court of competent
jurisdiction or a regulatory body, judicial or quasi-judicial agency or
authority having the authority to compel such disclosure, (b) it is advised by
its counsel that its failure to do so would be unlawful or (c) failure to do so
would expose the Auction Agent to loss, liability, claim, damage or expense for
which it has not received indemnity or security satisfactory to it. In the event
that the Auction Agent is required to disclose information in accordance with
the foregoing sentence, it shall provide written notice of such requirement to
BD as promptly as practicable. The Auction Agent shall, subject to the terms of
the Auction Agency Agreement, transmit any list of customers BD believes are
Beneficial Owners of shares of each series of Preferred Shares and information
related thereto only to its officers, employees, agents or representatives who
need to know such information for the purposes of acting in accordance with this
Agreement, and the Auction Agent shall prevent the transmission of such
information to others and shall cause its officers, employees, agents and
representatives to abide by the foregoing confidentiality restrictions;
provided, however, that the Auction Agent shall have no responsibility or
liability for the actions of any of its officers, employees, agents or
representatives after they have left the employ of the Auction Agent.

     3.3  Auction Schedule; Method of Submission of Orders.

          (a) The Funds and the Auction Agent shall conduct Auctions for each
series of Preferred Shares in accordance with the schedule set forth below. Such
schedule may be changed at any time by the Auction Agent with the consent of the
Fund, which consent shall not be withheld unreasonably. The Auction Agent shall
give notice of any such change to BD. Such notice shall be received prior to the
first Auction Date on which any such change shall be effective.

<TABLE>
<CAPTION>
Time                         Event
----                         -----
<S>                          <C>
By 9:30 A.M.                 Auction Agent advises the Funds and the
                             Broker-Dealers of the Maximum Rate as set forth in
                             Section 3.2(a) hereof.

9:30 A.M. - 1:00 P.M.        Auction Agent assembles information communicated to
                             it by Broker-Dealers as provided in Section 3(a) of
                             Part II of the Articles Supplementary. Submission
                             Deadline is 1:00 P.M.

Not earlier than 1:00 P.M.   Auction Agent makes determinations pursuant to
                             Section 4(a) of
</TABLE>


                                        4




<PAGE>


<TABLE>
<CAPTION>
Time                         Event
----                         -----
<S>                          <C>
                             Part II of the Articles Supplementary.

By approximately 3:30 P.M.   Auction Agent advises the Funds of the results of
                             the Auction as provided in Section 4(b) of Part II
                             of the Articles Supplementary.

                             Submitted Bids and Submitted Sell Orders will be
                             accepted and rejected in whole or in part and
                             shares of Preferred Shares are allocated as
                             provided in Section 5 of Part II of the Articles
                             Supplementary.

                             Auction Agent shall give notice of the Auction
                             results as set forth in Section 3.4(a) hereof.
</TABLE>

     The Auction Agent will follow the Bond Market Association's Market Practice
U.S. Holiday Recommendations for shortened trading days for the bond markets
(the "BMA Recommendation") unless the Auction Agent is instructed otherwise. In
the event of a BMA Recommendation on an Auction Date, the Submission Deadline
will be 11:30 a.m., instead of 1:00 p.m., and as a result the notice set forth
in Section 3.3 will occur earlier.

          (b) BD agrees to maintain a list of Potential Beneficial Owners and to
contact the Potential Beneficial Owners on such list on or prior to each Auction
Date for the purposes set forth in Section 2 of Part II of the Articles
Supplementary.

          (c) BD shall submit Orders to the Auction Agent in writing in
substantially the form attached hereto as Exhibit B. BD shall submit separate
Orders to the Auction Agent for each Potential Beneficial Owner or Beneficial
Owner on whose behalf BD is submitting an Order and shall not net or aggregate
the Orders of Potential Beneficial Owners or Beneficial Owners on whose behalf
BD is submitting Orders.

          (d) BD shall deliver to the Auction Agent (i) a written notice,
substantially in the form attached hereto as Exhibit C, of transfers of shares
of any series of Preferred Shares, made through BD by an Existing Holder to
another Person other than pursuant to an Auction, and (ii) a written notice,
substantially in the form attached hereto as Exhibit D, of the failure of
Preferred Shares to be transferred to or by any Person that purchased or sold
shares of any series of Preferred Shares through BD pursuant to an Auction. The
Auction Agent is not required to accept any notice delivered pursuant to the
terms of the foregoing sentence with respect to an Auction unless it is received
by the Auction Agent by 3:00 P.M. on the Business Day next preceding the
applicable Auction Date.

     3.4  Notice of Auction Results.

          (a) On each Auction Date, the Auction Agent shall notify BD by
telephone or other electronic means acceptable to the parties. On the Business
Day next succeeding such Auction Date, the Auction Agent shall notify BD in
writing of the disposition of all Orders submitted by BD in the Auction held on
such Auction Date.

          (b) BD shall notify each Beneficial Owner, Potential Beneficial Owner,
Existing Holder or Potential Holder on whose behalf BD has submitted an Order,
and take such other action as is required of BD.

     If any Beneficial Owner or Existing Holder selling shares of any series of
Preferred Shares in an Auction fails to deliver such shares, the Broker-Dealer
of any Person that was to have purchased shares of


                                       5




<PAGE>


any series of Preferred Shares in such Auction may deliver to such Person a
number of whole shares of the series of Preferred Shares that is less than the
number of shares that otherwise was to be purchased by such Person. In such
event, the number of shares of the series of Preferred Shares to be so delivered
shall be determined by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Upon the occurrence of any such failure
to deliver shares, such Broker-Dealer shall deliver to the Auction Agent the
notice required by Section 3.3(d)(ii) hereof. Notwithstanding the foregoing
terms of this Section 3.4(b), any delivery or non-delivery of shares of any
series of Preferred Shares which represents any departure from the results of an
Auction, as determined by the Auction Agent, shall be of no effect unless and
until the Auction Agent shall have been notified of such delivery or
non-delivery in accordance with the terms of Section 3.3(d) hereof. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 3.4(b).

     3.5  Service Charge to be Paid to BD.

     On the Business Day next succeeding each Auction Date, the Auction Agent
shall pay to BD from moneys received from the Funds an amount equal to: (a) in
the case of any Auction Date immediately preceding a Dividend Period of less
than one year, the product of (i) a fraction the numerator of which is the
number of days in such Dividend Period (calculated by counting the first day of
such Dividend Period but excluding the last day thereof) and the denominator of
which is 360, times (ii) 1/4 of 1%, times (iii) $25,000, times (iv) the sum of
(A) the aggregate number of shares of any series of Preferred Shares placed by
BD in the applicable Auction that were (x) the subject of a Submitted Bid of a
Beneficial Owner submitted by BD and continued to be held as a result of such
submission and (y) the subject of a Submitted Bid of a Potential Beneficial
Owner submitted by BD and were purchased as a result of such submission plus (B)
the aggregate number of shares of any series of Preferred Shares subject to
valid Hold Orders (determined in accordance with Section 2 of Part II of the
Articles Supplementary) submitted to the Auction Agent by BD plus (C) the number
of shares of any series of Preferred Shares deemed to be subject to Hold Orders
by Beneficial Owners pursuant to Section 2 of Part II of the Articles
Supplementary that were acquired by BD for its own account or were acquired by
such Beneficial Owners through BD; and (b) in the case of any Auction Date
immediately preceding a Special Dividend Period of one year or longer, that
amount as mutually agreed upon by the Funds and BD, based on the selling
concession that would be applicable to an underwriting of fixed or variable rate
Preferred Shares with a similar final maturity or variable rate dividend period,
at the commencement of such Special Dividend Period.

     For purposes of subclause (a)(iv)(C) of the foregoing sentence, if any
Beneficial Owner who acquired shares of any series of Preferred Shares through
BD transfers those shares to another Person other than pursuant to an Auction,
then the Broker-Dealer for the shares so transferred shall continue to be BD,
provided, however, that if the transfer was effected by, or if the transferee
is, a Broker-Dealer other than BD, then such Broker-Dealer shall be the
Broker-Dealer for such shares.

IV. MISCELLANEOUS.

     4.1  Termination.

     Any party may terminate this Agreement at any time upon five days' prior
written notice to the other party; provided, however, that if the Broker-Dealer
is Merrill Lynch, Pierce, Fenner & Smith Incorporated neither Merrill Lynch,
Pierce, Fenner & Smith Incorporated nor the Auction Agent may terminate this
Agreement without first obtaining the prior written consent of the Fund to such
termination, which consent shall not be withheld unreasonably. This Agreement
shall automatically terminate upon the redemption of all outstanding Preferred
Shares or upon termination of the Auction Agent Agreement.

     4.2  Force Majeure


                                       6




<PAGE>


     Neither party to this Agreement shall be responsible or liable for any
failure or delay in the performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
reasonable control, including, without limitation, acts of God; earthquakes;
fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots;
acts of terrorism; interruptions, loss or malfunctions or utilities; computer
(hardware or software) or communications services; accidents; labor disputes;
acts of civil or military authority or governmental actions; it being understood
that the parties shall use reasonable efforts which are consistent with accepted
practices in the banking industry to resume performance as soon as practicable
under the circumstances.

     4.3  Participant in Securities Depository; Payment of Dividends in Same-Day
          Funds.

          (a) BD is, and shall remain for the term of this Agreement, a member
of, or a participant in, the Securities Depository (or an affiliate of such a
member or participant).

          (b) BD represents that it (or if BD does not act as Agent Member, one
of its affiliates) shall make all dividend payments on the shares of any series
of Preferred Shares available in same-day funds on each Dividend Payment Date to
customers that use BD (or its affiliate) as Agent Member.

     4.4  Agent Member.

     At the date hereof, BD is a participant of the Securities Depository.

     4.5  Communications.

     Except for (i) communications authorized to be made by telephone pursuant
to this Agreement or the Auction Procedures and (ii) communications in
connection with the Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party hereunder
shall be in writing (including telecopy or similar writing) and shall be given
to such party at its address or telecopier number set forth below:

If to the Auction Agent,
addressed to:              The Bank of New York
                           Corporate Trust Administration
                           100 Church Street, 8th Floor
                           New York, New York 10286
                           Attention: Dealing and Trading Group - Auction Desk
                           Telephone No.: (212) 437-6166
                           Facsimile No.: (212) 437-6123

If to the BD,
addressed to:

     or such other address or telecopier number as such party hereafter may
     specify for such purpose by notice to the other party. Each such notice,
     request or communication shall be effective when delivered at the address
     specified herein. Communications shall be given on behalf of BD by a BD
     Officer and on behalf of the Auction Agent by an Authorized Officer. BD may
     record telephone communications with the Auction Agent.


                                       7




<PAGE>


     4.6  Entire Agreement.

     This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and there are no other representations,
endorsements, promises, agreements or understandings, oral, written or implied,
between the parties relating to the subject matter hereof.

     4.7  Benefits.

     Nothing in this Agreement, express or implied, shall give to any person,
other than the Funds, the Auction Agent and BD and their respective successors
and permitted assigns, any benefit of any legal or equitable right, remedy or
claim under this Agreement.

     4.8  Amendment; Waiver.

          (a) This Agreement shall not be deemed or construed to be modified,
     amended, rescinded, canceled or waived, in whole or in part, except by a
     written instrument signed by a duly authorized representative of the party
     to be charged.

          (b) Failure of either party to this Agreement to exercise any right or
     remedy hereunder in the event of a breach of this Agreement by the other
     party shall not constitute a waiver of any such right or remedy with
     respect to any subsequent breach.

     4.9  Successors and Assigns.

     This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and permitted assigns of each of BD
and the Auction Agent. This Agreement may not be assigned by either party hereto
absent the prior written consent of the other party.

     4.10 Severability.

     If any clause, provision or section of this Agreement shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any
remaining clause, provision or section hereof.

     4.11 Execution in Counterparts.

     This Agreement may be executed in several counterparts, each of which shall
be an original and all of which shall constitute but one and the same
instrument.

     4.12 Governing Law.

     This Agreement shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements made and to be performed
in said state.

     4.13 Jurisdiction.

     The parties agree that all actions and proceedings arising out of this
Auction Agency Agreement or any of the transactions contemplated hereby shall be
brought in the County of New York, and, in connection with any such action or
proceeding, submit to the jurisdiction of, and venue in, such County. Each of
the parties hereto also irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim arising out of this Agreement or the
transactions contemplated hereby.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.


                                       8




<PAGE>


                                         THE BANK OF NEW YORK, As Auction Agent


                                         By:
                                             -----------------------------------
                                             Name:
                                             Title:


                                         [NAME OF BD]


                                         By:
                                             -----------------------------------
                                             Name:
                                             Title:


                                       9




<PAGE>


                                    EXHIBIT A

                                  LIST OF FUNDS

                           (revised November 5, 2004)

Cohen & Steers Advantage Income Realty Fund, Inc.

Cohen & Steers Premium Income Realty Fund, Inc.

Cohen & Steers Quality Income Realty Fund, Inc.

Cohen & Steers REIT and Preferred Income Fund, Inc.

Cohen & Steers REIT and Utility Income Fund, Inc.

Cohen & Steers Select Utility Fund, Inc.


                                       A-1




<PAGE>


                                    EXHIBIT B

                              THE BANK OF NEW YORK
                                AUCTION BID FORM

Submit To:                               Issue:
----------                               ------
The Bank of New York
                                         ---------------------------------------
Corporate Trust Administration
100 Church Street, 8th Floor             ---------------------------------------
New York, New York 10286
Attention: Dealing and Trading Group -
Auction Desk
Telephone No.: (212) 437-6166
Facsimile No.: (212) 437-6123

The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:

Name of Bidder:
                -------------------------

                                BENEFICIAL OWNER

Shares of Series now held                HOLD
                          ------------        -----------------
                                         BID at rate of
                                                        ------------------------
                                         SELL
                                              -----------------

                           POTENTIAL BENEFICIAL OWNER

                                         # of shares of Series
                                                               -----------
                                         BID at rate of             Notes:
                                                        -----------

     (1)  If submitting more than one Bid for one Bidder, use additional Auction
          Bid Forms.

     (2)  If one or more Bids covering in the aggregate more than the number of
          outstanding shares held by any Beneficial Owner are submitted, such
          bid shall be considered valid in the order of priority set forth in
          the Auction Procedures on the above issue.

     (3)  A Hold or Sell Order may be placed only by a Beneficial Owner covering
          a number of shares not greater than the number of shares currently
          held.

     (4)  Potential Beneficial Owners may make only Bids, each of which must
          specify a rate. If more than one Bid is submitted on behalf of any
          Potential Beneficial Owner, each Bid submitted shall be a separate Bid
          with the rate specified.

     (5)  Bids may contain no more than three figures to the right of the
          decimal point (.001 of 1%). Fractions will not be accepted.

     (6)  An Order must be submitted in whole shares of Preferred Shares with an
          aggregate liquidation preference of $25,000.

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

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

     Authorized Signature
                          ------------


                                       B-1




<PAGE>


                                    EXHIBIT C

  (Note: To be used only for transfers made other than pursuant to an Auction)

                                  TRANSFER FORM

     Re: _________________________________________________________________
         ("Preferred Shares")

We are (check one):

     [_] the Existing Holder named below;

     [_] the Broker-Dealer for such Existing Holder; or

     [_] the Agent Member for such Existing Holder.

     We hereby notify you that such Beneficial Owner has transferred _________
Series ___ Preferred Shares to __________________________________

                                         ---------------------------------------
                                         (Name of Existing Holder)

                                         ---------------------------------------
                                         (Name of Broker-Dealer)

                                         ---------------------------------------
                                         (Name of Agent Member)


By:
    ----------------------------------
    Printed Name:
    Title:


                                       C-1




<PAGE>


                                    EXHIBIT D

          (Note: To be used only for failures to deliver or to pay for
                  Preferred Shares sold pursuant to an Auction)

                         NOTICE OF A FAILURE TO DELIVER

     We are a Broker-Dealer for _____________________ (the "Purchaser"), which
purchased _______ Series ___ Preferred Shares of ______________________________
_____________________________________________ in the Auction held on
____________________ from the seller of such shares.

     We hereby notify you that (check one):

______ the Seller failed to deliver such shares to the Purchaser.

______ the Purchaser failed to make payment to the Seller upon delivery of such
shares.

                                         Name:
                                               ---------------------------------


                                         By:
                                             -----------------------------------
                                             Printed Name:
                                             Title:


                                       D-1

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2L
<SEQUENCE>7
<FILENAME>ex99-2li.txt
<DESCRIPTION>EXHIBIT 2(L)(I)
<TEXT>


<PAGE>

                                                                 Exhibit 2(l)(i)

                 [Letterhead of Simpson Thacher & Bartlett LLP]


                                              November 12, 2004


Cohen & Steers Quality Income Realty Fund, Inc.
757 Third Avenue
New York, New York 10017

Ladies and Gentlemen:

         We have acted as counsel to Cohen & Steers Quality Income Realty Fund,
Inc., a closed-end management investment company organized as a Maryland
corporation (the "Company"), in connection with the Registration Statement on
Form N-2, File Nos. 333-119361 and 811-10481 (the "Registration Statement"),
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act") and the
Investment Company Act of 1940, as amended, relating to the issuance by the
Company of     shares of Series M7 taxable auction market preferred stock, par
value $.001 per share, with a liquidation preference of $25,000 per share (the
"Shares") in connection with the offering described in the Registration
Statement.

         We have examined the Registration Statement and a form of the share
certificate which has been filed with the Commission as an exhibit to the
Registration Statement. We also have examined the originals, or duplicates or
certified or conformed copies, of such corporate records, agreements, documents
and other instruments and have made such other investigations as we have deemed
relevant and necessary in connection with the opinions hereinafter set forth. As
to questions of fact material to this opinion, we have relied upon certificates
or comparable documents of public officials and of officers and representatives
of the Company.

         In rendering the opinion set forth below, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us





<PAGE>


Cohen & Steers Quality Income
Realty Fund, Inc.                     - 2 -                    November 12, 2004


as originals, the conformity to original documents of all documents submitted to
us as duplicates or certified or conformed copies and the authenticity of the
originals of such latter documents.

         Based upon the foregoing, and subject to the qualifications,
assumptions and limitations stated herein, we are of the opinion that when the
Pricing Committee of the Board of Directors of the Company (the "Board") has
determined certain of the terms, rights and preferences of the Shares pursuant
to authority delegated to it by the Board and the Articles Supplementary
relating to the Shares have been filed with the Maryland State Department of
Assessments and Taxation, the Shares to be offered for sale pursuant to the
Prospectus included in the Registration Statement will have been duly authorized
and, when thereafter, sold, issued and paid for in accordance with the
applicable definitive underwriting agreement approved by the Board, will have
been validly and legally issued and will be fully paid and nonassessable.

         Insofar as the opinion expressed herein relates to or is dependent upon
matters governed by the law of the State of Maryland, we have relied upon the
opinion of Venable LLP dated the date hereof.

         We do not express any opinion herein concerning any law other than the
law of the State of New York and, to the extent set forth herein, the law of the
State of Maryland.

         We hereby consent to the filing of this opinion letter as Exhibit
2(l)(i) to the Registration Statement and to the use of our name under the
caption "Legal Opinions" in the Prospectus included in the Registration
Statement.

                                        Very truly yours,



                                        /s/ SIMPSON THACHER & BARTLETT LLP



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2L
<SEQUENCE>8
<FILENAME>ex99-2lii.txt
<DESCRIPTION>EXHIBIT 2(L)(II)
<TEXT>


<PAGE>

                                                                Exhibit 2(l)(ii)

                                    November 12, 2004



Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York  10017-3909

         Re:   Cohen & Steers Quality Income Realty Fund, Inc.
               -----------------------------------------------

Ladies and Gentlemen:

         We have acted as special Maryland counsel for Cohen & Steers Quality
Income Realty Fund, Inc., a Maryland corporation (the "Fund"), in connection
with its offering of Taxable Auction Market Preferred Shares, each with a par
value of $0.001 and a liquidation preference of $25,000 (the "Shares").

         As special Maryland counsel for the Fund, we are familiar with its
Charter and Bylaws. We have examined the prospectus (the "Prospectus") included
in its Registration Statement on Form N-2 with respect to the Shares (Securities
Act Registration File No. 333-119361, Investment Company Act File No. 811-10481)
(the "Registration Statement"), substantially in the form in which it is to
become effective. We are also familiar with the form of Articles Supplementary
relating to the Shares (the "Articles Supplementary") that has been filed as an
exhibit to the Registration Statement. We have further examined and relied on a
certificate of the Maryland State Department of Assessments and Taxation
("SDAT") to the effect that the Fund is duly incorporated and existing under the
laws of the State of Maryland and is in good standing and duly authorized to
transact business in the State of Maryland.

         We have assumed for purposes of this opinion that prior to the issuance
of the Shares, the Fund will have received the approval of Standard & Poor's
Corporation and Moody's Investors Services, Inc. pursuant to Part I, Section 11,
item (b) of the Fund's Articles Supplementary filed with SDAT on April 2, 2002,
as amended, and on September 10, 2003.

         We have also examined and relied on such other corporate records of the
Fund and documents and certificates with respect to factual matters as we have
deemed necessary to render the opinion expressed herein. We have assumed,
without independent verification, the genuineness of all signatures on documents
submitted to us, the authenticity of all documents submitted to us as originals,
and the conformity with originals of all documents submitted to us as copies.





<PAGE>


Simpson Thacher & Bartlett LLP
November 12, 2004
Page 2



         Based on such examination, we are of the opinion that when the Pricing
Committee of the Board of Directors has determined certain of the terms, rights
and preferences of the Shares pursuant to authority delegated to it by the Board
of Directors, and the Articles Supplementary have been filed with SDAT, the
Shares to be offered for sale pursuant to the Prospectus will have been duly
authorized and, when thereafter, sold, issued and paid for in accordance with
the applicable definitive underwriting agreement approved by the Board of
Directors, will have been validly and legally issued and will be fully paid and
nonassessable.

         This letter expresses our opinion with respect to the Maryland General
Corporation Law governing matters such as due organization and the authorization
and issuance of stock (including the statutory provisions, all applicable
provisions of the Maryland Constitution and reported judicial decisions
interpreting the foregoing). It does not extend to the securities or "Blue Sky"
laws of Maryland, to federal securities laws or to other laws.

         You may rely on this opinion in rendering your opinion to the Fund that
is to be filed as an exhibit to the Registration Statement. We consent to the
filing of this opinion as an exhibit to the Registration Statement and to the
reference to our firm under the heading "Legal Opinions" in the Prospectus. We
do not thereby admit that we are "experts" within the meaning of the Securities
Act of 1933 and the rules and regulations thereunder. This opinion may not be
relied on for any other purpose or by any other person without our prior written
consent.

                                            Very truly yours,


                                            /s/ Venable LLP



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2N
<SEQUENCE>9
<FILENAME>ex99-2n.txt
<DESCRIPTION>EXHIBIT 2(N)
<TEXT>


<PAGE>

                                                                    Exhibit 2(n)

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the use in this Registration Statement on Form N-2 of our
report dated February 17, 2004, relating to the financial statements and
financial highlights of Cohen & Steers Quality Income Realty Fund, Inc., which
appears in such Registration Statement. We also consent to the references to us
under the headings "Experts" and "Independent Registered Public Accounting Firm"
in such Registration Statement.


PricewaterhouseCoopers LLP
New York, New York
November 5, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.POWATT
<SEQUENCE>10
<FILENAME>ex99-2sii.txt
<DESCRIPTION>EXHIBIT 2(S)(II)
<TEXT>


<PAGE>


                                                                Exhibit 2(s)(ii)

                 Cohen & Steers Quality Income Realty Fund, Inc.

                                POWER OF ATTORNEY

     Frank K. Ross, whose signature appears below, hereby constitutes and
appoints Martin Cohen, Robert H. Steers and Lawrence B. Stoller, and each of
them, his true and lawful attorneys and agents, with full power and authority of
substitution and resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or any of them,
may deem necessary or advisable or which may be required to enable Cohen &
Steers Quality Income Realty Fund, Inc. (the "Company") to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended (collectively, the "Acts"), and any rules, regulations or requirements
of the Securities and Exchange Commission in respect thereof, in connection with
the filing and effectiveness of any and all amendments (including post-effective
amendments) to the Company's Registration Statement on Form N-14 and any other
registration statements pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Company
any and all such amendments and registration statements filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or any of them, shall do or cause to be done
by virtue hereof.


                                                  /s/ Frank K. Ross
                                                  ------------------------------
                                                  Frank K. Ross

                                                  Date: March 5, 2004




<PAGE>


                 Cohen & Steers Quality Income Realty Fund, Inc.

                                POWER OF ATTORNEY

     Richard E. Kroon, whose signature appears below, hereby constitutes and
appoints Martin Cohen, Robert H. Steers and Lawrence B. Stoller, and each of
them, his true and lawful attorneys and agents, with full power and authority of
substitution and resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or any of them,
may deem necessary or advisable or which may be required to enable Cohen &
Steers Quality Income Realty Fund, Inc. (the "Company") to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended (collectively, the "Acts"), and any rules, regulations or requirements
of the Securities and Exchange Commission in respect thereof, in connection with
the filing and effectiveness of any and all amendments (including post-effective
amendments) to the Company's Registration Statement on Form N-14 and any other
registration statements pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Company
any and all such amendments and registration statements filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or any of them, shall do or cause to be done
by virtue hereof.


                                                  /s/ Richard E. Kroon
                                                  ------------------------------
                                                  Richard E. Kroon

                                                  Date: November 4, 2004




<PAGE>


                 Cohen & Steers Quality Income Realty Fund, Inc.

                                POWER OF ATTORNEY

     C. Edward Ward, Jr., whose signature appears below, hereby constitutes and
appoints Martin Cohen, Robert H. Steers and Lawrence B. Stoller, and each of
them, his true and lawful attorneys and agents, with full power and authority of
substitution and resubstitution, to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, or any of them,
may deem necessary or advisable or which may be required to enable Cohen &
Steers Quality Income Realty Fund, Inc. (the "Company") to comply with the
Investment Company Act of 1940, as amended, and the Securities Act of 1933, as
amended (collectively, the "Acts"), and any rules, regulations or requirements
of the Securities and Exchange Commission in respect thereof, in connection with
the filing and effectiveness of any and all amendments (including post-effective
amendments) to the Company's Registration Statement on Form N-14 and any other
registration statements pursuant to said Acts, including specifically, but
without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Company
any and all such amendments and registration statements filed with the
Securities and Exchange Commission under said Acts, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorneys and agents, or any of them, shall do or cause to be done
by virtue hereof.


                                                  /s/ C. Edward Ward, Jr.
                                                  ------------------------------
                                                  C. Edward Ward, Jr.

                                                  Date: November 4, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>11
<FILENAME>filename11.txt
<TEXT>


<PAGE>


                   [LETTERHEAD OF SIMPSON THACHER & BARTLETT]

VIA EDGAR                                                      November 12, 2004

            Re: Cohen & Steers Quality Income Realty Fund, Inc.
                File Nos. 811-10481; 333-119361
                Filed on September 29, 2004

                Cohen & Steers Advantage Income Realty Fund, Inc.
                File Nos. 811-09993; 333-119488
                Filed on October 1, 2004

Keith A. O'Connell
Senior Counsel
Division of Investment Management
U.S. Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Dear Mr. O'Connell:

          On behalf of Cohen & Steers Quality Income Realty Fund, Inc.
("Quality") and Cohen & Steers Advantage Income Realty Fund, Inc. ("Advantage"
and, together with Quality, the "Funds"), we transmit for filing via EDGAR with
the Securities and Exchange Commission (the "Commission") the Pre-Effective
Amendments No. 1 (the "Amendments") to the Funds' initial registration
statements on Form N-2 (the "Registration Statements") to register additional
Taxable Auction Market Preferred Shares. The Registration Statement for Quality
was filed on September 29, 2004 and the Registration Statement for Advantage was
filed on October 1, 2004. By letter dated October 21, 2004, we were provided
with comments from the staff of the Commission (the "Staff") regarding the
Registration Statements. The purpose of these Amendments is to respond to the
Staff's comments to the Registration Statements that you provided in your letter
and to make certain other changes outlined below. In this regard, we note that
the Amendments are substantially similar to the Funds' original Registration
Statements except the Registration Statements now reflect the Merrill Lynch
trademark for auction rate preferred securities, "AMPS".

          Set forth below are the Funds' responses to your comments insofar as
they concern your inquiries that apply to the Funds.




<PAGE>


Keith A. O'Connell                                             November 12, 2004

Prospectus - Cohen & Steers Premium Income Realty Fund, Inc.

Federal Income Taxation, page 14

1. Page 15 states, "Such dividends generally will, except in the case of
distributions of qualified dividend income and net capital gains, be taxable as
ordinary income to holders." The Fund invests heavily in REITS. Please
prominently clarify whether the preferred dividends are generally expected to be
eligible to be treated as qualified dividend income.

     Response: Under the caption "Prospectus Summary - Federal Income Taxation"
in the Quality and Advantage Registration Statements and our discussion with
respect to the distributions of both Quality and Advantage, we have revised this
discussion to indicate that neither Quality nor Advantage expects a significant
portion of its distributions to be eligible for the dividends received deduction
or derived from qualified dividend income. This change was also made to the
Cohen & Steers Premium Income Realty Fund which was declared effective on
Wednesday, November 10, 2004.

Statement of Additional Information (SAI)

Investment Restrictions, page 4

2. Certain fundamental policies have been redlined. Supplementally, please
confirm that no fundamental policies have been changed without shareholder
approval.

     Response: The fundamental investment policies of the Funds have not been
changed and the text which was redlined in the previous filings has been revised
to conform identically to the fundamental investment policies in the prior
registration statements of Quality and Advantage that have been declared
effective.

Financial Highlights, page 48

3. Footnote d states "Total market value return is computed based upon the New
York Stock Exchange market price of the fund's shares and excludes the effects
of brokerage commissions." Supplementally, please explain what brokerage
commissions are being excluded.

     Response: Total market value is calculated on the basis of the beginning
and ending market price of shares of Quality and Advantage for the period
presented. In order for an investor to realize that return, the investor would
have to purchase the shares of either Quality or Advantage at the beginning of
the period. The purpose of that statement in footnote d is to point out that the
calculation excludes the effect of brokerage commissions that would be incurred
if an investor did buy the fund shares. In this regard, then, market value
return demonstrates the underlying changes in asset value without distortions
related to varying brokerage costs. We have included text in footnote "d" to
clarify this point.


                                       -2-




<PAGE>


Keith A. O'Connell                                             November 12, 2004

General

4. We note that portions of the filing are incomplete. We may have additional
comments on such portions when you complete them in a pre-effective amendment,
on disclosures made in response to this letter, on information supplied
supplementally, or on exhibits added in any pre-effective amendments.

     Response: With the exception of certain information that will be completed
in a final pre-effective filing with the Commission, the filings for Quality and
Advantage are now substantially complete. If comments given by the Staff in one
section apply to other sections containing similar disclosure, these comments
have also been addressed in the other sections.

5. If you intend to omit certain information from the form of prospectus
included with any registration statement that is declared effective in reliance
on Rule 430A under the Securities Act, please identify the omitted information
to us supplementally, preferably before filing the final pre-effective
amendment.

     Response: The Funds currently intend to rely on Rule 430A under the
Securities Act of 1933, as amended, and will identify the omitted information to
you prior to the final pre-effective amendments.

6. Please advise us if you have submitted or expect to submit an exemptive
application or no-action request in connection with your registration
statements.

     Response: Neither of the Funds expects to submit an exemptive application
or no-action request in connection with its registration.

          We trust that these responses and the Amendments adequately address
your comments. If you have any questions or additional concerns, of if you need
any additional information, please do not hesitate to contact Jon Gray at (212)
455-3205, or Larry Stoller, of Cohen & Steers.

                                             Very truly yours,


                                             /s/ Jon Gray
                                             -----------------------------------
                                             Jon Gray


                                       -3-


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
