<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>efc4-0288_newformn2.txt
<TEXT>
   As filed with the Securities and Exchange Commission on February 9, 2004
                                             Securities Act File No. 333-
                                     Investment Company Act File No. 811-21506
==============================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM N-2
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933       /X/
                         Pre-Effective Amendment No.                      / /
                         Post-Effective Amendment No.                     / /
                                    and/or
                       REGISTRATION STATEMENT UNDER THE                   /X/
                        INVESTMENT COMPANY ACT OF 1940
                                 Amendment No.                            / /

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

                   Capital and Income Strategies Fund, Inc.
              (Exact Name of Registrant as Specified in Charter)

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

             800 Scudders Mill Road, Plainsboro, New Jersey 08536
                   (Address of Principal Executive Offices)

     (Registrant's Telephone Number, including Area Code): (609) 282-2800
                               -----------------

                                Terry K. Glenn
                   Capital and Income Strategies Fund, Inc.
             800 Scudders Mill Road, Plainsboro, New Jersey 08536
       Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
                    (Name and Address of Agent for Service)

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

        Andrew J. Donohue, Esq.                    Frank P. Bruno, Esq.
      FUND ASSET MANAGEMENT, L.P.             SIDLEY AUSTIN BROWN & WOOD LLP
             P.O. Box 9011                          787 Seventh Avenue
   Princeton, New Jersey 08543-9011            New York, New York 10019-6018

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

     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 are to be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act"), other than securities offered in
connection with dividend or interest reinvestment plans, check the following
box.                                                                      / /

<TABLE>
<CAPTION>

                            CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT
----------------------------------------------------------------------------------------------------------------------
                                                                  Proposed              Proposed
                                               Amount              Maximum              Maximum           Amount of
               Title of                        Being           Offering Price          Aggregate        Registration
      Securities Being Registered         Registered(1)(2)       Per Unit(1)       Offering Price(1)       Fee(3)
---------------------------------------- ------------------- -------------------- --------------------- --------------
<S>                                      <C>                 <C>                  <C>                    <C>
     Common Stock ($.10 par value)         50,000 shares           $20.00              $1,000,000           $127
---------------------------------------- ------------------- -------------------- --------------------- --------------

</TABLE>

(1)  Estimated solely for the purpose of calculating the registration fee.
(2)  Includes _____________ shares subject to the underwriters' overallotment
     option.
(3)  Transmitted prior to the filing date to the designated lockbox of the
     Securities and Exchange Commission at Mellon Bank in Pittsburgh, PA.

==============================================================================
     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 or until the Registration Statement shall
become effective on such date as the 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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.




PROSPECTUS
----------
                             Subject to Completion
                 Preliminary Prospectus dated February 9, 2004

                             _____________ Shares
                   Capital and Income Strategies Fund, Inc.
                                 Common Stock

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

     Capital and Income Strategies Fund, Inc. is a newly organized,
diversified, closed-end fund. The Fund's investment objective is to provide
total return. Total return is the combination of capital appreciation and
investment income. No assurance can be given that the Fund's investment
objective will be realized.

     The Fund seeks to achieve its investment objective by investing in a
portfolio of equity securities and debt securities of U.S. and foreign
issuers. The Fund's investment adviser from time to time may vary the Fund's
asset allocation based upon market and economic conditions. To enable the Fund
to take advantage of this flexible investment approach, the Fund may invest
without limitation in any type of equity security or debt security, including
preferred securities or debt securities that are rated below investment grade
or, if unrated, are considered by the Fund's investment adviser to be of
comparable quality. Securities of below investment grade quality are regarded
as having predominantly speculative characteristics with respect to capacity
to pay interest and dividend income and repay principal.

                                                 (continued on following page)
     Investing in the Fund's common stock may be speculative and involves a
high degree of risk and should not constitute a complete investment program.
Risks are described in the "Risk Factors and Special Considerations" section
beginning on page __ of this prospectus.

                                                     Per Share        Total(3)
                                                     ---------        --------
Public offering price.............................     $20.00           $
Underwriting discount (1) ........................       $              $
Proceeds, before expenses, to the Fund (2) .......       $              $

(1)  The Fund has agreed to pay the underwriters $[  ] per share of common
     stock as a partial reimbursement of expenses incurred in connection with
     the offering. See "Underwriting."
(2)  The Fund's investment adviser has agreed to pay all organizational
     expenses of the Fund. The investment adviser also agreed to pay the
     amount by which the offering costs of the Fund (other than the
     underwriting discount, but including the $[  ] per share partial
     reimbursement of expenses to the underwriters) exceeds $[  ] per share of
     common stock. The estimated offering expenses to be incurred by the Fund
     are $      .
(3)  The underwriters also may purchase up to an additional ____________
     shares at the public offering price, less the underwriting discount,
     within 45 days from the date of this prospectus to cover overallotments.
     If all such shares are purchased, the total public offering price will be
     $[  ], the total underwriting discount will be $[  ] and the total
     proceeds, before expenses, to the Fund will be $[  ].

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

     The shares will be ready for delivery on or about       , 2004.

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

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

             The date of this prospectus is          , 2004.

==============================================================================

<PAGE>

(continued from previous page)

     After the initial investment period of approximately three months
following the completion of this offering, and based on market and economic
conditions existing at that time, it is currently expected that initially
approximately [55]% of the Fund's total assets will be invested in common
stocks, approximately [30]% of the Fund's total assets will be invested in
preferred securities, and approximately [15]% of the Fund's total assets will
be invested in debt securities.

     The Fund may leverage its portfolio through the issuance of preferred
stock, borrowings, the issuance of debt securities or a combination thereof.
The Fund currently intends to issue shares of preferred stock representing
approximately _____% of the Fund's capital (including amounts obtained from
the issuance of the preferred stock), or approximately _____% of the Fund's
common stock equity. Following the investment of the net proceeds of this
common stock offering, the Fund may, depending on market and economic
conditions and the relative costs and benefits associated with the issuance of
preferred stock and other types of leverage, choose to leverage its portfolio
through borrowings rather than through the issuance of preferred stock, or the
Fund may choose to leverage through a combination of preferred stock and
borrowings. No assurance can be given that the Fund will leverage its
portfolio or that any leveraging strategy will be successful during any period
in which it is used.

     Because the Fund is newly organized, its shares of common stock have no
history of public trading. Shares of common stock of closed-end investment
companies frequently trade at a price lower than their net asset value. This
is commonly referred to as "trading at a discount." The risk may be greater
for investors expecting to sell their shares in a relatively short period
after completion of the public offering. The Fund plans to apply to list its
shares of common stock on the New York Stock Exchange or another national
securities exchange under the symbol "_____."

     This prospectus contains information you should know before investing,
including information about risks. Please read it before you invest and keep
it for future reference.



                                      3
<PAGE>

                               TABLE OF CONTENTS
                                                                          Page
                                                                          ----

Prospectus Summary...........................................................5
Risk Factors And Special Considerations.....................................12
Fee Table...................................................................22
The Fund....................................................................23
Use Of Proceeds.............................................................23
Investment Objective And Policies...........................................24
Other Investment Policies...................................................33
Risks And Special Considerations Of Leverage................................46
Investment Restrictions.....................................................50
Directors And Officers......................................................51
Investment Advisory And Management Arrangements.............................55
Portfolio Transactions......................................................60
Dividends And Distributions.................................................62
Taxes  .....................................................................63
Automatic Dividend Reinvestment Plan........................................68
Mutual Fund Investment Option...............................................69
Net Asset Value.............................................................70
Description Of Capital Stock................................................71
Custodian...................................................................74
Underwriting................................................................74
Transfer Agent, Dividend Disbursing Agent And Registrar.....................77
Accounting Services Provider................................................77
Legal Opinions..............................................................77
Independent Auditors And Experts............................................77
Additional Information......................................................77
Independent Auditors' Report................................................78
Statement Of Assets And Liabilities.........................................79
Notes To Statement Of Assets And Liabilities................................79
Appendix A - Ratings of Securities.........................................A-1

                                  ---------

     INFORMATION ABOUT THE FUND CAN BE REVIEWED AND COPIED AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, D.C. CALL 1-202-942-8090 FOR INFORMATION ON THE
OPERATION OF THE PUBLIC REFERENCE ROOM. THIS INFORMATION IS ALSO AVAILABLE ON
THE SEC'S INTERNET SITE AT HTTP://WWW.SEC.GOV AND COPIES MAY BE OBTAINED UPON
PAYMENT OF A DUPLICATING FEE BY WRITING THE PUBLIC REFERENCE SECTION OF THE
SEC, WASHINGTON, D.C. 20549-0102.

                                  ---------

     You should rely only on the information contained in this prospectus. We
have not, 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 are not, 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 appearing in this prospectus is accurate only as of the date
on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.



                                      4
<PAGE>

                              PROSPECTUS SUMMARY

     This summary is qualified in its entirety by reference to the detailed
information included in this prospectus.

<TABLE>
<CAPTION>
<S>                     <C>
The Fund                Capital and Income Strategies Fund, Inc. is a newly organized, diversified,
                        closed-end fund.

The Offering            The Fund is offering ____________ shares of common stock at an initial
                        offering price of $20.00 per share through a group of underwriters led by
                        ____________. You must purchase at least 100 shares of common stock. The
                        underwriters may purchase up to an additional _______________ shares of
                        common stock within 45 days from the date of this prospectus to cover
                        overallotments, if any.

Investment Objective    The Fund's investment objective is to provide total return. Total return is
and Policies            the combination of capital appreciation and investment income. No assurance
                        can be given that the Fund's investment objective will be realized.

                        The Fund seeks to achieve its investment objective by investing in a
                        portfolio of equity securities and debt securities of U.S. and foreign
                        issuers. Fund Asset Management, L.P., the Fund's investment adviser (the
                        "Investment Adviser"), from time to time may vary the percentage of the
                        Fund's assets invested in each asset category and in any particular type of
                        equity or debt security based upon market and economic conditions. To enable
                        the Fund to take advantage of this flexible investment approach, the Fund
                        may invest without limitation in any type of equity security or debt
                        security, including preferred securities or debt securities that are rated
                        below investment grade or, if unrated, are considered by the Investment
                        Adviser, to be of comparable quality. There is a risk that the securities
                        selected by the Investment Adviser will cause the Fund to underperform
                        relevant market indices or other funds with a similar investment objective
                        and investment strategies.

                        After the initial investment period of approximately three months following
                        the completion of this offering and based on market and economic conditions
                        existing at that time, it is currently expected that initially approximately
                        [55]% of the Fund's total assets will be invested in common stocks,
                        approximately [30]% of the Fund's total assets will be invested in preferred
                        securities, and approximately [15]% of the Fund's total assets will be
                        invested in debt securities. As set forth above, the Investment Adviser may
                        vary the Fund's asset allocation from time to time based upon market and
                        economic conditions.

                        To the extent the Fund invests in preferred securities and dividend paying
                        common stocks, the Investment Adviser currently intends to emphasize those
                        securities that: (i) are eligible to pay qualified dividend income and/or
                        (ii) make payments that are eligible for the dividends received deduction
                        allowed to the Fund's corporate stockholders (the "Dividends Received
                        Deduction"). Recently enacted Federal legislation reduced the individual
                        Federal income tax rate on long term capital gains and qualified dividend
                        income to a maximum of 15%. Long term capital gains and qualified dividend
                        income included in distributions of a regulated investment company (for
                        which status the Fund



                                                 5
<PAGE>

                        intends to qualify) to its individual stockholders are generally passed
                        through to such stockholders and taxed at the reduced rate. Corporations do
                        not receive the benefit of the 15% maximum tax on long term capital gains
                        and qualified dividend income but generally may claim a deduction in an
                        amount equal to 70% of the dividends received on shares of the Fund's common
                        stock that are designated by the Fund as qualifying for the Dividends
                        Received Deduction. No assurance can be given as to what percentage of the
                        dividends paid on the Fund's common stock will be eligible for: (i) the
                        reduced Federal income tax rate for qualified dividend income and long term
                        capital gain for individuals or (ii) the Dividends Received Deduction for
                        corporate stockholders of the Fund. See "Investment Objective and Policies"
                        and "Taxes."

                        Common Stocks. The Fund may invest without limitation in common stocks. The
                        Investment Adviser generally seeks to select common stocks it believes are
                        undervalued in relation to their intrinsic value as indicated by multiple
                        factors, including the earnings and cash flow potential or the asset value
                        of the respective issuers. The Investment Adviser also considers growth and
                        new products on a selective basis. The Investment Adviser uses a
                        value-oriented investment philosophy in selecting common stocks for the Fund
                        by employing a research intensive approach that considers factors such as:
                        security prices that reflect a market valuation that is judged to be below
                        the estimated present or future value of the company; favorable earnings
                        growth prospects; expected above-average return on equity and dividend
                        yield; the financial condition of the issuer; and various qualitative
                        factors. The Investment Adviser may sell a common stock if it no longer
                        believes the security will contribute to meeting the Fund's investment
                        objective. In considering whether to sell a security, the Investment Adviser
                        may evaluate, among other things, the condition of the U.S. economy, the
                        condition of foreign economies, meaningful changes in the issuer's financial
                        condition and changes in the condition and outlook in the issuer's industry
                        sector.

                        Preferred Securities. The Fund may invest without limitation in preferred
                        securities, including convertible preferred securities that may be converted
                        into common stock or other securities of the same or a different issuer.
                        Generally, preferred securities receive dividends in priority to
                        distributions on common stock and usually have a priority of claim over
                        common stockholders if the issuer of the stock is liquidated. Preferred
                        securities have certain characteristics of both debt and equity securities.
                        Like debt securities, preferred securities' rate of income is generally
                        contractually fixed. Like equity securities, preferred securities do not
                        have rights to precipitate bankruptcy filings or collection activities in
                        the event of missed payments. Furthermore, preferred securities are
                        generally in a subordinated position in an issuer's capital structure and
                        their values are heavily dependent on the profitability of the issuer rather
                        than on any legal claims to specific assets or cash flows.

                        Debt Securities. The Fund may invest without limitation in all types of debt
                        securities, including U.S. and foreign government bonds, corporate bonds,
                        corporate loans and convertible bonds, mortgage and asset backed securities
                        and emerging market debt. In addition, the Fund may invest without
                        limitation in high quality short term U.S. dollar or non-U.S. dollar
                        denominated fixed income securities or other instruments, such as U.S. or
                        foreign government



                                                 6
<PAGE>

                        securities, commercial paper and money market instruments issued by U.S. or
                        foreign commercial banks or depository institutions. There are no maturity
                        or duration limitations on the debt securities in which the Fund may invest.

                        High Yield Securities. The Fund may invest without limitation in high yield
                        securities, including high yield bonds (commonly referred to as "junk"
                        bonds), preferred securities, corporate loans and convertible debt
                        securities that are rated below investment grade by established rating
                        services (Ba or lower by Moody's Investors Service, Inc. ("Moody's"), BB or
                        lower by Standard & Poor's ("S&P") or BB or lower by Fitch Ratings
                        ("Fitch")) or, if unrated, are considered by the Investment Adviser to be of
                        comparable quality. The Fund may not, however, invest more than 10% of its
                        total assets in distressed securities. The Fund considers distressed
                        securities to be high yield securities that are the subject of bankruptcy
                        proceedings or otherwise in default as to the repayment of principal or the
                        payment of interest at the time of acquisition by the Fund or are rated in
                        the lowest rating categories (Ca or below by Moody's, CC or below by S&P or
                        CC or below by Fitch) or, if unrated, are considered by the Investment
                        Adviser to be of comparable quality ("Distressed Securities"). High yield
                        securities generally are regarded as having predominantly speculative
                        characteristics with respect to capacity to pay interest and dividend income
                        and to repay principal and involve greater volatility of price than
                        securities in the higher rating categories. The Fund also may invest in
                        investment grade securities.

                        Foreign Securities. The Fund may invest without limitation in equity and
                        debt securities of issuers domiciled outside the United States, including
                        issuers located in emerging market countries. The Fund also may invest in
                        securities denominated in currencies other than the U.S. dollar or that do
                        not provide for payment to the Fund in U.S. dollars.

                        Portfolio Strategies. The Fund may use a variety of portfolio strategies
                        both to seek to increase the return of the Fund and to seek to hedge, or
                        protect, its exposure to interest rate movements and movements in the
                        securities markets. These strategies include the use of derivatives, such as
                        indexed securities, inverse securities, interest rate transactions
                        (including interest rate swaps), credit default swaps, total return swaps,
                        options, futures, options on futures, short sales and foreign exchange
                        transactions.

                        The Fund's hedging transactions are designed to reduce volatility but may
                        come at some cost. For example, the Fund may try to limit its risk of loss
                        from a decline in price of a portfolio security by purchasing a put option.
                        However, the Fund must pay for the option, and the price of the security may
                        not in fact drop. In large part, the success of the Fund's hedging
                        activities depends on the Investment Adviser's ability to forecast movements
                        in securities prices and interest rates. The strategies the Fund uses to
                        seek to enhance its return may be riskier and have more speculative aspects
                        than its hedging strategies. The Fund is not required to use derivatives to
                        enhance income or hedge its portfolio and may choose not to do so. The Fund
                        cannot guarantee that any strategies it uses will work.

Use of Leverage by the  Issuance of Preferred Stock. The Fund may leverage its portfolio through the



                                                 7
<PAGE>

Fund                    issuance of preferred stock, borrowings, the issuance of debt securities or
                        a combination thereof. The Fund may borrow money and issue debt securities
                        in amounts up to 33 1/3%, and may issue shares of preferred stock in amounts
                        up to 50%, of the value of its total assets to finance additional
                        investments. The Fund currently intends to issue shares of preferred stock
                        representing approximately _____% of the Fund's capital (including amounts
                        obtained from the issuance of the preferred stock), or approximately _____%
                        of the Fund's common stock equity. Following the investment of the net
                        proceeds of this common stock offering, the Fund may, depending on market
                        and economic conditions and the relative costs and benefits associated with
                        the issuance of preferred stock and other types of leverage, choose to
                        leverage its portfolio through borrowings rather than through the issuance
                        of preferred stock or the Fund may choose to leverage through a combination
                        of preferred stock and borrowings. No assurance can be given that the Fund
                        will leverage its portfolio or that any leveraging strategy will be
                        successful during any period in which it is used.

                        The Fund's issuance of preferred stock will result in the leveraging of its
                        common stock. Although the Board of Directors has not yet finalized the
                        terms of the preferred stock offering, the Fund expects that the preferred
                        stock will pay dividends that will be adjusted over either relatively short
                        term periods (generally seven to 28 days) or medium term periods (up to five
                        years). The preferred stock dividend rate will be based upon prevailing
                        interest rates for debt obligations of comparable maturity and with
                        comparable ratings. The money raised by the preferred stock offering will be
                        invested in accordance with the investment objective of the Fund. The
                        expenses of the preferred stock, which will be borne by the Fund, will
                        reduce the net asset value of the common stock. During periods when the Fund
                        has preferred stock or borrowings outstanding, the Fund will pay fees to the
                        Investment Adviser for its services that are higher than if the Fund did not
                        issue preferred stock or borrow, because the fees will be calculated on the
                        basis of an aggregate of (i) the Fund's average daily net assets, including
                        proceeds received from the sale of any preferred stock, and (ii) the
                        proceeds of any outstanding borrowings used for leverage.

                        Distributions. While any shares of the Fund's preferred stock are
                        outstanding, the Fund may not declare any cash dividend or other
                        distribution on its common stock, or purchase any such capital stock, unless
                        at the time of such declaration, (i) all accumulated preferred stock
                        dividends have been paid and (ii) the net asset value of the Fund's
                        portfolio (determined after deducting the amount of such dividend or other
                        distribution) is at least 200% of the liquidation value of the outstanding
                        preferred stock (expected to be equal to the original purchase price per
                        share plus any accumulated but unpaid dividends thereon). If the Fund is
                        liquidated, preferred stockholders will be entitled to receive liquidating
                        distributions before any distribution is made to common stockholders. These
                        liquidating distributions are expected to equal the original purchase price
                        per share of the preferred stock plus any accumulated but unpaid dividends.

                        Risks of Leverage. The use of leverage creates certain risks for common
                        stockholders, including the greater likelihood of higher volatility of the
                        Fund's



                                                 8
<PAGE>

                        dividend yield, total return, net asset value and the market price of the
                        common stock. Changes in the value of the Fund's total assets will have a
                        disproportionate affect on the net asset value per share of common stock
                        when leverage is used. For example, if the Fund were to use leverage equal
                        to 50% of the value of the Fund's common stock, it would show an
                        approximately 1.5% increase or decline in net asset value for each 1%
                        increase or decline in the value of its total assets. An additional risk of
                        leverage is that the cost of the leverage plus applicable Fund expenses may
                        exceed the return on the securities acquired with the proceeds of the
                        leverage, thereby diminishing rather than enhancing the return to the Fund's
                        common stockholders. In particular, during times of rising interest rates,
                        the market value of the Fund's portfolio investments, and in particular its
                        fixed income holdings, may decline, while at the same time the Fund's cost
                        of leverage may increase. These risks would generally make the Fund's return
                        to common stockholders more volatile were it to use leverage. So long as the
                        Fund uses leverage, it may be required to sell investments in order to make
                        dividend or interest payments on preferred stock or borrowings used for
                        leverage when it may be disadvantageous to do so. Finally, if the asset
                        coverage for the Fund's preferred stock or borrowings declines to less than
                        200% or 300% of the Fund's total assets, respectively (as a result of market
                        fluctuations or otherwise), the Fund may be required to sell a portion of
                        its investments to redeem some or all of the preferred stock or repay the
                        borrowings when it may be disadvantageous to do so. See "Risk Factors and
                        Special Considerations--Leverage Risk."

                        Redemption of Preferred Stock. The Fund may redeem the preferred stock for
                        any reason. For example, the Fund may redeem all or part of the preferred
                        stock if the asset coverage for the preferred stock declines below 200% or
                        in order to maintain the asset coverage guidelines established by an
                        established rating agency that rated the preferred stock.

                        Voting Rights. Preferred stockholders, voting as a separate class, will be
                        entitled to elect two of the Fund's Directors. Common and preferred
                        stockholders, voting together as a single class, will be entitled to elect
                        the remaining Directors. If the Fund fails to pay dividends to the preferred
                        stockholders for two full years, the holders of all outstanding shares of
                        preferred stock, voting as a separate class, would then be entitled to elect
                        a majority of the Fund's Directors. The preferred stockholders also will
                        vote separately on certain other matters as required under the Fund's
                        Charter, the Investment Company Act of 1940, as amended (the "1940 Act"),
                        and the General Corporation Law of the State of Maryland. Otherwise, common
                        and preferred stockholders will have equal voting rights (one vote per
                        share) and will vote together as a single class.

                        Ratings. Before it offers the preferred stock, the Fund intends to apply to
                        one or more established rating agencies for ratings on the preferred stock.
                        The Fund believes that a rating for the preferred stock will make it easier
                        to market the stock, which should reduce the preferred stock dividend rate.


Dividends and           In order to allow the Fund's common stockholders to realize a predictable,
Distributions           but not guaranteed, level of cash flow and some periodic liquidity on their
                        investment without having to sell their shares, the Fund has adopted a
                        policy of



                                                 9
<PAGE>

                        paying regular distributions on its shares of common stock (the "Managed
                        Distribution Policy"). The Fund's Board of Directors has initially
                        determined to pay quarterly distributions on each share of common stock at
                        an annualized rate of __% of the initial public offering price per share
                        ($__.____ per share, per quarter). Quarterly dividends will be paid in
                        __________, __________, __________, and __________ of each year, commencing
                        in __________ 2004. The Fund's Board of Directors has determined to pay
                        additional distributions on an annual basis equal to any income earned by
                        the Fund in excess of the quarterly distributions as may be necessary to
                        distribute substantially all of the Fund's net investment company taxable
                        income for that year. See "Taxes." The Fund is not required to maintain the
                        Managed Distribution Policy and such policy may be modified or terminated by
                        the Fund's Board of Directors at any time without notice.

                        Under the 1940 Act and its rules, the Fund generally is not permitted to
                        distribute net realized long term capital gains more than once per year
                        without exemptive relief from the Securities and Exchange Commission (the
                        "Commission"). As a result, the Fund and the Investment Adviser intend to
                        apply to the Commission for an exemption that will, among other things,
                        permit the Fund to make periodic distributions of realized long term capital
                        gains to its stockholders. Until such time, if any, as the exemptive relief
                        is granted by the Commission, the Fund intends to make distributions under
                        the Managed Distribution Policy from its net investment income on a
                        quarterly basis and from its net realized long term capital gains on an
                        annual basis. No assurance can be given that the Commission will grant this
                        exemptive relief to the Fund and the Investment Adviser. After such
                        exemptive relief is granted by the Commission, the Fund intends to make
                        distributions under the Managed Distribution Policy from its net investment
                        income and its realized long term capital gains on an quarterly basis.
                        Therefore, after receipt of the above-referenced exemptive relief, a larger
                        pool of assets will be available for distribution on a quarterly basis.

                        If the total distributions paid by the Fund to its stockholders for any
                        calendar year exceed the Fund's net investment company taxable income and
                        net realized capital gain for that year, the excess will generally be
                        treated as a tax-free return of capital up to the amount of a stockholder's
                        tax basis in his or her stock. Any distributions that (based upon the Fund's
                        full year performance) constitute tax-free return of capital will reduce a
                        stockholder's tax basis in his or her stock, thereby increasing such
                        stockholder's potential gain or reducing such stockholder's potential loss
                        on the sale of such stock. In effect, a return of capital is the return of a
                        stockholder's investment in the Fund and may result in a corresponding
                        decline in the Fund's net asset value. Return of capital distributions also
                        may have the effect of increasing the Fund's operating expense ratio. Any
                        amounts distributed to a stockholder in excess of such stockholder's tax
                        basis in his or her stock will generally be taxable to the stockholder as
                        capital gain.

                        The Fund currently expects that the amount of distributions made under the
                        Managed Distribution Policy generally will be independent of, and not
                        contingent upon, the Fund's performance in any of the first three quarters
                        of the Fund's fiscal year. It also is currently expected that the Fund's
                        investment



                                                 10
<PAGE>

                         portfolio initially will not produce sufficient dividend and interest
                         income to fully fund distributions under the Managed Distribution Policy
                         due to the expected initial composition of the Fund's investment portfolio.
                         Consequently, if the Fund does not realize sufficient short term capital
                         gains and long term capital gains to make up any shortfall, distributions
                         to the Fund's common stockholders will include returns of capital. Prior to
                         receipt of the above-referenced exemptive order, long term capital gains
                         will be available to make up any shortfall in funding distributions only on
                         an annual basis, thereby increasing the likelihood that distributions will
                         include returns of capital to stockholders. In order to make distributions
                         under the Managed Distribution Policy, the Fund may have to sell portfolio
                         securities at a time when independent investment considerations may dictate
                         against such action. See "Risk Factors and Special
                         Considerations--Distribution Risk."


Automatic Dividend      Dividends and capital gains distributions generally are used to purchase
Reinvestment Plan       additional shares of the Fund's common stock. However, an investor can
                        choose to receive dividends and distributions in cash. Since not all
                        investors can participate in the automatic dividend reinvestment plan, you
                        should call your broker or nominee to confirm that you are eligible to
                        participate in the plan.

Listing                 Currently, there is no public market for the Fund's common stock. However,
                        the Fund plans to apply to list its shares of common stock on the New York
                        Stock Exchange or another national securities exchange under the symbol
                        "_____."

Investment Adviser      Fund Asset Management, L.P., the Investment Adviser, provides investment
                        advisory and administrative services to the Fund. For its services, the Fund
                        pays the Investment Adviser a monthly fee at the annual rate of ___% of the
                        aggregate of: (i) the Fund's average daily net assets (including proceeds
                        from the sale of any preferred stock) and (ii) the proceeds of any
                        outstanding borrowings used for leverage.

Mutual Fund             Investors who purchase shares in this offering and later sell their shares
Investment Option       have the option, subject to certain conditions, to purchase Class A shares
                        of certain funds advised by the Investment Adviser or its affiliates at net
                        asset value, without the imposition of the initial sales charge, with the
                        proceeds from such sale.
</TABLE>



                                                 11
<PAGE>

                    RISK FACTORS AND SPECIAL CONSIDERATIONS

     An investment in the Fund's common stock may be speculative in that it
involves a high degree of risk and should not constitute a complete investment
program.

     Liquidity and Market Price of Shares. The Fund is newly organized and has
no operating history or history of public trading.

     Shares of closed-end funds that trade in a secondary market frequently
trade at a market price that is below their net asset value. This is commonly
referred to as "trading at a discount." The risk may be greater for investors
expecting to sell their shares in a relatively short period after completion
of the public offering. Accordingly, the Fund is designed primarily for long
term investors and should not be considered a vehicle for trading purposes.
The Fund's total assets will be reduced following the offering by the
underwriting discount and the amount of offering expenses paid by the Fund.

     Distribution Risk. Pursuant to the Managed Distribution Policy, the Fund
intends to make regular quarterly distributions on its common stock. In order
to make distributions under the Managed Distribution Policy, the Fund may have
to sell portfolio securities at a time when independent investment
considerations may dictate against such action. In addition, the Fund's
ability to distribute any net realized long term capital gains more than once
per year is subject to the Fund's receipt of exemptive relief from the
Commission, which receipt cannot be assured. If the total distributions paid
by the Fund to its stockholders for any calendar year exceed the Fund's net
investment company taxable income and net realized capital gain for that year,
the excess will generally be treated as a tax-free return of capital up to the
amount of a stockholder's tax basis in his or her stock. In effect, a return
of capital is the return of a stockholder's investment in the Fund and may
result in a corresponding decline in the Fund's net asset value. See "Taxes."
Return of capital distributions also may have the effect of increasing the
Fund's operating expense ratio. The Fund currently expects that the amount of
distributions made under the Managed Distribution Policy generally will be
independent of, and not contingent upon, the Fund's performance in any of the
first three quarters of the Fund's fiscal year. It also is currently expected
that the Fund's investment portfolio initially will not produce sufficient
dividend and interest income to fully fund distributions under the Managed
Distribution Policy due to the expected initial composition of the Fund's
investment portfolio. Consequently, if the Fund does not realize sufficient
short term capital gains and long term capital gains to make up any shortfall,
distributions to the Fund's common stockholders will include returns of
capital. Prior to receipt of the above-referenced exemptive order, long term
capital gains will be available to make up any shortfall in funding
distributions only on an annual basis, thereby increasing the likelihood that
distributions will include returns of capital to stockholders.

     Leverage Risk. The Fund may leverage its portfolio through the issuance
of preferred stock, borrowings, the issuance of debt securities or a
combination thereof. In particular, the Fund may borrow money and issue debt
securities in amounts up to 33 1/3%, and may issue shares of preferred stock
in amounts up to 50%, of the value of its total assets to finance additional
investments. The Fund currently intends to issue shares of preferred stock
representing approximately _____% of the Fund's capital (including amounts
obtained from the issuance of the preferred stock), or approximately _____% of
the Fund's common stock equity. Following the investment of the net proceeds
of this common stock offering, the Fund may, depending on market and economic
conditions and the relative costs and benefits associated with the issuance of
preferred stock and other types of leverage, choose to leverage its portfolio
through borrowings rather than through the issuance of preferred stock or the
Fund may choose to leverage through a combination of preferred stock and
borrowings. No assurance can be given that the



                                      12
<PAGE>

Fund will leverage its portfolio or that any leveraging strategy will be
successful during any period in which it is used.

     The use of leverage creates certain risks for common stockholders,
including the greater likelihood of higher volatility of the Fund's dividend
yield, total return, net asset value and the market price of the common stock.
Changes in the value of the Fund's total assets will have a disproportionate
affect on the net asset value per share of common stock when leverage is used.
For example, if the Fund were to use leverage equal to 50% of the value of the
Fund's common stock, it would show an approximately 1.5% increase or decline
in net asset value for each 1% increase or decline in the value of its total
assets. An additional risk of leverage is that the cost of the leverage plus
applicable Fund expenses may exceed the return on the securities acquired with
the proceeds of the leverage, thereby diminishing rather than enhancing the
return to the Fund's common stockholders. In particular, during times of
rising interest rates, the market value of the Fund's portfolio investments,
and in particular its fixed income holdings, may decline, while at the same
time the Fund's cost of leverage may increase. These risks would generally
make the Fund's return to common stockholders more volatile were it to use
leverage. So long as the Fund uses leverage, it may be required to sell
investments in order to make dividend or interest payments on preferred stock
or borrowings used for leverage when it may be disadvantageous to do so.
Finally, if the asset coverage for the Fund's preferred stock or borrowings
declines to less than 200% or 300% of the Fund's total assets, respectively
(as a result of market fluctuations or otherwise), the Fund may be required to
sell a portion of its investments to redeem some or all of the preferred stock
or repay the borrowings when it may be disadvantageous to do so.

     Issuer Risk; Market Risk; Selection Risk. The value of securities held by
the Fund may decline for a number of reasons that directly relate to the
issuer, such as investor perception of the issuer's financial condition,
management performance, financial leverage and reduced demand for the issuer's
goods and services. Market risk is the risk that the market will go down in
value, including the possibility that the market will go down sharply and
unpredictably. Selection risk is the risk that the securities that the
Investment Adviser selects will underperform the relevant market indices or
other funds with similar investment objectives and investment strategies.

     Income Risk. The income received from the Fund by common stockholders is
based partially on the dividends and interest the Fund earns from its
investments and partially based on gains from the sale of securities held by
the Fund, each of which can vary widely over the short and long term. If
prevailing market interest rates drop, distribution rates of preferred and
debt securities held by the Fund could drop as well, which could adversely
affect the income available for distribution to common stockholders. The
Fund's ability to pay distributions to its common stockholders also would
likely be adversely affected when prevailing short term interest rates rise
while the Fund is utilizing leverage.

     Net Asset Value; Interest Rate Sensitivity; Credit Quality; Other Market
Conditions. Generally, when interest rates go up, the value of fixed income
securities, such as preferred securities paying fixed dividend rates and debt
securities, goes down. Because market interest rates are currently near their
lowest levels in many years, there is a greater risk that the Fund's portfolio
will decline in value if interest rates increase in the future. In addition,
when market interest rates rise, not only may the Fund's investment portfolio
decline in value, but the Fund's cost of leverage may increase. See "Risk
Factors and Special Considerations--Leverage Risk." Therefore, the net asset
value of a fund that invests in fixed income securities changes as interest
rates fluctuate. During periods of declining interest rates, an issuer may
exercise its option to redeem preferred securities or prepay principal of debt
securities earlier than scheduled, forcing the Fund to reinvest in lower
yielding securities. During periods of rising interest rates, the average life
of certain types of securities may be extended because of slower than expected
principal payments. This may lock in a below market interest rate, increase
the duration and reduce the value of the security. A real or perceived decline
in the credit quality or financial condition of issuers of



                                      13
<PAGE>

securities in which the Fund invests may result in the value of such
securities held by the Fund, the Fund's net asset value and potentially the
market price of the Fund's common stock, going down. A real or perceived
serious deterioration in the credit quality or financial condition of an
issuer could cause a permanent decrease in the Fund's net asset value.
Furthermore, volatility in the capital markets and other adverse market
conditions may result in a decrease in the value of the securities held by the
Fund. Given that the Fund uses market prices to value its investments, any
decrease in the market value of the securities held by the Fund will result in
a decrease in the Fund's net asset value and potentially the market price of
the Fund's common stock.

     Common Stocks. To the extent the Fund invests in common stock, those
investments will be subject to special risks. It is currently expected that
the Fund initially will have substantial exposure to common stocks. Although
common stocks have historically generated higher average returns than fixed
income securities over the long term, common stocks also have experienced
significantly more volatility in returns. Common stocks may be more
susceptible to adverse changes in market value due to issuer specific events
or general movements in the equities markets. A drop in the stock market may
depress the price of common stock held by the Fund. Common stock prices
fluctuate for many reasons, including changes in investors' perceptions of the
financial condition of an issuer or the general condition of the relevant
stock market, or the occurrence of political or economic events affecting
issuers. For example, an adverse event, such as an unfavorable earnings
report, may depress the value of common stock in which the Fund will invest;
the price of common stock of an issuer may be particularly sensitive to
general movements in the stock market; or a drop in the stock market may
depress the price of most or all of the common stocks held by the Fund. Also,
common stock of an issuer in the Fund's portfolio may decline in price if the
issuer fails to make anticipated dividend payments because, among other
reasons, the issuer of the security experiences a decline in its financial
condition. Common stock in which the Fund will invest is structurally
subordinated to preferred stocks, bonds and other debt instruments in a
company's capital structure, in terms of priority to corporate income and
assets, and therefore will be subject to greater risk than preferred stock or
debt instruments of such issuers. In addition, common stock prices may be
sensitive to rising interest rates, as the costs of capital rise and borrowing
costs increase.

     Value Investing Risk. To the extent the Fund invests in common stocks, it
currently intends to focus its investments on common stocks that the
Investment Adviser believes are undervalued or inexpensive relative to other
investments. These types of securities may present risks in addition to the
general risks associated with investing in common stocks. These securities
generally are selected on the basis of an issuer's fundamentals relative to
current market price. Such securities are subject to the risk that the
Investment Adviser's assessment of certain fundamental factors will be
mistaken. In addition, during certain time periods, market dynamics may
strongly favor "growth" stocks of issuers that do not display strong
fundamentals relative to market price based upon positive price momentum and
other factors. Disciplined adherence to a "value" investment mandate during
such periods can result in significant underperformance for the Fund's assets
invested in common stocks relative to overall market indices and other managed
investment vehicles that pursue growth style investments and/or more flexible
equity style mandates.

     Preferred Securities. It is currently expected that the Fund initially
will have exposure to preferred securities, including potentially convertible
preferred securities that may be converted into common stock or other
securities of the same or a different issuer. To the extent the Fund invests
in preferred securities, those investments will be subject to the following
special risks:

     o  Subordination. Investments in preferred securities entail a higher
        level of credit risk than more senior debt instruments, because
        preferred securities are subordinated to bonds and other debt
        instruments in an issuer's capital structure in terms of priority to
        corporate income and liquidation payments.



                                      14
<PAGE>

     o  Limited Voting Rights. Holders of preferred securities usually have no
        voting rights with respect to the issuing company, although certain
        types of preferred securities provide their holders with the right to
        elect directors if preferred dividends have been in arrears for a
        specified number of periods. When those voting rights apply, once the
        issuer pays all the arrearages, the preferred security holders no
        longer have voting rights.

     o  Redemption Rights. Certain preferred securities may contain special
        redemption features that grant the issuer of the preferred securities
        a right to redeem the securities prior to a specified date. As with
        all call provisions, a special redemption by the issuer may negatively
        impact the return of the security held by the Fund.

     o  Deferral. Preferred securities also may include provisions that
        require or permit the issuer, at its discretion, to defer dividend
        distributions for a stated period or periods without any adverse
        consequences to the issuer. If the Fund owns a preferred security that
        is deferring its dividend distributions, the Fund may be required to
        report and possibly distribute income for tax purposes although it has
        not yet received such income.

     o  Liquidity. Preferred securities may be substantially less liquid than
        many other securities, such as common stocks.

     o  Non-Cumulative Preferred Securities. Dividends on non-cumulative
        preferred securities do not accrue. Unlike cumulative preferred
        securities, if a dividend on a share of non-cumulative preferred stock
        is not paid on the dividend payment date, that dividend ordinarily
        will never be paid.

     o  Auction Rate or Remarketed Preferred Securities. Auction rate or
        remarketed preferred securities are adjustable preferred securities
        the dividends on which are determined at periodically held auctions or
        through remarketings. If sufficient bids do not exist at an auction
        (in case of auction rate preferred securities) or if a failed
        remarketing occurs (in the case of remarketed preferred securities),
        the Fund may not be able to sell all, and may not be able to sell any,
        of its auction rate or remarketed preferred securities through the
        auction or remarketing process. As a result, the Fund's investment in
        such security may be illiquid.

     Debt Securities. It is currently expected that the Fund initially will
have exposure to debt securities. To the extent the Fund invests in debt
securities, those investments will involve credit risk. This is the risk that
the borrower will not make timely payments of principal and interest. The
degree of credit risk depends on the issuer's financial condition and on the
terms of the debt securities. Debt securities are also subject to interest
rate risk. This is the risk that the value of the security may fall when
interest rates rise. In general, the market price of debt securities with
longer maturities will go up or down more in response to changes in interest
rates than the market price of shorter term securities. In addition, debt
securities are subject to call and redemption risk. This is the risk that an
issuer may call a security for redemption before it matures. If this happens
to a debt security in which the Fund invests, the Fund may lose income and may
have to invest the proceeds in securities with lower yields. See "--Net Asset
Value; Interest Rate Sensitivity; Credit Quality; Other Market Conditions"
above.

     Convertible Securities. The preferred securities and debt securities in
which the Fund may invest may be convertible into the issuer's or a related
party's common stock. Convertible securities generally offer lower dividend
yields or interest rates than non-convertible securities of similar quality.
As with all fixed income securities, the market values of the fixed rate
convertible securities that the Fund may invest in tend to decline as interest
rates increase and, conversely, to increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion



                                      15
<PAGE>

price, the convertible security tends to reflect the market price of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield
basis and thus may not decline in price to the same extent as the underlying
common stock. Convertible securities rank senior to common stocks in an
issuer's capital structure and consequently entail less risk than the issuer's
common stock.

     High Yield Securities. To the extent the Fund invests in a portfolio of
below investment grade, high yield securities, including high yield bonds
(commonly referred to as "junk" bonds), corporate loans, convertible debt
securities and preferred securities, those securities entail a higher level of
credit risk (loss of income and/or principal) and a corresponding greater risk
of loss than investments in investment grade securities. Securities rated in
the lower rating categories are considered to be predominantly speculative
with respect to capacity to pay interest and dividend income and repay
principal. Issuers of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. New issuers
also may be inexperienced in managing their debt burden. The issuer's ability
to service its debt obligations or make dividend payments may be adversely
affected by business developments unique to the issuer, the issuer's inability
to meet specific projected business forecasts, or the inability of the issuer
to obtain additional financing.

     Other than the distressed securities discussed below, the high yield
securities in which the Fund may invest do not include instruments which, at
the time of investment, are in default or the issuers of which are in
bankruptcy. However, no assurance can be given that such events will not occur
after the Fund purchases a particular security, in which case the Fund may
experience losses and incur costs.

     High yield securities also tend to be more sensitive to economic
conditions than investment grade securities. The financial condition of a high
yield issuer is usually more susceptible to a general economic downturn or a
sustained period of rising interest rates and high yield issuers are more
likely than investment grade issuers to become unable to make principal
payments and interest or dividend payments during such time periods.

     Like investment grade fixed income securities, high yield securities
generally are purchased and sold through dealers who make a market in such
securities for their own accounts. However, there are fewer dealers in the
high yield market, which market may be less liquid than the market for
investment grade fixed income securities, even under normal economic
conditions. Also, there may be significant disparities in the prices quoted
for high yield securities by various dealers and the spread between the bid
and asked price is generally much larger than for investment grade securities.
As a result, the Fund may experience difficulty acquiring appropriate high
yield securities for investment. Investments in high yield securities may,
from time to time, and especially in declining markets, become illiquid which
might impede the Fund's ability to dispose of a particular security, or force
the Fund to sell a security at a price lower than if the market were more
liquid. Prices realized upon such sales might be less than the prices used in
calculating the Fund's net asset value. To the extent the Fund invests in high
yield securities, the combination of price volatility and the limited
liquidity of high yield securities may have an adverse effect on the Fund's
investment performance.

     High yield securities tend to be more volatile than investment grade
fixed income securities, so that adverse events may have a greater impact on
the prices of high yield securities than on investment grade fixed income
securities. To the extent the Fund invests in high yield securities, factors
adversely affecting the market value of such securities will adversely affect
the Fund's net asset value.

     Adverse publicity and negative investor perceptions of the high yield
market, which could last for an extended time period also may reduce the value
and liquidity of high yield securities. In addition, the



                                      16
<PAGE>

Fund may incur additional expenses if it is forced to seek recovery upon a
default or restructuring of a portfolio holding.

     Junk bonds are often unsecured and subordinated to other creditors of the
issuer. In addition, junk bonds may have call or redemption features that
permit an issuer to repurchase the securities from the Fund. If a call were
exercised by an issuer during a period of declining interest rates, the Fund
likely would have to replace such called securities with lower yielding
securities that would decrease the net investment income to the Fund and
dividends to stockholders.

     Distressed Securities. The Fund may invest up to 10% of its total assets
in Distressed Securities. An investment in Distressed Securities is
speculative and involves significant risk in addition to the risks discussed
above in connection with investments in high yield securities. Distressed
Securities frequently do not produce income while they are outstanding. The
Fund may purchase Distressed Securities that are in default or the issuers of
which are in bankruptcy. To the extent the Fund invests in Distressed
Securities, the Fund may be required to bear certain extraordinary expenses in
order to protect and recover its investment.

     Impact of Recent Tax Legislation. Recently enacted tax legislation
reduces the rate of taxation for individuals on certain dividend income to a
lower rate that is also applicable to long term capital gains. The Fund's
investments and the tax treatment of Fund distributions may be affected by
future changes in tax laws and regulations, including changes as a result of
the "sunset" provisions that currently apply to the reduced Federal income tax
rate for qualified dividend income and long term capital gain. The impact of
such legislation on the Fund and its stockholders cannot be predicted.

     Tax and Accounting Risk. The Fund may invest in preferred securities or
other securities the Federal income tax treatment of which may not be clear or
may be subject to recharacterization by the Internal Revenue Service. It could
be more difficult for the Fund to comply with the tax requirements applicable
to regulated investment companies if the tax characterization of the Fund's
investments or the tax treatment of the income from such investments were
successfully challenged by the Internal Revenue Service. Additionally, the
Financial Accounting Standards Board currently is reviewing accounting
guidelines relating to taxable preferred securities. To the extent that a
change in the guidelines could adversely affect the market for, and
availability of, these securities, the Fund may be adversely affected.

     Foreign Market Risk. Since the Fund may invest without limitation in
equity and debt securities of issuers domiciled outside the United States, it
offers the potential for more diversification than a fund that invests only in
the United States. This is because securities traded on foreign markets have
often (though not always) performed differently from securities traded in the
United States. However, such investments involve special risks not present in
U.S. investments that can increase the chances that the Fund will lose money.
In particular, the Fund is subject to the risk that because there are
generally fewer investors on foreign exchanges and a smaller number of shares
traded each day, it may make it difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign securities may
go up and down more than prices of securities traded in the United States.

     Foreign Economy Risk. The economies of certain foreign markets may not
compare favorably with the economy of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources
and balance of payments position. Certain such economies may rely heavily on
particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular
country or countries, changes in international trading patterns, trade
barriers and other protectionist or retaliatory measures. With respect to the
Fund's investments in Europe, any adverse developments in connection with the
ongoing transition to the



                                      17
<PAGE>

Economic and Monetary Union (EMU) could potentially destabilize EMU. Such
destabilization could adversely affect the Fund's European investments.

     Investments in foreign markets also may be adversely affected by
governmental actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of assets or the
imposition of punitive taxes. In addition, the governments of certain
countries may prohibit or impose substantial restrictions on foreign investing
in their capital markets or in certain industries. Any of these actions could
severely affect security prices, impair the Fund's ability to purchase or sell
foreign securities or transfer the Fund's assets or income back into the
United States, or otherwise adversely affect the Fund's operations.

     Other foreign market risks include foreign exchange controls,
difficulties in pricing securities, defaults on foreign government securities,
difficulties in enforcing favorable legal judgments in foreign courts and
political and social instability. Legal remedies available to investors in
certain foreign countries may be less extensive than those available to
investors in the United States or other foreign countries.

     Currency Risk. Securities and other instruments in which the Fund invests
may be denominated or quoted in currencies other than the U.S. dollar. Changes
in foreign currency exchange rates affect the value of the Fund's portfolio.
Generally, when the U.S. dollar rises in value against a foreign currency, a
security denominated in that currency loses value because the currency is
worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value
against a foreign currency, a security denominated in that currency gains
value because the currency is worth more U.S. dollars. This risk, generally
known as "currency risk," means that a strong U.S. dollar will reduce returns
for U.S. investors while a weak U.S. dollar will increase those returns.

     Governmental Supervision and Regulation/Accounting Standards. Many
foreign governments supervise and regulate stock exchanges, brokers and the
sale of securities less than the United States does. Some countries may not
have laws to protect investors the way that the U.S. securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a company's
securities based on non-public information about that company. Accounting
standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much
detail as U.S. accounting standards, it may be harder for the Investment
Adviser to completely and accurately determine a company's financial
condition.

     Certain Risks of Holding Fund Assets Outside the United States. The Fund
may hold its foreign securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may be recently
organized or new to the foreign custody business. In addition there may be
limited or no regulatory oversight over their operations. Also, the laws of
certain countries may put limits on the Fund's ability to recover its assets
if a foreign bank, depository or issuer of a security, or any of their agents,
goes bankrupt. In addition, it is often more expensive for the Fund to buy,
sell and hold securities in certain foreign markets than in the United States.
The increased expense of investing in foreign markets reduces the amount the
Fund can earn on its investments and typically results in a higher operating
expense ratio for the Fund than for investment companies invested only in the
United States.

     Settlement Risk. Settlement and clearance procedures in certain foreign
markets differ significantly from those in the United States. Foreign
settlement and clearance procedures and trade regulations also may involve
certain risks (such as delays in payment for or delivery of securities) not
typically generated by the settlement of U.S. investments. Communications
between the United States and emerging market countries may be unreliable,
increasing the risk of delayed settlements or losses of



                                      18
<PAGE>

security certificates. Settlements in certain foreign countries at times have
not kept pace with the number of securities transactions; these problems may
make it difficult for the Fund to carry out transactions. If the Fund cannot
settle or is delayed in settling a purchase of securities, it may miss
attractive investment opportunities and certain of its assets may be
uninvested with no return earned thereon for some period. If the Fund cannot
settle or is delayed in settling a sale of securities, it may lose money if
the value of the security then declines or, if it has contracted to sell the
security to another party, the Fund could be liable for any losses incurred.

     Emerging Markets Risk. The risks of foreign investments are usually much
greater for emerging markets. Investments in emerging markets may be
considered speculative. Emerging markets include those in countries defined as
emerging or developing by the World Bank, the International Finance
Corporation or the United Nations. Emerging markets are riskier because they
develop unevenly and may never fully develop. They are more likely to
experience hyperinflation and currency devaluations, which adversely affect
returns to U.S. investors. In addition, the securities markets in many of
these countries have far lower trading volumes and less liquidity than
developed markets. Since these markets are so small, they may be more likely
to suffer sharp and frequent price changes or long term price depression
because of adverse publicity, investor perceptions or the actions of a few
large investors. In addition, traditional measures of investment value used in
the United States, such as price to earnings ratios, may not apply to certain
small markets.

     Many emerging markets have histories of political instability and abrupt
changes in policies. As a result, their governments are more likely to take
actions that are hostile or detrimental to private enterprise or foreign
investment than those of more developed countries. Certain emerging markets
also may face other significant internal or external risks, including the risk
of war, and ethnic, religious and racial conflicts. In addition, governments
in many emerging market countries participate to a significant degree in their
economies and securities markets, which may impair investment and economic
growth.

     Depositary Receipts. The Fund may invest in securities of foreign issuers
in the form of Depositary Receipts or other securities that are convertible
into securities of foreign issuers. American Depositary Receipts are receipts
typically issued by an American bank or trust company that show evidence of
underlying securities issued by a foreign corporation. European Depositary
Receipts (issued in Europe) and Global Depositary Receipts (issued throughout
the world) each evidence a similar ownership arrangement. The Fund also may
invest in unsponsored Depositary Receipts. The issuers of such unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States. Therefore, there may be less information available regarding
such issuers, and there may not be a correlation between such information and
the market value of the Depositary Receipts. Depositary Receipts are generally
subject to the same risks as the foreign securities that they evidence or into
which they may be converted.

     Portfolio Strategies. The Fund may engage in various portfolio strategies
both to seek to increase the return of the Fund and to seek to hedge its
portfolio against adverse effects from movements in interest rates and in the
securities markets. These strategies include the use of derivatives, such as
indexed securities, inverse securities, options, futures, options on futures,
interest rate transactions, credit default swaps, interest rate swaps, total
return swaps, short sales and foreign exchange transactions. Such strategies
subject the Fund to the risk that, if the Investment Adviser incorrectly
forecasts market values, interest rates or other applicable factors, the
Fund's performance could suffer. Certain of these strategies such as inverse
securities, credit default swaps, interest rate swaps, total return swaps and
short sales may provide investment leverage to the Fund's portfolio and result
in many of the same risks of leverage to the holders of the Fund's common
stock as discussed above under "--Leverage." The Fund is not required to use
derivatives or other portfolio strategies to enhance income or to hedge its
portfolio and may choose not to do so. There can be no assurance that the
Fund's portfolio strategies will be effective. Some of the



                                      19
<PAGE>

derivative strategies that the Fund may use to enhance its return are riskier
than its hedging transactions and have speculative characteristics. Such
strategies do not attempt to limit the Fund's risk of loss.

     General Risks Related to Derivatives. Derivatives are financial contracts
or instruments whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index (or relationship between two
indices). The Fund may invest in a variety of derivative instruments for
hedging purposes or to seek to enhance its return, such as options, futures
contracts and swap agreements, and may engage in short sales. The Fund also
may have exposure to derivatives through investment in credit linked notes,
credit or equity linked trust certificates and other securities issued by
special purpose or structured vehicles. The Fund may use derivatives as a
substitute for taking a position in an underlying security or other asset, as
part of a strategy designed to reduce exposure to other risks, such as
interest rate risk. The Fund also may use derivatives to add leverage to the
portfolio. The Fund's use of derivative instruments involves risks different
from, and possibly greater than, the risks associated with investing directly
in securities and other traditional investments. Derivatives are subject to a
number of risks, such as liquidity risk, interest rate risk, credit risk,
leverage risk, the risk of ambiguous documentation and management risk. They
also involve the risk of mispricing or improper valuation and the risk that
changes in the value of the derivative may not correlate perfectly with the
underlying asset, rate or index. If the Fund invests in a derivative
instrument it could lose more than the principal amount invested. The use of
derivatives also may increase the amount of taxes payable by stockholders.
Also, suitable derivative transactions may not be available in all
circumstances and there can be no assurance that the Fund will engage in these
transactions to reduce exposure to other risks when that would be beneficial.

     Options and Futures Transactions. Options and futures are types of
derivatives. The Fund may engage in options and futures transactions to reduce
its exposure to interest rate movements or to enhance its return. If the Fund
incorrectly forecasts market values, interest rates or other factors, the
Fund's performance could suffer. The Fund also may suffer a loss if the other
party to the transaction fails to meet its obligations. The Fund is not
required to enter into options and futures transactions for hedging purposes
or to enhance its return and may choose not to do so.

     Swaps. Swap agreements are types of derivatives. In order to seek to
hedge the value of the Fund's portfolio, or to seek to enhance the Fund's
return, the Fund may enter into interest rate, credit default or total return
swap transactions. In interest rate swap transactions, there is a risk that
yields will move in the direction opposite of the direction anticipated by the
Fund, which would cause the Fund to make payments to its counterparty in the
transaction that could adversely affect Fund performance. In addition to the
risks applicable to swaps generally, credit default swap transactions involve
special risks because they are difficult to value, are highly susceptible to
liquidity and credit risk, and generally pay a return to the party that has
paid the premium only in the event of an actual default by the issuer of the
underlying obligation (as opposed to a credit downgrade or other indication of
financial difficulty). Total return swap transactions involve the risks that
the counterparty will default on its payment obligation to the Fund in the
transaction and that the Fund will not be able to meet its obligation to the
counterparty in the transaction. The Fund is not required to enter into
interest rate, credit default or total return swap transactions for hedging
purposes or to enhance its return and may choose not to do so.

     Short Sales. The Fund may make short sales of securities. A short sale is
a transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. When the
Fund makes a short sale, it must borrow the security sold short and deliver
collateral to the broker dealer through which it made the short sale to cover
its obligation to deliver the security upon conclusion of the sale. The Fund's
obligation to replace the borrowed security will be secured by collateral
deposited with the broker dealer, usually cash, U.S. government securities or
other liquid securities similar to those borrowed. The Fund will also be
required to segregate similar collateral with its custodian. If the price of
the security sold short increases between the time of the short sale and the
time



                                      20
<PAGE>

the Fund replaces the borrowed security, the Fund will incur a loss. The Fund
also may make a short sale ("against the box") by selling a security that the
Fund owns or has the right to acquire without the payment of further
consideration. The Fund's potential for loss is greater if it does not own the
security that it is short selling.

     Liquidity of Investments. Certain securities in which the Fund invests
may lack an established secondary trading market or are otherwise considered
illiquid. Liquidity of a security relates to the ability to easily dispose of
the security and the price to be obtained and does not generally relate to the
credit risk or likelihood of receipt of cash at maturity. Illiquid securities
may trade at a discount from comparable, more liquid investments.

     Rating Agencies. The Fund may be subject to guidelines of one or more
established rating agencies that may issue ratings for its preferred stock.
These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed by the 1940 Act and
may prohibit or limit the use by the Fund of certain portfolio management
techniques or investments. The Fund does not expect these guidelines to
prevent the Investment Adviser from managing the Fund's portfolio in
accordance with the Fund's investment objective and policies.

     Portfolio Turnover Risk. Generally, the Fund does not purchase securities
for short term trading profits. However, the Fund may dispose of securities
without regard to the time they have been held if, in its judgment, such
transactions are advisable in light of a change in circumstances of a
particular company or within a particular industry, a change in general
market, financial or economic conditions or to make distributions to the
Fund's common stockholders under the Managed Distribution Policy. (The
portfolio turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
particular fiscal year. For purposes of determining this rate, all securities
whose maturities at the time of acquisition are one year or less are
excluded.) A high portfolio turnover rate results in greater transaction
costs, which are borne directly by the Fund, and also has certain tax
consequences for stockholders.

     Market Disruption. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets, some of
which were closed for a four-day period. These terrorist attacks, and the
continued threat thereof, and related events, including U.S. military actions
in Iraq and continued unrest in the Middle East, have led to increased short
term market volatility and may have long term effects on U.S. and world
economies and markets. Similar disruptions of the financial markets could
adversely affect the market prices of the Fund's portfolio securities,
interest rates, auctions, secondary trading, ratings, credit risk, inflation
and other factors relating to the Fund's common stock.

     Antitakeover Provisions. The Fund's Charter, By-laws and the General
Corporation Law of the State of Maryland include provisions that could limit
the ability of other entities or persons to acquire control of the Fund, to
convert the Fund to an open-end fund, or to change the composition of its
Board of Directors. Such provisions could limit the ability of stockholders to
sell their shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.



                                      21
<PAGE>

<TABLE>
<CAPTION>
                                   FEE TABLE

<S>                                                                                             <C>
Stockholder Transaction Fees:
    Maximum Sales Load (as a percentage of offering price)..............................        %
    Offering Expenses Borne by the Fund (as a percentage of offering price)(a)..........        %
    Dividend Reinvestment Plan Fees.....................................................        None
Annual Expenses (as a percentage of net assets attributable to common stock):
    Investment Advisory Fee(b)(c).......................................................        %
    Interest Payments on Borrowed Funds(c)..............................................        None
    Other Expenses(c)...................................................................               %
                                                                                                -------
       Total Annual Expenses(c).........................................................               %
                                                                                                =======
</TABLE>

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

(a) The Investment Adviser has agreed to pay all of the Fund's organizational
    expenses. Offering costs will be paid by the Fund up to $     per share
    (   % of the offering price). The Investment Adviser has agreed to pay the
    amount by which the offering costs (other than the sales load, but
    including the $    per share partial reimbursement of expenses to the
    underwriters) exceeds $    per share of common stock (   % of the offering
    price). The offering costs to be paid by the Fund are not included in the
    Total Annual Expenses shown in the table. Offering costs borne by common
    stockholders will result in a reduction of capital of the Fund attributable
    to common stock. If the Fund offers preferred stock in an amount equal to
    approximately   % of the Fund's capital, the costs of that offering,
    estimated to be approximately   % of the total dollar amount of the
    preferred stock offering, will be effectively borne by the common
    stockholders and result in a reduction of the net asset value of the
    shares of common stock. These preferred stock offering costs are estimated
    to be approximately $ per share of common stock (   % of the offering
    price).
(b) See "Investment Advisory and Management Arrangements"-- page 55.
(c) Assumes leverage through the issuance of preferred stock in an amount
    equal to approximately   % of the Fund's total assets (including the amount
    obtained from leverage) and approximately   % of the Fund's common stock
    equity at a dividend rate of   %. If the Fund does not use leverage, it is
    estimated that, as a percentage of net assets attributable to common
    stock, the Investment Advisory Fee would be   %, Interest Payments on
    Borrowed Funds would be 0.00%, Other Expenses would be   % and Total Annual
    Expenses would be   %. Following the investment of the net proceeds of this
    common stock offering, the Fund may, depending on market and economic
    conditions and the relative costs and benefits associated with the
    issuance of preferred stock and other types of leverage, choose to
    leverage through borrowings rather than through the issuance of preferred
    stock or the Fund may choose to leverage through a combination of
    preferred stock and borrowings. No assurance can be given that the Fund
    will leverage through the issuance of preferred stock or borrowings or
    that any leveraging strategy will be successful during any period in
    which it is used. See "Risk Factors and Special Considerations--Leverage
    Risk" and "Risk Factors and Special Considerations of Leverage."

<TABLE>
<CAPTION>

EXAMPLE:                                                             1 Year        3 Years       5 Years    10 Years
                                                                     ------        -------       -------    --------

<S>                                                                  <C>           <C>           <C>        <C>
   An investor would pay the following expenses (including
   the sales load of $    , estimated offering expenses of
   this offering of $   and the estimated preferred stock
   offering costs assuming the Fund offers preferred stock in
   an amount equal to approximately   % of the Fund's capital
   (after issuance) of $    ) on a $1,000 investment, assuming
   total annual expenses of    % and a 5% annual return
   throughout the periods...................................            $              $             $           $

</TABLE>



                                      22
<PAGE>

     The Fee Table is intended to assist investors in understanding the costs
and expenses that a stockholder in the Fund will bear directly or indirectly.
The expenses set forth under "Other Expenses" are based on estimated amounts
through the end of the Fund's first fiscal year and assumes that the Fund
issues approximately shares of common stock. If the Fund issues fewer shares
of common stock, all other things being equal, these expenses would increase.
The Example set forth above assumes reinvestment of all dividends and
distributions and utilizes a 5% annual rate of return as mandated by
Securities and Exchange Commission (the "Commission") regulations. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF
RETURN, AND ACTUAL EXPENSES, LEVERAGE AMOUNT OR ANNUAL RATE OF RETURN MAY BE
MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.

                                   THE FUND

     Capital and Income Strategies Fund, Inc. (the "Fund") is a newly
organized, diversified, closed-end management investment company. The Fund was
incorporated under the laws of the State of Maryland on __________ __, 2004,
and has registered under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund's principal office is located at 800 Scudders Mill Road,
Plainsboro, New Jersey 08536, and its telephone number is (609) 282-2800.

     The Fund is organized as a closed-end investment company. Closed-end
investment companies differ from open-end investment companies (commonly
referred to as mutual funds) in that closed-end investment companies do not
redeem their securities at the option of the stockholder, whereas open-end
investment companies issue securities redeemable at net asset value at any
time at the option of the stockholder and typically engage in a continuous
offering of their shares. Accordingly, open-end investment companies are
subject to continuous asset in-flows and out-flows that can complicate
portfolio management. However, shares of closed-end investment companies
frequently trade at a discount from net asset value. This risk may be greater
for investors expecting to sell their shares in a relatively short period
after completion of the public offering.

     The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other closed-end investment companies advised by Fund Asset Management L.P.,
the Fund's investment adviser (the "Investment Adviser") with a similar
investment objective and policies as the Fund. Any such merger, consolidation
or other form of reorganization would require the prior approval of the Board
of Directors and the stockholders of the Fund. See "Description of Capital
Stock--Certain Provisions of the Charter and By-laws."

                                USE OF PROCEEDS

     The net proceeds of this offering will be approximately $      (or
approximately $      assuming the underwriters exercise the overallotment
option in full) after payment of offering costs estimated to be approximately
$      and the deduction of the underwriting discount. The Investment Adviser
has agreed to pay the amount by which the offering costs (other than the
underwriting discount, but including the $ per share partial reimbursement of
expenses to the underwriters) exceeds $ per share of common stock (   % of the
offering price). The Investment Adviser has agreed to pay all of the Fund's
organizational expenses.

     The Fund expects that there will be an initial investment period of up to
approximately three months following the completion of its common stock
offering, depending on market conditions and the availability of appropriate
securities, before the net proceeds thereof are invested in accordance with
the Fund's investment objective and policies. Pending such investment, it is
anticipated that all or a portion of such proceeds will be invested in high
grade, short term debt securities (both fixed and floating rate),



                                      23
<PAGE>

money market funds, credit linked notes, credit or equity linked trust
certificates and/or index futures contracts or similar derivative instruments
designed to give the Fund exposure to some of the markets in which it intends
to invest while the Investment Adviser selects specific securities. A
relatively long initial investment period may negatively affect the return to
the Fund's stockholders and the Fund's ability to achieve its investment
objective. See "Investment Objective and Policies."

                       INVESTMENT OBJECTIVE AND POLICIES

     The Fund's investment objective is to provide total return. Total return
is the combination of capital appreciation and investment income. The Fund's
investment objective is a fundamental policy and may not be changed without
the approval of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act). The Fund cannot guarantee that it will achieve
its investment objective.

     The Fund seeks to achieve its investment objective by investing in a
portfolio of equity securities and debt securities of U.S. and foreign
issuers. The Investment Adviser may vary from time to time the percentage of
the Fund's assets invested in each asset category and in any particular type
of equity or debt security based upon market and economic conditions. To
enable the Fund to take advantage of this flexible investment approach, the
Fund may invest without limitation in any type of equity security or debt
security, including preferred securities or debt securities that are rated
below investment grade or, if unrated, are considered by the Investment
Adviser to be of comparable quality.

     After the initial investment period of approximately three months
following the completion of this offering, and based on market and economic
conditions existing at that time, it is currently expected that initially
approximately [55]% of the Fund's total assets will be invested in common
stocks, approximately [30]% of the Fund's total assets will be invested in
preferred securities, and approximately [15]% of the Fund's total assets will
be invested in debt securities. As set forth above, the Investment Adviser may
vary the Fund's asset allocation from time to time based upon market and
economic conditions.

     To the extent the Fund invests in preferred securities and dividend
paying common stocks, the Investment Adviser currently intends to emphasize
those securities that: (i) are eligible to pay qualified dividend income
and/or (ii) make payments that are eligible for the dividends received
deduction allowed to the Fund's corporate stockholders ("Dividends Received
Deduction") pursuant to Section 243 of the Internal Revenue Code of 1986, as
amended (the "Code"). Recently enacted Federal legislation reduced the
individual Federal income tax rate on long term capital gains and qualified
dividend income to a maximum of 15%. Long term capital gains and qualified
dividend income included in distributions of a regulated investment company (a
"RIC") (for which status the Fund intends to qualify) to its individual
stockholders are generally passed through to such stockholders and taxed at
the reduced rates. Pursuant to Section 243 of the Code, corporations generally
may deduct 70% of the dividend income they receive from domestic corporations.
Corporate stockholders of a RIC generally are permitted to claim a deduction
with respect to that portion of their dividend distributions attributable to
amounts received by the RIC that qualify for the Dividends Received Deduction.
No assurance can be given as to what percentage of the dividends paid on the
Fund's common stock will be eligible for: (i) the reduced Federal income tax
rate for qualified dividend income and long term capital gain for individuals
or (ii) the Dividends Received Deduction for corporate stockholders of the
Fund. See "Taxes." The 15% Federal income tax rate applicable to long term
capital gains and qualified dividend income is scheduled to expire after
December 31, 2008. After this date, absent extension or modification of the
relevant legislative provisions, long term capital gains distributions paid by
the Fund generally will be taxable at the previously applicable maximum 20%
rate, and distributions attributable to qualified dividend income will



                                      24
<PAGE>

be taxed to the stockholder at his or her marginal Federal income tax rate
(which generally will be higher than 15%).

     Investment in the Fund's common stock offers the individual investor
several potential benefits. The Fund offers investors the opportunity to
invest in a professionally managed portfolio which contains common stocks,
preferred securities and debt securities of U.S. and foreign issuers, some of
which are a type of investment typically not available to individual
investors. The Investment Adviser provides professional management, which
includes the extensive securities and credit analysis needed to invest in
common stocks, preferred securities, foreign securities, debt securities, high
yield securities, and convertible securities. The Fund also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of such investments. Additionally, the Investment Adviser may seek
to enhance the return of the Fund's common stock by leveraging the Fund's
capital structure through borrowings, the issuance of short term debt
securities, the issuance of shares of preferred stock or a combination
thereof. These benefits are at least partially offset by the expenses involved
in running an investment company. Such expenses primarily consist of advisory
fees and operational costs. The use of leverage also involves certain expenses
and risk considerations. See "Risks and Special Considerations of
Leverage--Effects of Leverage."

     The Fund may engage in various portfolio strategies to seek to enhance
its return or to hedge its portfolio against movements in interest rates
through the use of derivatives, such as indexed and inverse securities,
options, futures, options on futures, interest rate transactions, including
interest rate swaps, total return swaps, credit default swaps, short selling
and foreign exchange transactions. Each of these portfolio strategies is
described below. No assurance can be given that the Fund will employ these
strategies or that, if employed, they will be effective.

     The Fund may vary its investment objective and policies for temporary
defensive purposes during periods in which the Investment Adviser believes
that conditions in the securities markets or other economic, financial or
political conditions warrant and in order to keep the Fund's cash fully
invested, including during the periods which the net proceeds of the offering
are being invested. Under such conditions, the Fund may invest up to 100% of
its total assets in securities issued or guaranteed by the U.S. government or
its instrumentalities or agencies, certificates of deposit, bankers'
acceptances and other bank obligations, commercial paper rated in the highest
category by an established rating service, or other debt securities deemed by
the Investment Adviser to be consistent with a defensive posture, or may hold
its assets in cash.

     The Fund may invest in, among other things, the types of securities and
instruments described below:

Description of Common Stocks

     The Fund may invest without limitation in common stocks. The Fund may
invest in common stocks of both U.S. and foreign issuers. The Investment
Adviser generally seeks to select common stocks it believes are undervalued in
relation to their intrinsic value as indicated by multiple factors, including
the earnings and cash flow potential or the asset value of the respective
issuers. The Investment Adviser also considers growth and new products on a
selective basis. The Investment Adviser uses a value-oriented investment
philosophy in selecting common stocks for the Fund by employing a research
intensive approach that considers factors such as: security prices that
reflect a market valuation that is judged to be below the estimated present or
future value of the company; favorable earnings growth prospects; expected
above-average return on equity and dividend yield; the financial condition of
the issuer; and various qualitative factors. The Investment Adviser may sell a
common stock if it no longer believes the security will contribute to meeting
the Fund's investment objective. In considering whether



                                      25
<PAGE>

to sell a security, the Investment Adviser may evaluate, among other things,
the condition of the U.S. economy, the condition of foreign economies,
meaningful changes in the issuer's financial condition, and changes in the
condition and outlook in the issuer's industry sector.

Description of Preferred Securities

     General. The Fund may invest without limitation in preferred securities,
including convertible preferred securities that may be converted into common
stock or other securities of the same or a different issuer. The Fund may
invest in preferred securities of both U.S. and foreign issuers. The
Investment Adviser currently intends to emphasize preferred securities that are
eligible to pay qualified dividend income and whose dividends are eligible for
the Dividends Received Deduction. Many preferred securities, including
"hybrid" or taxable preferred securities, pay dividends that do not qualify
for the Dividends Received Deduction and are not eligible for the reduced
Federal tax rate applicable to qualified dividend income. Such dividend
payments constitute deductible interest expense for the issuers thereof rather
than dividends eligible for the reduced Federal income tax rate applicable to
qualified dividend income and/or the Dividends Received Deduction. See
"Taxable Preferred Securities" below.

     Generally, preferred securities receive dividends in priority to
distributions on common stock and usually have a priority of claim over common
stockholders if the issuer of the stock is liquidated. Preferred securities
have certain characteristics of both debt and equity securities. Like debt
securities, preferred securities' rate of income is generally contractually
fixed. Like equity securities, preferred securities do not have rights to
precipitate bankruptcy filings or collection activities in the event of missed
payments. Furthermore, preferred securities are generally in a subordinated
position in an issuer's capital structure and their values are heavily
dependent on the profitability of the issuer rather than on any legal claims
to specific assets or cash flows.

     Traditional Fixed Rate Preferred Securities. Unlike taxable preferred
securities described below, traditional fixed rate preferred securities
generally have fixed dividend rates for the life of the issue and typically,
unless issued by certain foreign corporations, pay dividends eligible for the
reduced tax rate applicable to qualified dividend income and, if issued by
domestic corporations, make payments that qualify for the Dividends Received
Deduction. They can be perpetual, with no mandatory redemption date, or issued
with a fixed mandatory redemption date. Certain issues of preferred securities
are convertible into other equity securities. Perpetual preferred securities
provide a fixed dividend throughout the life of the issue, with no mandatory
retirement provisions, but may be callable. Sinking fund preferred securities
provide for the redemption of a portion of the issue on a regularly scheduled
basis with, in most cases, the entire issue being retired at a future date.
The value of fixed rate preferred securities can be expected to vary inversely
with interest rates. Certain fixed rate preferred securities have features
intended to provide some degree of price stability. These features may include
an auction mechanism at some specified future date. The auction feature is
normally intended to enhance the probability that a preferred securities
stockholder will be able to dispose of its holdings close to a pre-specified
price, typically equal to par or a stated value. Other price stability
mechanisms include convertibility into an amount of common equity of the same
issuer at some specified future date, typically in amounts not greater than
par value of the underlying preferred securities. Another common form of fixed
rate preferred securities is the traditional convertible preferred security,
which permits the holder to convert into a specified number of shares at the
holder's option at any time prior to a specified date. Innovative preferred
securities and convertible preferred securities are less liquid than the
traditional fixed rate preferred security.

     Dividends on any series of preferred securities may be cumulative or
non-cumulative. Cumulative dividends accumulate until paid out, so if on the
dividend payment date no dividend is declared such



                                      26
<PAGE>

obligation will exist and take precedence over any common stock dividends
until paid out. Non-cumulative dividends do not accrue and any omitted
dividends may never be paid.

     Adjustable Rate Preferred Securities. Unlike traditional fixed rate
preferred securities, adjustable rate preferred securities are preferred
securities that have a dividend rate that adjusts periodically to reflect
changes in the general level of interest rates. Adjustable rate preferred
securities generally pay dividends eligible for the reduced tax rate
applicable to qualified dividend income and that qualify for the Dividends
Received Deduction. The adjustable feature is intended to make the market
value of these securities less sensitive to changes in interest rates than
similar securities with fixed dividend rates.

     The dividend rate on adjustable rate preferred securities typically is
determined quarterly according to an adjustment formula established at the
time of issuance of such securities that cannot be changed without approval of
the holders thereof. Although adjustment formulas vary among issues, they
typically involve a fixed relationship either to: (1) rates on specific
classes of debt securities issued by the U.S. Treasury, such as the highest
base rate yield of the 90-day Treasury bill, the 10-year Treasury note, or
either the 20-year or 30-year Treasury bond or (2) London Interbank Offered
Rate, with limits (known as "collars") on the minimum dividend rate that may
be paid. As the maximum dividend rate is approached, any further increase in
interest rates may adversely affect the market value of the stock. As the
minimum dividend rate is approached, any further decrease in interest rates
may positively affect the market value of the preferred securities.

     The market values of outstanding issues of adjustable rate preferred
securities may fluctuate in response to changing market conditions. In the
event that market participants in a particular issue demand a different yield
than the adjustment formulas produce, the market price will change to produce
the desired yield. The dividend yield demanded by market participants may vary
with changing perceptions of credit quality and the relative levels of short
term and long term interest rates, as well as other factors. Most of the
adjustable rate preferred securities currently outstanding are perpetual.

     Auction Rate Preferred Securities. Auction rate preferred securities pay
dividends that adjust based upon periodic auctions. Such preferred securities
are similar to short term corporate money market instruments in that an
auction rate preferred stockholder has the opportunity to sell the preferred
securities at par in an auction, through which buyers set the dividend rate in
a bidding process for the next pre-determined dividend period. The dividend
rate set in the auction depends upon market conditions and the credit quality
of the particular issuer. Typically, the auction rate preferred securities'
dividend rate is limited to a specified maximum percentage of an external
commercial paper index as of the auction date. Further, the terms of auction
rate preferred securities generally provide that they are redeemable by the
issuer at certain times or under certain conditions.

     Remarketed Preferred Securities. Like buyers of auction rate preferred
securities, buyers of shares of a series of remarketed preferred securities
receive a uniform dividend rate. In a remarketing, however, unlike an auction,
the dividend rate and dividend period are set by remarketing agents, taking
into account sell and hold orders from existing holders, the rates and number
of shares sought by potential buyers and prevailing market conditions. During
the remarketing process, remarketing agents use their reasonable best efforts
to remarket the remarketed preferred securities tendered for sale in the
remarketing. The dividend rate for each dividend period will be the rate per
annum that the remarketing agents determine, in their sole discretion, to be
the lowest rate, giving effect to the allocation of shares of remarketed
preferred stock among dividend periods of different lengths, that will enable
the remarketing agents to sell at par all shares tendered for sale in the
remarketing.

     Taxable Preferred Securities. The Fund also may invest in taxable
preferred securities (often referred to as "hybrid" preferred securities), the
payments on which are not eligible for the reduced tax



                                      27
<PAGE>

rates for individual stockholders applicable to qualified dividend income and
the Dividends Received Deduction allowed to corporate stockholders. Such
payments constitute deductible interest expense for issuers thereof rather
than dividends eligible for the reduced Federal income tax rate applicable to
qualified dividend income and/or the Dividends Received Deduction. The taxable
preferred securities in which the Fund may invest typically offer additional
yield spread versus other types of preferred securities due to the fact that
payments made with respect to such preferred securities do not qualify for the
reduced tax rate applicable to qualified dividend income and/or the Dividends
Received Deduction. Taxable preferred securities are a comparatively new asset
class.

     Taxable preferred securities include but are not limited to: trust
originated preferred securities, monthly income preferred securities,
quarterly income bond securities, quarterly income debt securities, quarterly
income preferred securities, corporate trust securities, public income notes
and other trust preferred securities.

     Taxable preferred securities are typically issued by an affiliated
business trust of a corporation, generally in the form of beneficial interests
in subordinated debentures or similarly structured securities. The taxable
preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
The taxable preferred securities market is generally divided into the "$25
par" and the "institutional" segments. The $25 par segment is typified by
securities that are listed on the New York Stock Exchange (the "NYSE"), which
trade and are quoted "flat" (i.e., without accrued dividend income that is not
included in the trading price) and which are typically callable at par value
five years after their original issuance date. The institutional segment is
typified by $1,000 par value securities that are not exchange listed, which
trade and are quoted on an "accrued income" basis, and which typically have a
minimum of 10 years of call protection (at premium prices) from the date of
their original issuance.

     Taxable preferred securities normally constitute junior and fully
subordinated liabilities of an issuer or the beneficiary of a guarantee that
is junior and fully subordinated to the other liabilities of the guarantor. In
addition, taxable preferred securities often permit the issuer to defer the
payment of income for a specified period, which may be 18 months or more,
without triggering an event of default. Because of their subordinated position
in the capital structure of an issuer, the ability to defer payments for
extended periods of time without adverse consequence to the issuer, and
certain other features (such as restrictions on common dividend payments by
the issuer or ultimate guarantor when cumulative payments on the taxable
preferred securities have not been made), issuers and investors generally
treat taxable preferred securities as close substitutes for traditional
preferred securities. Taxable preferred securities have many of the key
characteristics of equity due to their subordinated position in an issuer's
capital structure and because their quality and value are heavily dependent on
the profitability of the issuer rather than on any legal claims to specific
assets or cash flows.

     Taxable preferred securities are often issued with a final maturity date,
although some are perpetual in nature. In certain instances, the final
maturity date may be extended and/or the final payment of principal may be
deferred at the issuer's option for a specified time without any adverse
consequence to the issuer. No redemption can typically take place unless all
cumulative payment obligations have been met, although issuers may be able to
engage in open-market repurchases without regard to any cumulative dividends
payable. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make
up any arrearages to its stockholders. Should an issuer default on its
obligations under such a security, the amount of dividends the Fund pays to
stockholders may be adversely affected.

     Many taxable preferred securities are issued by trusts or other special
purpose entities established by operating companies, and are not direct
obligations of the operating company. At the time a trust or



                                      28
<PAGE>

special purpose entity sells its preferred securities to investors, the trust
or special purpose entity purchases debt of the operating company (with terms
comparable to those of the securities issued by the trust or special purpose
entity), which enables the operating company to deduct for Federal income tax
purposes the interest paid on the debt held by the trust or special purpose
entity. The trust or special purpose entity is generally required to be
treated as transparent for Federal income tax purposes such that the holders
of the taxable preferred securities are treated as owning beneficial interests
in the underlying debt of the operating company.

     Accordingly, dividend payments made with respect to such taxable
preferred securities are treated as interest rather than dividends for Federal
income tax purposes and, as such, are not eligible for the Dividends Received
Deduction or the reduced tax rate applicable to qualified dividend income. The
trust or special purpose entity in turn would be a holder of the operating
company's debt and would have priority with respect to the operating company's
assets over the operating company's common stockholders, but would typically
be subordinated to other classes of the operating company's debt. Typically a
taxable preferred security has a rating that is slightly below that of its
corresponding operating company's senior debt securities. As a result of their
subordinated position in an issuer's capital structure, taxable preferred
securities typically offer investors a higher interest payment compared to the
senior debt securities of the operating company.

                                  ---------
                                                         .........

     From time to time, preferred securities issues have been, and may in the
future be, offered having features other than those described herein. The Fund
reserves the right to invest in these securities if the Investment Adviser
believes that doing so would be consistent with the Fund's investment
objective and policies. Since the market for these instruments would be new,
the Fund may have difficulty disposing of them at a suitable price and time.
In addition to limited liquidity, these instruments may present other risks,
such as high price volatility.

Description of Debt Securities

     General. As described below, the Fund may invest without limitation in
all types of debt securities, including U.S. and foreign government bonds,
corporate bonds, corporate loans and convertible bonds, mortgage and asset
backed securities and emerging market debt. In addition, the Fund may invest
without limitation in high quality short term U.S. dollar or non-U.S. dollar
denominated fixed income securities or other instruments, such as U.S. or
foreign government securities, commercial paper and money market instruments
issued by U.S. or foreign commercial banks or depository institutions. There
are no maturity or duration limitations on the debt securities in which the
Fund may invest. The Fund may invest without limitation in below investment
grade, high yield securities, including high yield bonds (commonly referred to
as "junk" bonds), preferred securities, corporate loans and convertible debt
securities. The Fund also may invest up to 10% of its total assets in
Distressed Securities. For a description of these high yield securities, see
"--Description of High Yield Securities" below. A further discussion of
certain of these debt securities and certain related risk factors is set forth
below.

     Corporate Loans. Commercial banks and other financial institutions make
corporate loans to companies that need capital to grow or restructure.
Borrowers generally pay interest on corporate loans at rates that change in
response to changes in market interest rates such as the London Interbank
Offered Rate (LIBOR) or the prime rates of U.S. banks. As a result, the value
of corporate loan investments is generally less responsive to shifts in market
interest rates. Because the trading market for corporate loans is less
developed than the secondary market for bonds and notes, the Fund may
experience difficulties in selling its corporate loans. Borrowers frequently
provide collateral to secure repayment of these obligations. Leading financial
institutions often act as agent for a broader group of lenders, generally



                                      29
<PAGE>

referred to as a syndicate. The syndicate's agent arranges the corporate
loans, holds collateral and accepts payments of principal and interest. If the
agent develops financial problems, the Fund may not recover its investment or
recovery may be delayed. By investing in a corporate loan, the Fund becomes a
member of the syndicate.

     The corporate loans in which the Fund invests can be expected to provide
higher yields than bonds and notes that have investment grade ratings, but may
be subject to greater risk of loss of principal and income. Borrowers do not
always provide collateral for corporate loans, or the value of the collateral
may not completely cover the borrower's obligations at the time of a default.
If a borrower files for protection from its creditors under the U.S.
bankruptcy laws, these laws may limit the Fund's rights to its collateral. In
addition, the value of collateral may erode during a bankruptcy case. In the
event of a bankruptcy, the holder of a corporate loan may not recover its
principal, may experience a long delay in recovering its investment and may
not receive interest during the delay.

     Mortgage Backed Securities. Mortgage backed securities represent the
right to receive a portion of principal and/or interest payments made on a
pool of residential or commercial mortgage loans. When interest rates fall,
borrowers may refinance or otherwise repay principal on their mortgages
earlier than scheduled. When this happens, certain types of mortgage backed
securities will be paid off more quickly than originally anticipated and the
Fund will have to invest the proceeds in securities with lower yields. This
risk is known as "prepayment risk." When interest rates rise, certain types of
mortgage backed securities will be paid off more slowly than originally
anticipated and the value of these securities will fall. This risk is known as
"extension risk."

     Because of prepayment risk and extension risk, mortgage backed securities
react differently to changes in interest rates than other fixed income
securities. Small movements in interest rates (both increases and decreases)
may quickly and significantly reduce the value of certain mortgage backed
securities.

     Asset Backed Securities. Asset backed securities are "pass through"
securities, meaning that principal and interest payments made by the borrower
on the underlying assets (such as credit card receivables) are passed through
to the Fund. Like traditional fixed income securities, the value of asset
backed securities typically increases when interest rates fall and decreases
when interest rates rise. Certain asset backed securities also may be subject
to the risk of prepayment. In a period of declining interest rates, borrowers
may pay what they owe on the underlying assets more quickly than anticipated.
Prepayment reduces the yield to maturity and the average life of the asset
backed securities. In addition, when the Fund reinvests the proceeds of a
prepayment it may receive a lower interest rate than the rate on the security
that was prepaid. This risk is known as "prepayment risk." In a period of
rising interest rates, prepayments may occur at a slower rate than expected.
As a result, the average maturity of debt securities in the Fund's portfolio
will increase. The value of longer term securities generally changes more
widely in response to changes in interest rates than shorter term securities.
This risk is known as "extension risk."

     Sovereign Debt. The Fund may invest in sovereign debt securities. These
securities are issued or guaranteed by foreign government entities.
Investments in sovereign debt are subject to the risk that a government entity
may delay or refuse to pay interest or repay principal on its sovereign debt.
Some of the reasons may include cash flow problems, insufficient foreign
currency reserves, political considerations, the relative size of the
government entity's debt position to the economy or the failure to put in
place economic reforms required by the International Monetary Fund or other
multilateral agencies. If a government entity defaults, it may ask for more
time in which to pay or for further loans. There is no legal process for
collecting sovereign debts that a government does not pay nor bankruptcy
proceeding by which all or part of a sovereign debt that a government entity
has not repaid may be collected.



                                      30
<PAGE>

     Emerging Markets Debt. The Fund may invest in any type of debt
obligations of issuers in emerging market countries. The Fund will consider an
emerging market country to be any country that is included in the Morgan
Stanley Capital International Emerging Markets Free Index. Emerging markets
debt securities are subject to the risks associated with debt securities, high
yield securities, convertible securities and emerging markets as described
under "Risk Factors and Special Considerations" and as described below under
"--- Description of High Yield Securities."

Description of Convertible Securities

     The Fund may invest in convertible securities. A convertible security is
a bond, debenture, note or preferred security that may be converted into or
exchanged for a prescribed amount of common stock or other securities of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive
interest or dividends generally paid or accrued until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities,
including convertible preferred securities, have several unique investment
characteristics such as (i) higher yields than common stocks, but lower yields
than comparable nonconvertible securities, (ii) a lesser degree of fluctuation
in value than the underlying stock since they have fixed income
characteristics, and (iii) the potential for capital appreciation if the
market price of the underlying common stock increases. Holders of convertible
securities have a claim on the assets of the issuer prior to the common
stockholders but may be subordinated to similar non-convertible securities of
the same issuer. A convertible security may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. If a convertible security held by the Fund is called for
redemption, the Fund may be required to permit the issuer to redeem the
security, convert it into the underlying common stock or other securities or
sell it to a third party.

Description of High Yield Securities

     General. The Fund may invest without limit in high yield securities,
including junk bonds, preferred securities, corporate loans and convertible
debt securities that are rated below investment grade by established rating
services (Ba or lower by Moody's Investors Service, Inc. ("Moody's"), BB or
lower by Standard & Poor's ("S&P") or BB or lower by Fitch Ratings ("Fitch"))
or, if unrated, are considered by the Investment Adviser to be of comparable
quality. See Appendix A "--Ratings of Securities" for information concerning
rating categories. The Fund may not, however, invest more than 10% of its
total assets in distressed securities. The Fund considers distressed
securities to be high yield securities that are the subject of bankruptcy
proceedings or otherwise in default as to the repayment of principal or
interest at the time of acquisition by the Fund or are rated in the lowest
rating categories (Ca or below by Moody's, CC or below by S&P or CC or below
by Fitch) or, if unrated, are considered by the Investment Adviser to be of
comparable quality ("Distressed Securities"). The Fund may continue to hold
securities that are downgraded after the Fund purchases them and will sell
such securities only if, in the Investment Adviser's judgment, it is
advantageous to sell such securities. High yield securities generally are
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and dividend income and to repay principal and
involve greater volatility of price than securities in the higher rating
categories. The Fund also may invest in investment grade securities and may
invest in securities of any maturity or duration.

     Selection and supervision of high yield securities by the Investment
Adviser involves continuous analysis of individual issuers, general business
conditions and other factors which may be too time-consuming or too costly for
the average investor. The furnishing of these services does not, of course,
guarantee successful results. The Investment Adviser's analysis of issuers
includes, among other things, historic and current financial conditions,
current and anticipated cash flow and borrowing requirements, value of assets
in relation to historical costs, strength of management, responsiveness to
business



                                      31
<PAGE>

conditions, credit standing, and current and anticipated results of
operations. Analysis of general conditions and other factors may include
anticipated change in economic activity and interest rates, the availability
of new investment opportunities and the economic outlook for specific
industries. While the Investment Adviser considers as one factor in its credit
analysis the ratings assigned by the rating services, the Investment Adviser
performs its own independent credit analysis of issuers and, consequently, the
Fund may invest, without limit, in unrated securities. As a result, the Fund's
ability to achieve its investment objective may depend to a greater extent on
the Investment Adviser's own credit analysis than investment companies that
invest in investment grade securities.

     Investments in high yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in investment
grade securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy. High yield securities are regarded as being predominantly
speculative as to the issuer's ability to make repayments of principal and
payments of interest. Investment in such securities involves substantial risk.
Issuers of high yield securities may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with investment grade securities. For example, during an
economic downturn or a sustained period of rising interest rates, issuers of
high yield securities may be more likely to experience financial stress,
especially if such issuers are highly leveraged. During periods of economic
downturn, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts or the unavailability
of additional financing. Therefore, there can be no assurance that in the
future there will not exist a higher default rate relative to the rates
currently existing in the high yield market. If an issuer of high yield
securities defaults, in addition to risking non-payment of all or a portion of
interest and principal, the Fund may incur additional expenses to seek
recovery. The market prices of high yield securities structured as
zero-coupon, step-up or payment-in-kind securities will normally be affected
to a greater extent by interest rate changes, and therefore tend to be more
volatile than the prices of securities that pay interest currently and in
cash.

     Other than with respect to Distressed Securities (which are discussed
below), the high yield securities in which the Fund may invest do not include
securities which, at the time of investment, are in default or the issuers of
which are in bankruptcy. However, no assurance can be given that such events
will not occur after the Fund purchases a particular security, in which case
the Fund may experience losses and incur costs. High yield securities tend to
be more volatile than investment grade securities, so adverse events may have
a greater impact on the prices of high yield securities than on investment
grade securities. Factors adversely affecting the market value of such
securities are likely to affect adversely the Fund's net asset value.

     Like investment grade securities, high yield securities generally are
purchased and sold through dealers who make a market in such securities for
their own accounts. However, there are fewer dealers in the high yield market,
which market may be less liquid than the market for investment grade
securities, even under normal economic conditions. Also, there may be
significant disparities in the prices quoted for high yield securities by
various dealers, and the spread between the bid and asked price is generally
much larger than for investment grade securities. As a result, the Fund may
experience difficulty acquiring appropriate high yield securities for
investment.

     Adverse conditions and investor perceptions thereof (whether or not based
on economic fundamentals) may impair liquidity in the high yield market and
may cause the prices the Fund receives for its high yield securities to be
reduced. In addition, the Fund may experience difficulty in liquidating a
portion of its portfolio when necessary to meet the Fund's liquidity needs or
in response to a specific



                                      32
<PAGE>

economic event such as a deterioration in the creditworthiness of the issuer.
Under such conditions, judgment may play a greater role in valuing certain of
the Fund's portfolio securities than in the case of securities trading in a
more liquid market. In addition, the Fund may incur additional expenses if it
is forced to seek recovery upon a default of a portfolio holding or if it
participates in the restructuring of the obligation.

     The risk of loss due to default by an issuer is significantly greater for
the holders of junk bonds because such securities are often unsecured and
subordinated to other creditors of the issuer. In addition, junk bonds may
have call or redemption features that permit an issuer to repurchase the
securities from the Fund. If a call were exercised by an issuer during a
period of declining interest rates, the Fund likely would have to replace such
called securities with lower yielding securities, thus decreasing the net
investment income to the Fund and dividends to stockholders.

     The high yield securities in which the Fund invests may include credit
linked notes, structured notes or other instruments evidencing interests in
special purpose vehicles or trusts that hold interests in high yield
securities.

     The Fund may receive warrants or other non-income producing equity
securities in connection with its investments in high yield securities,
including in unit offerings, in an exchange offer, upon the conversion of a
convertible security, or upon the restructuring or bankruptcy of investments
owned by the Fund. The Fund may continue to hold such securities until, in the
Investment Adviser's judgment in light of current market conditions, it is
advantageous to effect a disposition of such securities.

     Distressed Securities. The Fund may invest up to 10% of its total asset
in Distressed Securities. An investment in Distressed Securities is
speculative and involves significant risk in addition to the risks discussed
above in connection with investments in high yield securities. Generally, the
Fund will invest in distressed securities when the Investment Adviser believes
they offer significant potential for higher returns or can be exchanged for
other securities that offer this potential. However, there can be no assurance
that the issuer will make an exchange offer or adopt a plan of reorganization.
The Fund will generally not receive interest payments on Distressed Securities
and may incur costs to protect its investment. In addition, the Fund's
principal may not be repaid. Distressed Securities and any securities received
in an exchange may be difficult to sell and may be subject to restriction on
resale.

                           OTHER INVESTMENT POLICIES

     The Fund has adopted certain other policies as set forth below:

Investments in Foreign Securities

     General. The Fund may invest without limitation in securities of issuers
domiciled outside the United States, including issuers located in emerging
market counties. The Fund may invest without limitation in securities
denominated in currencies other than the U.S. dollar or that do not provide
for payment to the Fund in U.S. dollars. The Investment Adviser generally
considers emerging market countries to be any country that is defined as
having an emerging or developing economy by the World Bank or its related
organizations or the United Nations or its subsidiaries. Investments in
foreign securities involves certain risks not involved in domestic
investments.

     Public Information. Many of the foreign securities held by the Fund will
not be registered with the Commission nor will the issuers thereof be subject
to the reporting requirements of such agency. Accordingly, there may be less
publicly available information about the foreign issuer of such securities
than about a U.S. issuer, and such foreign issuers may not be subject to
accounting, auditing and financial



                                      33
<PAGE>

reporting standards and requirements comparable to those of U.S. issuers.
Traditional investment measurements, such as price/earnings ratios, as used in
the United States, may not be applicable to such securities, particularly
those issued in certain smaller, emerging foreign capital markets. Foreign
issuers, and issuers in smaller, emerging capital markets in particular,
generally are not subject to uniform accounting, auditing and financial
reporting standards or to practices and requirements comparable to those
applicable to domestic issuers.

     Trading Volume, Clearance and Settlement. Foreign financial markets,
while often growing in trading volume, have, for the most part, substantially
less volume than U.S. markets, and securities of many foreign companies are
less liquid and their prices may be more volatile than securities of
comparable domestic companies. Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been times when
settlements have failed to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Further,
satisfactory custodial services for investment securities may not be available
in some countries having smaller, emerging capital markets, which may result
in the Fund incurring additional costs and delays in transporting and
custodying such securities outside such countries. Delays in settlement could
result in periods when assets of the Fund are uninvested and no return is
earned thereon. The inability of the Fund to make intended security purchases
due to settlement problems or the risk of intermediary counterparty failures
could cause the Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell
the security, could result in possible liability to the purchaser.

     Government Supervision and Regulation. There generally is less
governmental supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. For example, there may
be no comparable provisions under certain foreign laws to insider trading and
similar investor protection securities laws that apply with respect to
securities transactions consummated in the United States. Further, brokerage
commissions and other transaction costs on foreign securities exchanges
generally are higher than in the United States.

     Restrictions on Foreign Investment. Some countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Fund. As illustrations,
certain countries require governmental approval prior to investments by
foreign persons, or limit the amount of investment by foreign persons in a
particular company, or limit the investment by foreign persons in a company to
only a specific class of securities that may have less advantageous terms than
securities of the company available for purchase by nationals. Certain
countries may restrict investment opportunities in issuers or industries
deemed important to national interests.

     A number of countries have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their
capital markets. In accordance with the 1940 Act, the Fund may invest up to
10% of its total assets in securities of closed-end investment companies, not
more than 5% of which may be invested in any one such company. This
restriction on investments in securities of closed-end investment companies
may limit opportunities for the Fund to invest indirectly in certain smaller
capital markets. Shares of certain closed-end investment companies may at
times be acquired only at market prices representing premiums to their net
asset values. If the Fund acquires shares in closed-end investment companies,
stockholders would bear both their proportionate share of the Fund's expenses
(including investment advisory fees) and, indirectly, the expenses of such
closed-end investment companies. The Fund also may seek, at its own cost, to
create its own investment entities under the laws of certain countries.



                                      34
<PAGE>

     Foreign Sub-Custodians and Securities Depositories. Rules adopted under
the 1940 Act permit the Fund to maintain its foreign securities and cash in
the custody of certain eligible non-U.S. banks and securities depositories.
Certain banks in foreign countries may not be eligible sub-custodians for the
Fund, in which event the Fund may be precluded from purchasing securities in
certain foreign countries in which it otherwise would invest or the Fund may
incur additional costs and delays in providing transportation and custody
services for such securities outside of such countries. The Fund may encounter
difficulties in effecting on a timely basis portfolio transactions with
respect to any securities of issuers held outside their countries. Other banks
that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain
countries there may be legal restrictions or limitations on the ability of the
Fund to recover assets held in custody by foreign sub-custodians in the event
of the bankruptcy of the sub-custodian.

Indexed and Inverse Floating Obligations

     The Fund may invest in securities whose potential returns are directly
related to changes in an underlying index or interest rate, known as indexed
securities. The return on indexed securities will rise when the underlying
index or interest rate rises and fall when the index or interest rate falls.
The Fund also may invest in securities whose return is inversely related to
changes in an interest rate ("inverse floaters"). In general, inverse floaters
change in value in a manner that is opposite to most bonds--that is, interest
rates on inverse floaters will decrease when short term rates increase and
increase when short term rates decrease. Investments in indexed securities and
inverse floaters may subject the Fund to the risk of reduced or eliminated
interest payments. Investments in indexed securities also may subject the Fund
to loss of principal. In addition, certain indexed securities and inverse
floaters may increase or decrease in value at a greater rate than the
underlying interest rate, which effectively leverages the Fund's investment.
Regardless of the effect, inverse floaters represent a leveraged investment.
As a result, the market value of such securities will generally be more
volatile than that of fixed rate securities. Both indexed securities and
inverse floaters can be derivative securities and can be considered
speculative.

Interest Rate Transactions

     In order to seek to hedge the value of the Fund's portfolio against
interest rate fluctuations, to hedge against increases in the Fund's costs
associated with the dividend payments on any outstanding preferred stock or to
seek to enhance the Fund's return, the Fund may enter into various interest
rate transactions such as interest rate swaps and the purchase or sale of
interest rate caps and floors. The Fund may enter into these transactions to
seek to preserve a return or spread on a particular investment or portion of
its portfolio, to seek to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date or to seek to
enhance its return. However, the Fund also may invest in interest rate swaps
to seek to enhance income or to seek to increase the Fund's yield, for
example, during periods of steep interest rate yield curves (i.e., wide
differences between short term and long term interest rates). The Fund is not
required to pursue these portfolio strategies and may choose not to do so. The
Fund cannot guarantee that any strategies it uses will work.

     In an interest rate swap, the Fund exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). For example, if the Fund holds a
debt instrument with an interest rate that is reset only once each year, it
may swap the right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This would enable the
Fund to offset a decline in the value of the debt instrument due to rising
interest rates but would also limit its ability to benefit from falling
interest rates. Conversely, if the Fund holds a debt instrument with an
interest rate that is reset every week and it would like to lock in what it
believes to be a high interest rate for one year, it may swap the right to
receive interest at this variable weekly rate for the right to receive
interest at a rate that is fixed for one year. Such a swap would protect the
Fund



                                      35
<PAGE>

from a reduction in yield due to falling interest rates and may permit the
Fund to enhance its income through the positive differential between one week
and one year interest rates, but would preclude it from taking full advantage
of rising interest rates.

     The Fund usually will enter into interest rate swaps on a net basis
(i.e., the two payment streams are netted out with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and
an amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be segregated by the Fund. If the
interest rate swap transaction is entered into on other than a net basis, the
full amount of the Fund's obligations will be accrued on a daily basis, and
the full amount of the Fund's obligations will be segregated by the Fund.

     The Fund also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest equal
to the difference of the index and the predetermined rate on a notional
principal amount (i.e., the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs)
from the party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest at the
difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not
enter into caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Fund.

     Typically, the parties with which the Fund will enter into interest rate
transactions will be broker dealers and other financial institutions. The Fund
will not enter into any interest rate swap, cap or floor transaction unless
the unsecured senior debt or the claims paying ability of the other party
thereto is rated investment grade quality by at least one established rating
agency at the time of entering into such transaction or whose creditworthiness
is believed by the Investment Adviser to be equivalent to such rating. If
there is a default by the other party to such a transaction, the Fund will
have contractual remedies pursuant to the agreements related to the
transaction. 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 its outstanding preferred stock because it may be obligated to make the
payments that it had intended to avoid. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid
in comparison with other similar instruments traded in the interbank market.
Caps and floors, however, are more recent innovations and are less liquid than
swaps. There is still a risk, however, 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 at the time an interest rate
swap or cap transaction reaches its scheduled termination date. If this
occurs, it could have a negative impact on the Fund's ability to make dividend
payments on its outstanding preferred stock. 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 with respect to all shares of
outstanding preferred stock of the Fund. A sudden and dramatic decline in
interest rates may result in a significant decline in the asset coverage. If
the Fund fails to maintain any required asset coverage with respect to all
shares of outstanding preferred stock of the Fund or fails to comply with
other covenants of shares of its outstanding preferred stock, the Fund may be
required to redeem some or all of these shares of preferred stock. Such
redemption would likely 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



                                      36
<PAGE>

in the termination payment by or to the Fund. Early termination of a cap could
result in the termination payment to the Fund. Certain Federal income tax
requirements may limit the Fund's ability to engage in interest rate swaps.
Payments from transactions in interest rate swaps generally will be taxable to
stockholders as ordinary income that will not be eligible for the Dividends
Received Deduction or the reduced Federal income tax rate applicable to
qualified dividend income. See "Taxes."

Credit Default Swap Agreements

     The Fund may enter into credit default swap agreements for hedging
purposes or to seek to enhance its returns. The credit default swap agreement
may have as reference obligations one or more securities that are not
currently held by the Fund. The protection "buyer" in a credit default
contract may be obligated to pay the protection "seller" an upfront or a
periodic stream of payments over the term of the contract provided that no
credit event on a reference obligation has occurred. If a credit event occurs,
the seller generally must pay the buyer the "par value" (full notional value)
of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity described in the swap, or the seller may be required to
deliver the related net cash amount, if the swap is cash settled. The Fund may
be either the buyer or seller in the transaction. If the Fund is a buyer and
no credit event occurs, the Fund may recover nothing if the swap is held
through its termination date. However, if a credit event occurs, the buyer
generally may elect to receive the full notional value of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity
that may have little or no value. As a seller, the Fund generally receives an
upfront payment or a fixed rate of income throughout the term of the swap,
which typically is between six months and five years, provided that there is
no credit event. If a credit event occurs, generally the seller must pay the
buyer the full notional value of the swap in exchange for an equal face amount
of deliverable obligations of the reference entity that may have little or no
value. As the seller, the Fund would effectively add leverage to its portfolio
because, in addition to its total net assets, the Fund would be subject to
investment exposure on the notional amount of the swap.

     Credit default swap agreements involve greater risks than if the Fund had
invested in the reference obligation directly since, in addition to general
market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into credit default
swap agreements only with counterparties who are rated investment grade
quality by at least one established rating agency at the time of entering into
such transaction or whose creditworthiness is believed by the Investment
Adviser to be equivalent to such rating. A buyer generally also will lose its
investment and recover nothing should no credit event occur and the swap is
held to its termination date. If a credit event were to occur, the value of
any deliverable obligation received by the seller, coupled with the upfront or
periodic payments previously received, may be less than the full notional
value it pays to the buyer, resulting in a loss of value to the seller. The
Fund's obligations under a credit default swap agreement will be accrued daily
(offset against any amounts owing to the Fund). In connection with each such
transaction, the Fund will at all times segregate unencumbered liquid
securities or cash with a value at least equal to the Fund's exposure (any
accrued but unpaid net amounts owed by the Fund to any counterparty), on a
marked-to-market basis (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that the Fund has assets available
to satisfy its obligations with respect to the transaction and will limit any
potential leveraging of the Fund's portfolio. Such segregation will not limit
the Fund's exposure to loss.

Total Return Swap Agreements

     The Fund may enter into total return swap agreements. Total return swap
agreements are contracts in which one party agrees to make periodic payments
based on the change in market value of the underlying assets, which may
include a specified security, basket of securities or securities indices
during the specified period, in return for periodic payments based on a fixed
or variable interest rate or the total return from other underlying assets.
Total return swap agreements may be used to obtain exposure to a



                                      37
<PAGE>

security or market without owning or taking physical custody of such security
or market. Total return swap agreements may effectively add leverage to the
Fund's portfolio because, in addition to its total net assets, the Fund would
be subject to investment exposure on the notional amount of the swap.

     Total return swap agreements entail the risk that a party will default on
its payment obligations to the Fund thereunder. Swap agreements also bear the
risk that the Fund will not be able to meet its obligation to the
counterparty. Generally, the Fund will enter into total return swaps on a net
basis (i.e., the two payment streams are netted out with the Fund receiving or
paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each total return swap will be accrued on a daily basis, and
an amount of cash or liquid instruments having an aggregate net asset value at
least equal to the accrued excess will be segregated by the Fund. If the total
return swap transaction is entered into on other than a net basis, the full
amount of the Fund's obligations will be accrued on a daily basis, and the
full amount of the Fund's obligations will be segregated by the Fund in an
amount equal to or greater than the market value of the liabilities under the
total return swap agreement or the amount it would have cost the Fund
initially to make an equivalent direct investment, plus or minus any amount
the Fund is obligated to pay or is to receive under the total return swap
agreement.

Credit or Equity Linked Trust Certificates

     Among the income producing securities in which the Fund may invest are
credit or equity linked trust certificates, which are investments in a limited
purpose trust or other vehicle which, in turn, invests in a basket of
derivative instruments, such as credit default swaps, interest rate swaps and
other securities, in order to provide exposure to certain equity or fixed
income markets. For instance, the Fund may invest in credit or equity linked
trust certificates as a cash management tool in order to gain exposure to
certain equity or fixed income markets and/or to remain fully invested when
more traditional securities are not available, including during the period
when the net proceeds of this offering and any borrowings or offering of
preferred stock are being invested.

     Like an investment in a bond, investments in these credit or equity
linked trust certificates represent the right to receive periodic income
payments (in the form of distributions) and payment of principal at the end of
the term of the certificate. However, these payments are conditioned on the
trust's receipt of payments from, and the trust's potential obligations to,
the counterparties to the derivative instruments and other securities in which
the trust invests. For instance, the trust may sell one or more credit default
swaps, under which the trust would receive a stream of payments over the term
of the swap agreements, provided that no event of default has occurred with
respect to the referenced debt obligation upon which the swap is based. If a
default occurs, the stream of payments may stop and the trust would be
obligated to pay to the counterparty the par (or other agreed upon value) of
the referenced debt obligation. This, in turn, would reduce the amount of
income and principal that the Fund would receive as an investor in the trust.
The Fund's investments in these instruments are indirectly subject to the
risks associated with derivative instruments, including, among others, credit
risk, default or similar event risk, counterparty risk, interest rate risk,
total return and management risk. It is also expected that the certificates
will be exempt from registration under the Securities Act of 1933, as amended.
Accordingly, there may be no established trading market for the certificates
and they may constitute illiquid investments.

Options

     Call Options. The Fund may purchase call options on any of the types of
securities or instruments in which it may invest. A purchased call option
gives the Fund the right to buy, and obligates the seller to sell, the
underlying security at the exercise price at any time during the option
period. The



                                      38
<PAGE>

Fund also may purchase and sell call options on indices. Index options are
similar to options on securities except that, rather than taking or making
delivery of securities underlying the option at a specified price upon
exercise, an index option gives the holder the right to receive cash upon
exercise of the option if the level of the index upon which the option is
based is greater than the exercise price of the option.

     The Fund also is authorized to write (i.e., sell) covered call options on
the securities or instruments in which it may invest and to enter into closing
purchase transactions with respect to certain of such options. A covered call
option is an option in which the Fund, in return for a premium, gives another
party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason
for writing call options is the attempt to realize, through the receipt of
premiums, a greater return than would be realized on the securities alone. By
writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price. In addition, the Fund's ability to
sell the underlying security will be limited while the option is in effect
unless the Fund enters into a closing purchase transaction. A closing purchase
transaction cancels out the Fund's position as the writer of an option by
means of an offsetting purchase of an identical option prior to the expiration
of the option it has written. Covered call options also serve as a partial
hedge to the extent of the premium received against the price of the
underlying security declining.

     The Fund also is authorized to write (i.e., sell) uncovered call options
on securities or instruments in which it may invest but that are not currently
held by the Fund. The principal reason for writing uncovered call options is
to realize income without committing capital to the ownership of the
underlying securities or instruments. When writing uncovered call options, the
Fund must deposit and maintain sufficient margin with the broker dealer
through which it made the uncovered call option as collateral to ensure that
the securities can be purchased for delivery if and when the option is
exercised. In addition, in connection with each such transaction the Fund will
segregate unencumbered liquid securities or cash with a value at least equal
to the Fund's exposure (the difference between the unpaid amounts owed by the
Fund on such transaction minus any collateral deposited with the broker
dealer), on a marked-to-market basis (as calculated pursuant to requirements
of the Commission). Such segregation will ensure that the Fund has assets
available to satisfy its obligations with respect to the transaction and will
avoid any potential leveraging of the Fund's portfolio. Such segregation will
not limit the Fund's exposure to loss. During periods of declining securities
prices or when prices are stable, writing uncovered calls can be a profitable
strategy to increase the Fund's income with minimal capital risk. Uncovered
calls are riskier than covered calls because there is no underlying security
held by the Fund that can act as a partial hedge. Uncovered calls have
speculative characteristics and the potential for loss is unlimited. When an
uncovered call is exercised, the Fund must purchase the underlying security to
meet its call obligation. There is also a risk, especially with less liquid
preferred and debt securities, that the securities may not be available for
purchase. If the purchase price exceeds the exercise price, the Fund will lose
the difference.

     Put Options. The Fund is authorized to purchase put options to seek to
hedge against a decline in the value of its securities or to enhance its
return. By buying a put option, the Fund acquires a right to sell such
underlying securities or instruments at the exercise price, thus limiting the
Fund's risk of loss through a decline in the market value of the securities or
instruments until the put option expires. The amount of any appreciation in
the value of the underlying securities or instruments will be partially offset
by the amount of the premium paid for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on
whether the amount received is more or less than the premium paid for the put
option plus the related transaction costs. A closing sale transaction cancels
out the Fund's position as the purchaser of an option by means of an
offsetting sale of an identical option prior to the expiration of the option
it has purchased. The Fund also may purchase uncovered put options.



                                      39
<PAGE>

     The Fund also has authority to write (i.e., sell) put options on the
types of securities or instruments that may be held by the Fund, provided that
such put options are covered, meaning that such options are secured by
segregated, liquid instruments. The Fund will receive a premium for writing a
put option, which increases the Fund's return. The Fund will not sell puts if,
as a result, more than 50% of the Fund's assets would be required to cover its
potential obligations under its hedging and other investment transactions.

     The Fund is also authorized to write (i.e., sell) uncovered put options
on securities or instruments in which it may invest but that the Fund does not
currently have a corresponding short position or has not deposited cash equal
to the exercise value of the put option with the broker dealer through which
it made the uncovered put option as collateral. The principal reason for
writing uncovered put options is to receive premium income and to acquire such
securities or instruments at a net cost below the current market value. The
Fund has the obligation to buy the securities or instruments at an agreed upon
price if the securities or instruments decrease below the exercise price. If
the securities or instruments price increases during the option period, the
option will expire worthless and the Fund will retain the premium and will not
have to purchase the securities or instruments at the exercise price. In
connection with such transaction, the Fund will segregate unencumbered liquid
securities or cash with a value at least equal to the Fund's exposure, on a
marked-to-market basis (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that the Fund has assets available
to satisfy its obligations with respect to the transaction and will avoid any
potential leveraging of the Fund's portfolio. Such segregation will not limit
the Fund's exposure to loss.

Financial Futures and Options Thereon

     The Fund is authorized to engage in transactions in financial futures
contracts ("futures contracts") and related options on such futures contracts
either as a hedge against adverse changes in the market value of its portfolio
securities or to seek to enhance the Fund's return. A futures contract is an
agreement between two parties that obligates the purchaser of the futures
contract to buy and the seller of a futures contract to sell a security for a
set price on a future date or, in the case of an index futures contract, to
make and accept a cash settlement based upon the difference in value of the
index between the time the contract was entered into and the time of its
settlement. A majority of transactions in futures contracts, however, do not
result in the actual delivery of the underlying instrument or cash settlement
but are settled through liquidation (i.e., by entering into an offsetting
transaction). Futures contracts have been designed by boards of trade that
have been designated "contract markets" by the Commodities Futures Trading
Commission (the "CFTC"). Transactions by the Fund in futures contracts and
financial futures are subject to limitations as described below under
"--Restrictions on the Use of Futures Transactions." The Fund may sell
financial futures contracts in anticipation of an increase in the general
level of interest rates. Generally, as interest rates rise, the market values
of securities that may be held by the Fund will fall, thus reducing the net
asset value of the Fund. However, as interest rates rise, the value of the
Fund's short position in the futures contract also will tend to increase, thus
offsetting all or a portion of the depreciation in the market value of the
Fund's investments that are being hedged. While the Fund will incur commission
expenses in selling and closing out futures positions, these commissions are
generally less than the transaction expenses that the Fund would have incurred
had the Fund sold portfolio securities in order to reduce its exposure to
increases in interest rates. The Fund also may purchase financial futures
contracts in anticipation of an increase in the value of certain securities
when it is not fully invested in a particular market in which it intends to
make investments to gain market exposure that may in part or entirely offset
an increase in the cost of securities it intends to purchase. It is
anticipated that, in a substantial majority of these transactions, the Fund
will purchase securities upon termination of the futures contract.



                                      40
<PAGE>

     The Fund also has authority to purchase and write call and put options on
futures contracts. Generally, these strategies are utilized under the same
market and market sector conditions (i.e., conditions relating to specific
types of investments) in which the Fund enters into futures transactions. The
Fund may purchase put options or write call options on futures contracts
rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities or an increase in interest rates.
Similarly, the Fund may purchase call options, or write put options on futures
contracts, as a substitute for the purchase of such futures to hedge against
the increased cost resulting from an increase in the market value or a decline
in interest rates of securities that the Fund intends to purchase.

     The Fund may engage in options and futures transactions on exchanges and
options in the over- the-counter markets ("OTC options"). In general,
exchange-traded contracts are third-party contracts (i.e., performance of the
parties' obligation is guaranteed by an exchange or clearing corporation) with
standardized strike prices and expiration dates. OTC options transactions are
two-party contracts with price and terms negotiated by the buyer and seller.
See "--Restrictions on OTC Options" below for information as to restrictions
on the use of OTC options.

     Under regulations of the CFTC, the futures trading activity described
herein will not result in the Fund being deemed a "commodity pool" and the
Fund need not be operated by a person registered with the CFTC as a "commodity
pool operator."

     When the Fund purchases a futures contract or writes a put option or
purchases a call option thereon, an amount of cash or liquid instruments will
be segregated so that the amount so segregated, plus the amount of variation
margin held in the account of its broker, equals the market value of the
futures contract, thereby ensuring that the use of such futures is
unleveraged.

     The Fund will engage in transactions in OTC options only with banks or
dealers that have capital of at least $50 million or whose obligations are
guaranteed by an entity having capital of at least $50 million. OTC options
and assets used to cover OTC options written by the Fund are considered by the
staff of the Commission to be illiquid. The illiquidity of such options or
assets may prevent a successful sale of such options or assets, result in a
delay of sale, or reduce the amount of proceeds that might otherwise be
realized.

Risk Factors in Interest Rate Transactions and Options and Futures Transactions

     The use of interest rate transactions is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Interest rate transactions
involve the risk of an imperfect correlation between the index used in the
hedging transaction and that pertaining to the securities that are the subject
of such transaction. If the Investment Adviser is incorrect in its forecasts
of market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would have been
if these investment techniques were not used. In addition, interest rate
transactions that may be entered into by the Fund do not involve the delivery
of securities or other underlying assets or principal. Accordingly, the risk
of loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the
security underlying an interest rate swap is prepaid and the Fund continues to
be obligated to make payments to the other party to the swap, the Fund would
have to make such payments from another source. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to
receive. In the case of a purchase by the Fund of an interest rate cap or
floor, the amount of loss is limited to the fee paid. Since interest rate
transactions are individually negotiated, the Investment Adviser expects to
achieve an acceptable degree of correlation between the Fund's rights



                                      41
<PAGE>

to receive interest on securities and its rights and obligations to receive
and pay interest pursuant to interest rate swaps.

     Utilization of options and futures transactions to hedge the portfolio
involves the risk of imperfect correlation in movements in the price of
options and futures and movements in the prices of the securities that are the
subject of the hedge. If the price of the options or futures moves more or
less than the price of the subject of the hedge, the Fund will experience a
gain or loss that will not be completely offset by movements in the price of
the subject of the hedge. The risk particularly applies to the Fund's use of
futures and options thereon when it uses such instruments as a so-called
"cross-hedge," which means that the security that is the subject of the
futures contract is different from the security being hedged by the contract.
Utilization of options and futures and options thereon through uncovered call
options and uncovered put options are highly speculative strategies. If the
price of the uncovered option moves in the direction not anticipated by the
Fund, the Fund's losses will not be limited.

     Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into a closing purchase or sale transaction.
This requires a secondary market on an exchange for call or put options of the
same series. The Fund intends to enter into options and futures transactions,
on an exchange or in the over-the-counter market, only if there appears to be
a liquid secondary market for such options and futures. However, no assurance
can be given that a liquid secondary market will exist at any specific time.
Thus, it may not be possible to close an options or futures position. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or an option related to a futures contract.

Short Sales

     The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund may make short
sales both as a form of hedging to offset potential declines in long positions
in similar securities and in order to seek to enhance return.

     When the Fund makes a short sale, it must borrow the security sold short
and deliver collateral to the broker dealer through which it made the short
sale to cover its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.

     The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker dealer, usually cash, U.S. government
securities or other liquid securities similar to those borrowed. The Fund also
will be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the value of both collateral amounts in the
aggregate is at all times equal to at least 100% of the current market value
of the security sold short. Depending on arrangements made with the broker
dealer from which it borrowed the security regarding payment over of any
payments received by the Fund on such security, the Fund may not receive any
payments (including interest) on its collateral deposited with such broker
dealer.

     If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss. Conversely, if the price declines, the Fund will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.



                                      42
<PAGE>

     The Fund also may make short sales "against the box." These transactions
will involve either short sales of securities retained in the Fund's portfolio
or securities it has the right to acquire without the payment of further
consideration.

Foreign Exchange Transactions

     The Fund may engage in spot and forward foreign exchange transactions and
currency swaps, purchase and sell options on currencies and purchase and sell
currency futures and related options thereon (collectively, "Currency
Instruments") for purposes of hedging against the decline in the value of
currencies in which its portfolio holdings are denominated against the U.S.
dollar.

     Forward Foreign Exchange Transactions. Forward foreign exchange
transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date
set at the time of the contract. Spot foreign exchange transactions are
similar but require current, rather than future, settlement. The Fund will
enter into foreign exchange transactions only for purposes of hedging either a
specific transaction or a portfolio position. The Fund may enter into a
foreign exchange transaction for purposes of hedging a specific transaction
by, for example, purchasing a currency needed to settle a security transaction
or selling a currency in which the Fund has received or anticipates receiving
a dividend or distribution. The Fund may enter into a foreign exchange
transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by
purchasing a currency in which the Fund anticipates acquiring a portfolio
position in the near future. The Fund also may hedge portfolio positions
through currency swaps, which are transactions in which one currency is
simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis. Forward foreign exchange transactions
involve substantial currency risk and also involve credit and liquidity risk.

     Currency Futures. The Fund also may hedge against the decline in the
value of a currency against the U.S. dollar through use of currency futures or
options thereon. Currency futures are similar to forward foreign exchange
transactions except that futures are standardized, exchange-traded contracts.
See "--Financial Futures and Options Thereon" above. Currency futures involve
substantial currency risk and also involve total return.

     Currency Options. The Fund also may hedge against the decline in the
value of a currency against the U.S. dollar through the use of currency
options. Currency options are similar to options on securities, but in
consideration for an option premium the writer of a currency option is
obligated to sell (in the case of a call option) or purchase (in the case of a
put option) a specified amount of a specified currency on or before the
expiration date for a specified amount of another currency. The Fund may
engage in transactions in options on currencies either on exchanges or OTC
markets. See "--Options" above. Currency options involve substantial currency
risk and also may involve credit, leverage or liquidity risk.

     Limitations on Currency Hedging. The Fund will not speculate in Currency
Instruments. Accordingly, the Fund will not hedge a currency in excess of the
aggregate market value of the securities it owns (including receivables for
unsettled securities sales), or has committed to or anticipates purchasing,
that are denominated in such currency. The Fund may, however, hedge a currency
by entering into a transaction in a Currency Instrument denominated in a
currency other than the currency being hedged (a "cross-hedge"). The Fund will
only enter into a currency cross-hedge if the Investment Adviser believes that
(i) there is a demonstrable high correlation between the currency in which the
cross-hedge is denominated and the currency being hedged, and (ii) executing a
cross-hedge through the currency in which the cross-hedge is denominated will
be significantly more cost-effective or provide



                                      43
<PAGE>

substantially greater liquidity than executing a similar hedging transaction by
means of the currency being hedged.

Other Investment Strategies

     Repurchase Agreements and Purchase and Sale Contracts. The Fund may
invest in securities pursuant to repurchase agreements and purchase and sale
contracts. Repurchase agreements and purchase and sale contracts may be
entered into only with a member bank of the Federal Reserve System or primary
dealer in U.S. government securities. Under such agreements, the bank or
primary dealer agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In the case of
repurchase agreements, the prices at which the trades are conducted do not
reflect accrued interest on the underlying obligations; whereas, in the case
of purchase and sale contracts, the prices take into account accrued interest.
Such agreements usually cover short periods, such as under one week.
Repurchase agreements may be construed to be collateralized loans by the
purchaser to the seller secured by the securities transferred to the
purchaser. In the case of a repurchase agreement, the Fund will require the
seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase
agreement; the Fund does not have the right to seek additional collateral in
the case of purchase and sale contracts. In the event of default by the seller
under a repurchase agreement construed to be a collateralized loan, the
underlying securities are not owned by the Fund but only constitute collateral
for the seller's obligation to pay the repurchase price. Therefore, the Fund
may suffer time delays and incur costs or possible losses in connection with
the disposition of the collateral. A purchase and sale contract differs from a
repurchase agreement in that the contract arrangements stipulate that the
securities are owned by the Fund. In the event of a default under such a
repurchase agreement or a purchase and sale contract, instead of the
contractual fixed rate of return, the rate of return to the Fund shall be
dependent upon intervening fluctuations of the market value of such security
and the accrued interest on the security. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses
arising from market fluctuations following the failure of the seller to
perform.

     Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements with respect to its portfolio investments subject to the investment
restrictions set forth herein. Reverse repurchase agreements involve the sale
of securities held by the Fund with an agreement by the Fund to repurchase the
securities at an agreed upon price, date and interest payment. The use by the
Fund of reverse repurchase agreements involves many of the same risks of
leverage described under "Risks and Special Considerations of
Leverage--Effects of Leverage" herein since the proceeds derived from such
reverse repurchase agreements may be invested in additional securities. At the
time the Fund enters into a reverse repurchase agreement, it may segregate
liquid instruments having a value not less than the repurchase price
(including accrued interest). If the Fund segregates such liquid instruments,
a reverse repurchase agreement will not be considered a borrowing by the Fund;
however, under circumstances in which the Fund does not segregate such liquid
instruments, such reverse repurchase agreement will be considered a borrowing
for the purpose of the Fund's limitation on borrowings. Reverse repurchase
agreements involve the risk that the market value of the securities acquired
in connection with the reverse repurchase agreement may decline below the
price of the securities the Fund has sold but is obligated to repurchase.
Also, reverse repurchase agreements involve the risk that the market value of
the securities retained in lieu of sale by the Fund in connection with the
reverse repurchase agreement may decline in price. In the event the buyer of
securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may receive an
extension of time to determine whether to enforce the Fund's obligation to
repurchase the securities, and the Fund's use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision.
Also, the Fund



                                      44
<PAGE>

would bear the risk of loss to the extent that the proceeds of the reverse
repurchase agreement are less than the value of the securities subject to such
agreement.

     Lending of Portfolio Securities. The Fund may lend securities with a
value not exceeding 33 1/3% of its total assets or the limit prescribed by
applicable law to banks, brokers and other financial institutions. In return,
the Fund receives collateral in cash or securities issued or guaranteed by the
U.S. government, which will be maintained at all times in an amount equal to
at least 100% of the current market value of the loaned securities. The Fund
maintains the ability to obtain the right to vote or consent on proxy
proposals involving material events affecting securities loaned. The Fund
receives the income on the loaned securities. Where the Fund receives
securities as collateral, the Fund receives a fee for its loans from the
borrower and does not receive the income on the collateral. Where the Fund
receives cash collateral, it may invest such collateral and retain the amount
earned, net of any amount rebated to the borrower. As a result, the Fund's
yield may increase. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities within the
standard time period for settlement of securities transactions. The Fund is
obligated to return the collateral to the borrower at the termination of the
loan. The Fund could suffer a loss in the event the Fund must return the cash
collateral and there are losses on investments made with the cash collateral.
In the event the borrower defaults on any of its obligations with respect to a
securities loan, the Fund could suffer a loss where there are losses on
investments made with the cash collateral or, where the value of the
securities collateral falls below the market value of the borrowed securities.
The Fund could also experience delays and costs in gaining access to the
collateral. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. The Fund has
received an exemptive order from the Commission permitting it to lend
portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") or its affiliates and to retain an affiliate of the Fund as
lending agent. See "Portfolio Transactions."

     Illiquid Securities. The Fund may invest in securities that lack a
secondary trading market or are otherwise considered illiquid. Liquidity of a
security relates to the ability to easily dispose of the security and the
price to be obtained upon disposition of the security, which may be less than
would be obtained for a comparable more liquid security. The Fund has no
limitation on the amount of its investments that are not readily marketable or
are subject to restrictions on resale. Illiquid securities may be subject to
wide fluctuations in market value. The Fund may be subject to significant
delays in disposing of certain securities. As a result, the Fund may be forced
to sell these securities at less than fair market value or may not be able to
sell them when the Investment Adviser believes that it is desirable to do so.
Illiquid securities also may entail registration expenses and other
transaction costs that are higher than those for liquid securities. Such
investments may affect the Fund's ability to realize the net asset value in
the event of a voluntary or involuntary liquidation of its assets. See "Net
Asset Value" for information with respect to the valuation of illiquid
securities.

     When-Issued and Forward Commitment Securities. The Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. When such transactions are negotiated, the price,
which generally is expressed in yield terms, is fixed at the time the
commitment is made, but delivery and payment for the securities take place at
a later date. When-issued securities and forward commitments may be sold prior
to the settlement date, but the Fund will enter into when-issued and forward
commitment transactions only with the intention of actually receiving or
delivering the securities, as the case may be. If the Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it can incur
a gain or loss. At the time the Fund enters into a transaction on a
when-issued or forward commitment basis, it will segregate cash or other
liquid instruments with a value not less than the value of the when-issued or
forward commitment securities. The value of these assets will be monitored
daily to ensure that their marked-to-market value at all times will exceed the
corresponding obligations of the



                                      45
<PAGE>

Fund. There is always a risk that the securities may not be delivered, and the
Fund may incur a loss. Settlements in the ordinary course, which may take
substantially more than five business days for mortgage-related securities,
are not treated by the Fund as when-issued or forward commitment transactions
and accordingly are not subject to the foregoing restrictions.

     Standby Commitment Agreements. The Fund from time to time may enter into
standby commitment agreements. Such agreements commit the Fund, for a stated
period of time, to purchase a stated amount of a fixed income security that
may be issued and sold to the Fund at the option of the issuer. The price and
coupon of the security is fixed at the time of the commitment. At the time of
entering into the agreement the Fund may be paid a commitment fee, regardless
of whether or not the security ultimately is issued. The Fund will enter into
such agreements only for the purpose of investing in the security underlying
the commitment at a yield and price which is considered advantageous to the
Fund. The Fund at all times will segregate cash or other liquid instruments
with a value equal to the purchase price of the securities underlying the
commitment.

     No assurance can be given that the securities subject to a standby
commitment will be issued and the value of the security, if issued, on the
delivery date may be more or less than its purchase price. Since the issuance
of the security underlying the commitment is at the option of the issuer, the
Fund may bear the risk of decline in the value of such security and may not
benefit from an appreciation in the value of the security during the
commitment period.

     The purchase of a security subject to a standby commitment agreement and
the related commitment fee will be recorded on the date on which the security
reasonably can be expected to be issued and the value of the security
thereafter will be reflected in the calculation of the Fund's net asset value.
The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.

                                  ---------

     The Fund may in the future employ new or additional investment strategies
and instruments if those strategies and instruments are consistent with the
Fund's investment objective and are permissible under applicable regulations
governing the Fund.

                 RISKS AND SPECIAL CONSIDERATIONS OF LEVERAGE

Effects of Leverage

     At times, the Fund expects to utilize leverage through borrowings, the
issuance of short term debt securities or the issuance of shares of preferred
stock. The Fund has the ability to utilize leverage through borrowing or the
issuance of short term debt securities in an amount up to 33 1/3% of the value
of its total assets (including the amount obtained from such borrowings or
debt issuance). The Fund also has the ability to utilize leverage through the
issuance of shares of preferred stock in an amount up to 50% of the value of
its total assets (including the amount obtained from such preferred stock
issuance). The Fund currently intends to issue shares of preferred stock
representing approximately _____% of the Fund's capital (including amounts
obtained from the issuance of the preferred stock), or approximately _____% of
the Fund's common stock equity. Following the investment of the net proceeds
of this common stock offering, the Fund may, depending on market and economic
conditions and the relative costs and benefits associated with the issuance of
preferred stock and other types of leverage, choose to leverage its portfolio
through borrowings rather than through the issuance of preferred stock, or the
Fund may choose to leverage through a combination of preferred stock and
borrowings. No assurance can be given that the



                                      46
<PAGE>

Fund will leverage its portfolio or that any leveraging strategy will be
successful during any period in which it is used.

     The Fund's issuance of preferred stock will result in the leveraging of
its common stock. Although the Board of Directors has not yet finalized the
terms of the preferred stock offering, the Fund expects that the preferred
stock will pay dividends that will be adjusted over either relatively short
term periods (generally seven to 28 days) or medium term periods (up to five
years). The preferred stock dividend rate will be based upon prevailing
interest rates for debt obligations of comparable maturity and with comparable
ratings. The money raised by the preferred stock offering will be invested in
accordance with the investment objective of the Fund. The expenses of the
preferred stock, which will be borne by the Fund, will reduce the net asset
value of the common stock.

     As discussed under "Investment Advisory and Management Arrangements,"
during periods when the Fund has preferred stock outstanding or outstanding
borrowings for leverage, the fees paid to the Investment Adviser for
investment advisory and management services will be higher than if the Fund
did not issue preferred stock or borrow because the fees paid will be
calculated on the basis of an aggregate of (i) the Fund's average daily net
assets (including proceeds from the sale of preferred stock), and (ii) the
proceeds of any outstanding borrowings used for leverage. Consequently, the
Fund and the Investment Adviser may have differing interests in determining
whether to leverage the Fund's assets. The Board of Directors will monitor
this potential conflict.

     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 that otherwise might require untimely dispositions
of Fund securities. The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace.

     The use of leverage creates certain risks for common stockholders,
including the greater likelihood of higher volatility of the Fund's dividend
yield, total return, net asset value and the market price of the common stock.
Changes in the value of the Fund's total assets will have a disproportionate
affect on the net asset value per share of common stock when leverage is used.
For example, if the Fund were to use leverage equal to 50% of the value of the
Fund's common stock, it would show an approximately 1.5% increase or decline
in net asset value for each 1% increase or decline in the value of its total
assets. An additional risk of leverage is that the cost of the leverage plus
applicable Fund expenses may exceed the return on the securities acquired with
the proceeds of the leverage, thereby diminishing rather than enhancing the
return to the Fund's common stockholders. In particular, during times of
rising interest rates, the market value of the Fund's portfolio investments,
and in particular its fixed income holdings, may decline, while at the same
time the Fund's cost of leverage may increase. These risks would generally
make the Fund's return to common stockholders more volatile were it to use
leverage. So long as the Fund uses leverage, it may be required to sell
investments in order to make dividend or interest payments on preferred stock
or borrowings used for leverage when it may be disadvantageous to do so.
Finally, if the asset coverage for the Fund's preferred stock or borrowings
declines to less than 200% or 300% of the Fund's total assets, respectively
(as a result of market fluctuations or otherwise), the Fund may be required to
sell a portion of its investments to redeem some or all of the preferred stock
or repay the borrowings when it may be disadvantageous to do so.

     In an extreme case, a decline in net asset value could affect the Fund's
ability to pay dividends on the Fund's common stock. Failure to make such
dividend payments could adversely affect the Fund's qualification as a
regulated investment company under the Federal tax laws. See "Taxes." However,
the Fund intends to take all measures necessary to make common stock dividend
payments. If the Fund's current investment income is ever insufficient to meet
dividend payments on either the common stock or



                                      47
<PAGE>

the preferred stock, the Fund may have to liquidate certain of its
investments. In addition, the Fund will have the authority to redeem the
preferred stock for any reason and may redeem all or part of the preferred
stock under the following circumstances:

     o  if the asset coverage for the preferred stock declines below 200%, or

     o  in order to maintain the asset coverage guidelines established by an
        established rating agency that has rated the preferred stock.

     Redemption of the preferred stock or insufficient investment return on
the Fund's portfolio may reduce the net asset value of the common stock and
require the Fund to liquidate a portion of its investments at a time when it
may be disadvantageous to do so.

           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
that may affect the Fund's ability to pay dividends and distributions on the
common stock in certain instances. The Fund also may be required to pledge its
assets to the lenders in connection with certain types of borrowings. The Fund
also may be subject to certain restrictions on investments imposed by
guidelines of one or more established rating agencies that may issue ratings
for the short term debt instruments or preferred stock 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. It is
not anticipated that these covenants or guidelines will impede the Investment
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.

     Under the 1940 Act, the Fund is not permitted to incur indebtedness
unless immediately after such incurrence the Fund has an asset coverage of at
least 300% of the aggregate outstanding principal balance of indebtedness
(i.e., such indebtedness may not exceed 33 1/3% of the value of the Fund's
total assets). Additionally, under the 1940 Act, the Fund may not declare any
dividend or other distribution upon any class of its capital stock, or
purchase any such capital stock, unless the aggregate indebtedness of the Fund
has, at the time of the declaration of any such dividend or distribution or at
the time of any such purchase, an asset coverage of at least 300% after
deducting the amount of such dividend, distribution, or purchase price, as the
case may be. Under the 1940 Act, the Fund is not permitted to issue shares of
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock (i.e., such liquidation value may not exceed 50%
of the value of the Fund's total assets). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its common
stock unless, at the time of such declaration, the net asset value of the
Fund's portfolio (determined after deducting the amount of such dividend or
distribution) is at least 200% of such liquidation value. In the event shares
of preferred stock are issued, the Fund intends, to the extent possible, to
purchase or redeem shares of preferred stock from time to time to maintain
coverage of any preferred stock of at least 200%.

     The Fund's willingness to borrow money and issue debt securities or
preferred stock for investment purposes, and the amount it will borrow or
issue, will depend on many factors, the most important of which are investment
outlook, market conditions and interest rates. Successful use of a leveraging
strategy depends on the Investment Adviser's ability to predict correctly
interest rates and market movements, and no assurance can be given that a
leveraging strategy will be successful during any period in which it is
employed.

     Assuming the use of leverage by issuing preferred stock (paying dividends
at a rate that generally will be adjusted every seven days) in an amount
representing approximately    % of the Fund total capital



                                      48
<PAGE>

at an annual dividend rate of    % payable on such preferred stock based on
market rates as of a recent date, the annual return that the Fund's portfolio
must experience (net of estimated expenses) in order to cover such dividend
payments would be    %.

     The following table is designed to illustrate the effect on the return to
a holder of common stock of the leverage obtained by the issuance of preferred
stock representing approximately % of the Fund's capital, assuming
hypothetical annual returns on the Fund's portfolio of minus 10% to plus 10%.
As the table shows, leverage generally increases the return to stockholders
when portfolio return is positive and decreases the return when portfolio
return is negative. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.

<TABLE>
<CAPTION>
<S>                                                         <C>        <C>        <C>       <C>      <C>
Assumed Portfolio Return (net of expenses)...............   (10)%      (5)%       0%        5%       10%

Corresponding Common Stock Return........................    ( )%      ( )%       %         %         %
</TABLE>

     Until the Fund issues shares of preferred stock or borrows, the Fund's
common stock will not be leveraged and the special considerations related to
leverage described in the prospectus will not apply. Such leveraging of the
common stock cannot be fully achieved until the proceeds resulting from the
use of leverage have been invested in accordance with the Fund's investment
objective and policies.

Portfolio Management and Other Considerations

     If changes in market and economic conditions occur to the point where the
Fund's leverage could adversely affect common stockholders as noted above (or
in anticipation of such changes), the Fund may attempt to reduce the degree to
which it is leveraged by redeeming preferred stock pursuant to the Fund's
Articles Supplementary, which establish the rights and preferences of the
preferred stock, or otherwise by purchasing shares of preferred stock.
Purchases and redemptions of preferred stock, whether on the open market or in
negotiated transactions, are subject to limitations under the 1940 Act. In
determining whether or not it is in the best interest of the Fund and its
stockholders to redeem or repurchase outstanding preferred stock, the Board of
Directors will take into account a variety of factors, including the
following:

     o  market and economic conditions,

     o  the ratio of preferred stock to common stock, and

     o  the expenses and timing associated with such redemption or repurchase.

If market and economic conditions subsequently change, the Fund may sell
previously unissued shares of preferred stock or shares of preferred stock
that the Fund had issued but later repurchased or redeemed. The Fund will
incur additional expenses in connection with the subsequent registration and
sale of preferred stock.

     The Fund intends to apply for ratings of the preferred stock from one or
more established rating service. In order to obtain these ratings, the Fund
may be required to maintain portfolio holdings that meet the specified
guidelines of such organizations. These guidelines may impose asset coverage
and portfolio composition requirements that are more stringent than those
imposed by the 1940 Act and may prohibit or limit the use by the Fund of
certain portfolio management techniques or investments. The Fund does not
anticipate that these guidelines will impede the Investment Adviser from
managing the Fund's portfolio in accordance with the Fund's investment
objective and policies. Ratings on preferred stock issued by the Fund should
not be confused with ratings on the portfolio securities held by the Fund.



                                      49
<PAGE>

     Under the 1940 Act, the Fund is not permitted to issue shares of
preferred stock unless immediately after such issuance the net asset value of
the Fund's portfolio is at least 200% of the liquidation value of the
outstanding preferred stock (expected to equal the original purchase price of
the outstanding shares of preferred stock plus any accumulated but unpaid
dividends thereon). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its common stock unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of the
liquidation value of the outstanding preferred stock. Under the Fund's
proposed capital structure, assuming the sale of shares of preferred stock
representing approximately    % of the Fund's capital, the net asset value of
the Fund's portfolio is expected to be approximately    % of the liquidation
value of the Fund's preferred stock. To the extent possible, the Fund intends
to purchase or redeem shares of preferred stock from time to time to maintain
coverage of preferred stock of at least 200%.

                            INVESTMENT RESTRICTIONS

     The following are fundamental investment restrictions of the Fund and,
prior to the issuance of any preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of
common stock (which for this purpose and under the 1940 Act means the lesser
of (i) 67% of the shares of common stock represented at a meeting at which
more than 50% of the outstanding shares of common stock are represented or
(ii) more than 50% of the outstanding shares). Subsequent to the issuance of a
class of preferred stock, the following investment restrictions may not be
changed without the approval of a majority of the outstanding shares of common
stock and of preferred stock, voting together as a class, and the approval of
a majority of the outstanding shares of preferred stock, voting separately as
a class. The Fund may not:

          1. Make any investment inconsistent with the Fund's classification
     as a diversified company under the 1940 Act.

          2. Make investments for the purpose of exercising control or
     management.

          3. Purchase or sell real estate, commodities or commodity contracts,
     except that, to the extent permitted by applicable law, the Fund may
     invest in securities directly or indirectly secured by real estate or
     interests therein or issued by entities that invest in real estate or
     interests therein, and the Fund may purchase and sell financial futures
     contracts and options thereon.

          4. Issue senior securities or borrow money except as permitted by
     Section 18 of the 1940 Act or otherwise as permitted by applicable law.

          5. Underwrite securities of other issuers, except insofar as the
     Fund may be deemed an underwriter under the Securities Act of 1933, as
     amended, in selling portfolio securities.

          6. Make loans to other persons, except (i) the Fund shall not be
     deemed to be making a loan to the extent that the Fund purchases bonds,
     debentures or other corporate debt securities, preferred securities,
     commercial paper, pass through instruments, bank loan participation
     interests, corporate loans, certificates of deposit, bankers'
     acceptances, repurchase agreements or any similar instruments and (ii)
     the Fund may lend its portfolio securities in an amount not in excess of
     33 1/3% of its total assets, taken at market value, provided that such
     loans shall be made in accordance with the guidelines set forth in this
     prospectus.

          7. Invest more than 25% of its total assets (taken at market value
     at the time of each investment) in the securities of issuers in any one
     industry; provided that this limitation shall not



                                      50
<PAGE>

     apply with respect to obligations issued or guaranteed by the U.S.
     government or by its agencies or instrumentalities.

     For purposes of investment restriction (7), industry means any one or
more of the industry sub-classifications used by one or more widely recognized
market indices or ratings group indices, and/or as defined by the Investment
Adviser.

     Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without stockholder approval, provide that
the Fund may not:

          a. Purchase securities of other investment companies, except to the
     extent that such purchases are permitted by applicable law.

          b. Mortgage, pledge, hypothecate or in any manner transfer, as
     security for indebtedness, any securities owned or held by the Fund
     except as may be necessary in connection with borrowings mentioned in
     investment restriction (4) above or except as may be necessary in
     connection with transactions described under "Other Investment Policies"
     above.

          c. Purchase any securities on margin, except that the Fund may
     obtain such short term credit as may be necessary for the clearance of
     purchases and sales of portfolio securities (the deposit or payment by
     the Fund of initial or variation margin in connection with financial
     futures contracts and options thereon is not considered the purchase of a
     security on margin).

     If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.

     The Fund interprets its policies with respect to borrowing and lending to
permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom
pursuant to exemptive order of the Commission.

     The Investment Adviser of the Fund and Merrill Lynch are owned and
controlled by Merrill Lynch & Co., Inc. ("ML & Co."). Because of the
affiliation of Merrill Lynch with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch
except pursuant to an exemptive order or otherwise in compliance with the
provisions of the 1940 Act and the rules and regulations thereunder. Included
among such restricted transactions will be purchases from or sales to Merrill
Lynch of securities in transactions in which it acts as principal. See
"Portfolio Transactions."

                            DIRECTORS AND OFFICERS

     The Directors of the Fund consist of     individuals,     of whom are not
"interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act.

     Each non-interested Director is a member of the Fund's Audit Committee
(the "Committee"). The principal responsibilities of the Committee are the
appointment, compensation and oversight of the Fund's independent accountants,
including the resolution of disagreements regarding financial reporting
between Fund management and such independent accountants. The Committee's
responsibilities include, without limitation, to (i) review with the
independent accountants the arrangements for and scope of



                                      51
<PAGE>

annual and special audits and any other services provided by the independent
accountants to the Fund; (ii) discuss with the independent accountants certain
matters relating to the Fund's financial statements, including any adjustment
to such financial statements recommended by such independent accountants or
any other results of any audit; (iii) ensure that the independent accountants
submit on a periodic basis a formal written statement with respect to their
independence, discuss with the independent accountants any relationships or
services disclosed in the statement that may impact the objectivity and
independence of the Fund's independent accountants and recommend that the
Board of Directors take appropriate action in response thereto to satisfy
itself of the independent accountants' independence; and (iv) consider the
comments of the independent accountants with respect to the quality and
adequacy of the Fund's accounting and financial reporting policies and
practices and internal controls and Fund management's responses thereto. The
Board of Directors of the Fund has adopted a written charter for the
Committee. The Committee has retained independent legal counsel to assist it
in connection with these duties. [Since the Fund was incorporated, the
Committee has held one meeting.]

     Each non-interested Director is also a member of the Board's Nominating
Committee. The principal responsibilities of the Nominating Committee are to
identify individuals qualified to serve as non-interested Directors of the
Fund and to recommend its nominees for consideration by the full Board. While
the Nominating Committee is solely responsible for the selection and
nomination of the Fund's non-interested Directors, the Nominating Committee
may consider nominations for the office of the Director made by Fund
stockholders or by Fund management as it deems appropriate. Fund stockholders
who wish to recommend a nominee should send nominations to the Secretary of
the Fund that include biographical information and set forth the
qualifications of the proposed nominee. Since the Fund was incorporated, the
Nominating Committee has not held any meetings.

Biographical Information

     Certain biographical and other information relating to the non-interested
Directors of the Fund is set forth below, including their ages, their
principal occupations for at least the last five years, the length of time
served, the total number of portfolios overseen in the complex of funds
advised by the Investment Adviser and its affiliate, Merrill Lynch Investment
Managers, L.P. ("MLIM") ("FAM/MLIM-advised funds") and other public
directorships.



                                      52
<PAGE>

<TABLE>
<CAPTION>
                                                                                         Number of
                                         Term of                                         FAM/MLIM-
                         Position(s)   Office** and                                    Advised Funds
Name, Address* and Age    Held with     Length of        Principal Occupation(s)       and Portfolios      Public
      of Director         the Fund     Time Served        During Past Five Years          Overseen      Directorships
---------------------- -------------- ---------------- ----------------------------- ----------------- ----------------
<S>                    <C>            <C>              <C>                           <C>               <C>

                                            [To Be Provided By Amendment]

</TABLE>

--------------
*    The address of each non-interested Director is P.O. Box 9095, Princeton,
     New Jersey 08543-9095.
**   Each Director serves until his or her successor is elected and qualified
     or until his or her death, resignation, or removal as provided in the
     Fund's By-laws, Charter or by statute or until December 31 of the year in
     which he or she turns 72.

     Certain biographical and other information relating to the Director who
is an "interested person" of the Fund as defined in the 1940 Act (the
"interested Director") and to the other officers of the Fund is set forth
below, including their ages, their principal occupations for at least the last
five years, the length of time served, the total number of portfolios overseen
in FAM/MLIM-advised funds and public directorships held.


<TABLE>
<CAPTION>
                                                                                         Number of
                                         Term of                                         FAM/MLIM-
                        Position(s)    Office** and                                    Advised Funds
    Name, Address+       Held with      Length of        Principal Occupation(s)       and Portfolios      Public
       and Age            the Fund     Time Served        During Past Five Years          Overseen      Directorships
-------------------- --------------- ---------------- ---------------------------- ------------------- ---------------

<S>                     <C>           <C>             <C>                             <C>               <C>
Terry K. Glenn* (63)    President**   President and   President of the                    registered    None
                        and           Director of     FAM/MLIM-advised funds;         investment
                        Director***   the Fund        Chairman (Americas Region) of   companies
                                      since 2004      MLIM from 2000 to 2002;         consisting
                                                      Executive Vice President of     of portfolios
                                                      the FAM and MLIM (which terms
                                                      as used herein include their
                                                      corporate predecessors) from
                                                      1983 to 2002; President of
                                                      FAM Distributors, Inc.
                                                      ("FAMD") from 1986 to 2002
                                                      and Director thereof from
                                                      1991 to 2002; Executive Vice
                                                      President and Director of
                                                      Princeton Services, Inc.
                                                      ("Princeton Services") from
                                                      1993 to 2002; President of
                                                      Princeton Administrators,
                                                      L.P. from 1988 to 2002;
                                                      Director of Financial Data
                                                      Services, Inc. from 1985 to
                                                      2002.

Donald C. Burke (43)    Vice          Vice            First Vice President of FAM         registered    None
                        President     President and   and MLIM since 1997 and         investment
                        and           Treasurer of    Treasurer thereof since 1999;   companies
                        Treasurer     the Fund        Senior Vice President and       consisting
                                      since 2004      Treasurer of Princeton          of
                                                      Services since 1999; Vice       portfolios
                                                      President of FAMD since 1999;
                                                      Vice President of FAM and
                                                      MLIM from 1990 to 1997;
                                                      Director of Taxation of MLIM
                                                      since 1990.



                                      53
<PAGE>

                                                                                         Number of
                                         Term of                                         FAM/MLIM-
                        Position(s)    Office** and                                    Advised Funds
    Name, Address+       Held with      Length of        Principal Occupation(s)       and Portfolios      Public
       and Age            the Fund     Time Served        During Past Five Years          Overseen      Directorships
-------------------- --------------- ---------------- ---------------------------- ------------------- ---------------
[o] ([o])               Vice          Vice            [o].                                registered    None
                        President     President and                                   investment
                        and           Co-Portfolio                                    companies
                        Co-Portfolio  Manager since                                   consisting
                        Manager       2004                                            of
                                                                                      portfolios

[o] ([o])               Vice          Vice            [o].                                registered    None
                        President     President and                                   investment
                        and           Co-Portfolio                                    companies
                        Co-Portfolio  Manager since                                   consisting
                        Manager       2004                                            of
                                                                                      portfolios

Phillip S. Gillespie    Secretary     Secretary       First Vice President of MLIM        registered    None
(39)                                  since 2004      since 2001; Director of MLIM    investment
                                                      since 2000; Vice President of   companies
                                                      MLIM from 1999 to 2000;         consisting of
                                                      Attorney associated with MLIM   portfolios
                                                      since 1998; Assistant General
                                                      Counsel of Chancellor LGT
                                                      Asset Management Inc. from
                                                      1997 to 1998; Senior Counsel
                                                      and Attorney in the Division
                                                      of Investment Management and
                                                      Office of General Counsel at
                                                      the U.S. Securities and
                                                      Exchange Commission from 1993
                                                      to 1997.

</TABLE>

---------------
+    The address of Mr. Glenn and each officer listed is P.O. Box 9011,
     Princeton, New Jersey 08543-9011.
*    Mr. Glenn is an "interested person," as defined in the 1940 Act, of the
     Fund based on his former positions with FAM, MLIM, FAMD, Princeton
     Services and Princeton Administrators, L.P.
**   Elected by and serves at the pleasure of the Board of Directors of the
     Fund.
***  As a Director, Mr. Glenn serves until his successor is elected and
     qualified or until his death or resignation, or removal as provided in
     the Fund's By-laws or Charter or by statute, or until December 31 of the
     year in which he turns 72.

     In the event that the Fund issues preferred stock, holders of shares of
preferred stock, voting as a separate class, will be entitled to elect two of
the Fund's Directors, and the remaining Directors will be elected by all
holders of capital stock, voting as a single class. See "Description of
Capital Stock."

Share Ownership

     Information relating to each Director's share ownership in the Fund and
in all registered funds in the Merrill Lynch family of funds that are overseen
by the respective Director ("Supervised Merrill Lynch Funds") as of December
31, 2003 is set forth in the chart below.

<TABLE>
<CAPTION>

                                                                                              Aggregate Dollar Range
                                                                                                 of Securities in
                                                                    Aggregate Dollar Range      Supervised Merrill
                              Name                                   of Equity in the Fund          Lynch Funds
                              ----                                   ---------------------          -----------

<S>                                                                 <C>                       <C>
Interested Director:
                                                                             [To Be Provided By Amendment]



                                      54
<PAGE>

Non-interested Director:

</TABLE>


--------------
*    Chairman of the Audit Committee.

     As of the date of this prospectus, the Investment Adviser owned all of
the outstanding shares of common stock of the Fund; none of the Directors and
officers of the Fund owned any outstanding shares of the Fund. As of the date
of this prospectus, none of the non-interested Directors of the Fund or their
immediate family members owned beneficially or of record any securities in ML
& Co.

Compensation of Directors

     Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
of officers and employees of the Fund as well as the fees of all Directors of
the Fund who are affiliated persons of ML & Co. or its subsidiaries.

     The Fund pays each non-interested Director a combined fee of $    per year
for service on the Board of Directors, the Committee and the Nominating
Committee, plus $    per in-person Board meeting attended and $    per
in-person Committee meeting attended. Each of the Co-Chairmen of the Committee
receives an additional annual fee of $    per year. The Fund reimburses each
non-interested Director for his or her out-of-pocket expenses relating to
attendance at Board and Committee meetings.

     The following table sets forth the estimated compensation to be paid by
the Fund to the non-interested Directors projected through the end of the
Fund's first full fiscal year and the aggregate compensation paid to them from
all registered FAM/MLIM-advised funds for the calendar year ended December 31,
2003.

<TABLE>
<CAPTION>

                                                                  Pension
                                                                  Retirement    Aggregate
                                                                  Benefits     Compensation
                                                     Estimated    Accrued     from Fund and
                                                     Aggregate    as Part         other
                                                   Compensation   of Fund     FAM/MLIM-Advise
Name                                                 from Fund     Expense        Funds*
----                                               ------------- ----------- ------------------
<S>                                                <C>           <C>         <C>

                               [To Be Provided By Amendment]

</TABLE>

-------------
*    For the number of FAM/MLIM-advised funds from which each Director
     receives compensation, see the table above under "-- Biographical
     Information."

                INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS

     The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and administrative services. The Investment
Adviser acts as the investment adviser to more than 100 registered investment
companies and offers investment advisory services to individuals and
institutional accounts. As of December 31, 2003, the Investment Adviser and
its affiliates, including MLIM, had a total of approximately $    billion in
investment company and other portfolio assets under management, including
approximately $    billion in [o] assets. This amount includes assets managed by
certain affiliates of the Investment Adviser. The Investment Adviser is a
limited partnership, the partners of which are ML & Co. and Princeton
Services, Inc. The principal business address of the Investment Adviser is 800
Scudders Mill Road, Plainsboro, New Jersey 08536.



                                      55
<PAGE>

     The Investment Advisory Agreement provides that, subject to the
supervision of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.

          [Portfolio Manager Information to be Provided by Amendment]

     For its services, the Fund pays the Investment Adviser a monthly fee at
the annual rate of % of an aggregate of (i) the Fund's average daily net
assets and (ii) the proceeds of any outstanding borrowings used for leverage
("average daily net assets" means the average daily value of the total assets
of the Fund, including the amount obtained from leverage and any proceeds from
the issuance of preferred stock, minus the sum of (i) accrued liabilities of
the Fund, (ii) any accrued and unpaid interest on outstanding borrowings and
(iii) accumulated dividends on shares of preferred stock). For purposes of
this calculation, average daily net assets is determined at the end of each
month on the basis of the average net assets of the Fund for each day during
the month. The liquidation preference of any outstanding preferred stock
(other than accumulated dividends) is not considered a liability in
determining the Fund's average daily net assets.

     The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, Commission fees, fees and expenses of
non-interested Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.

     Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in the 1940
Act) of any such party. Such contract is not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party
thereto or by the vote of the stockholders of the Fund.

     In connection with the Board of Director's consideration of the
Investment Advisory Agreement, the Board of Directors reviewed information
reasonably necessary to evaluate the terms of the Investment Advisory
Agreement derived from a number of sources and covering a range of issues
relating to, among other things, alternatives to the Investment Advisory
Agreement.

                         [To Be Provided By Amendment]

Code of Ethics

     The Fund's Board of Directors approved a Code of Ethics under Rule 17j-1
of the 1940 Act that covers the Fund and the Investment Adviser. The Code of
Ethics establishes procedures for personal



                                      56
<PAGE>

investing and restricts certain transactions. Employees subject to the Code of
Ethics may invest in securities for their personal investment accounts,
including securities that may be purchased or held by the Fund.

Proxy Voting Policies and Procedures

     The Fund's Board of Directors has delegated to the Investment Adviser
authority to vote all proxies relating to the Fund's portfolio securities. The
Investment Adviser has adopted policies and procedures ("Proxy Voting
Procedures") with respect to the voting of proxies related to the portfolio
securities held in the account of one or more of its clients, including the
Fund. Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting decisions solely
in the best interests of the Fund and its stockholders, and to act in a manner
that the Investment Adviser believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that the Investment Adviser considers the interests of its
clients, including the Fund, and not the interests of the Investment Adviser,
when voting proxies and that real (or perceived) material conflicts that may
arise between the Investment Adviser's interest and those of the Investment
Adviser's clients are properly addressed and resolved.

     In order to implement the Proxy Voting Procedures, the Investment Adviser
has formed a Proxy Voting Committee (the "Proxy Committee"). The Proxy
Committee is comprised of the Investment Adviser's Chief Investment Officer
(the "CIO"), one or more other senior investment professionals appointed by
the CIO, portfolio managers and investment analysts appointed by the CIO and
any other personnel the CIO deems appropriate. The Proxy Committee will also
include two non-voting representatives from the Investment Adviser's legal
department appointed by the Investment Adviser's General Counsel. The Proxy
Committee's membership shall be limited to full-time employees of the
Investment Adviser. No person with any investment banking, trading, retail
brokerage or research responsibilities for the Investment Adviser's affiliates
may serve as a member of the Proxy Committee or participate in its decision
making (except to the extent such person is asked by the Proxy Committee to
present information to the Proxy Committee, on the same basis as other
interested, knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Proxy Committee determines how to vote the
proxies of all clients, including the Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes are
consistent with the best interests of those clients and are free from
unwarranted and inappropriate influences. The Proxy Committee establishes
general proxy voting policies for the Investment Adviser and is responsible
for determining how those policies are applied to specific proxy votes, in
light of each issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated consequences of
alternate actions. In so doing, the Proxy Committee may determine to vote a
particular proxy in a manner contrary to its generally stated policies. In
addition, the Proxy Committee will be responsible for ensuring that all
reporting and recordkeeping requirements related to proxy voting are
fulfilled.

     The Proxy Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Proxy Committee may elect not
to adopt a specific voting policy applicable to that issue. The Investment
Adviser believes that certain proxy voting issues require investment analysis
- such as approval of mergers and other significant corporate transactions -
akin to investment decisions, and are, therefore, not suitable for general
guidelines. The Proxy Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to investment
decisions, or determine to permit the portfolio manager to make individual
decisions on how best to maximize economic value for the Fund (similar to
normal buy/sell investment decisions made by such portfolio manager). While it
is expected that the Investment Adviser will generally seek to vote proxies
over which the Investment Adviser exercises voting authority in a uniform
manner for all the Investment Adviser's clients, the Proxy



                                      57
<PAGE>

Committee, in conjunction with the Fund's portfolio manager, may determine
that the Fund's specific circumstances require that its proxies be voted
differently.

     To assist the Investment Adviser in voting proxies, the Proxy Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level
proxy-related services to institutional investment managers, plan sponsors,
custodians, consultants, and other institutional investors. The services
provided to the Investment Adviser by ISS include in-depth research, voting
recommendations (although the Investment Adviser is not obligated to follow
such recommendations), vote execution, and recordkeeping. ISS will also assist
the Fund in fulfilling its reporting and recordkeeping obligations under the
1940 Act.

     The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally will not
seek to vote proxies related to portfolio securities that are on loan,
although it may do so under certain circumstances. In addition, the Investment
Adviser will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain countries where
the Proxy Committee determines that the costs associated with voting generally
outweigh the benefits. The Proxy Committee may at any time override these
general policies if it determines that such action is in the best interests of
the Fund.

     From time to time, the Investment Adviser may be required to vote proxies
in respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Proxy Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving Affiliates
and Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Proxy Committee does not reasonably believe it is able to follow its
guidelines (or if the particular proxy matter is not addressed by the
guidelines) and vote impartially, the Proxy Committee may, in its discretion
for the purposes of ensuring that an independent determination is reached,
retain an independent fiduciary to advise the Proxy Committee on how to vote
or to cast votes on behalf of the Investment Adviser's clients.

     In the event that the Proxy Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Proxy Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Proxy Committee),
consisting solely of Proxy Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons whose job
responsibilities do not include contact with the Client and whose job
evaluations would not be affected by the Investment Adviser's relationship
with the Client (or failure to retain such relationship). The subcommittee
shall determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their judgment,
akin to an investment decision, to defer to the applicable portfolio manager,
provided that, if the subcommittee determines to alter the Investment
Adviser's normal voting guidelines or, on matters where the Investment
Adviser's policy is case-by-case, does not follow the voting recommendation of
any proxy voting service or other independent fiduciary that may be retained
to provide research or advice to the Investment Adviser on that matter, no
proxies relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Proxy Committee concurs
that the subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties.

     In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote



                                      58
<PAGE>

differently from the recommendation set forth in a voting guideline if the
Proxy Committee determines that it is in the Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the request of a
Proxy Committee member and may be amended or deleted upon the vote of a
majority of Proxy Committee members present at a Proxy Committee meeting at
which there is a quorum.

     The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:

     o  Proposals related to the composition of the Board of Directors of
        issuers other than investment companies. As a general matter, the
        Proxy Committee believes that a company's Board of Directors (rather
        than stockholders) is most likely to have access to important,
        nonpublic information regarding a company's business and prospects,
        and is therefore best-positioned to set corporate policy and oversee
        management. The Proxy Committee, therefore, believes that the
        foundation of good corporate governance is the election of qualified,
        independent corporate directors who are likely to diligently represent
        the interests of stockholders and oversee management of the
        corporation in a manner that will seek to maximize stockholder value
        over time. In individual cases, the Proxy Committee may look at a
        nominee's history of representing stockholder interests as a director
        of other companies or other factors, to the extent the Proxy Committee
        deems relevant.

     o  Proposals related to the selection of an issuer's independent
        auditors. As a general matter, the Proxy Committee believes that
        corporate auditors have a responsibility to represent the interests of
        stockholders and provide an independent view on the propriety of
        financial reporting decisions of corporate management. While the Proxy
        Committee will generally defer to a corporation's choice of auditor,
        in individual cases, the Proxy Committee may look at an auditor's
        history of representing stockholder interests as auditor of other
        companies, to the extent the Proxy Committee deems relevant.

     o  Proposals related to management compensation and employee benefits. As
        a general matter, the Proxy Committee favors disclosure of an issuer's
        compensation and benefit policies and opposes excessive compensation,
        but believes that compensation matters are normally best determined by
        an issuer's board of directors, rather than stockholders. Proposals to
        "micro-manage" an issuer's compensation practices or to set arbitrary
        restrictions on compensation or benefits will, therefore, generally
        not be supported.

     o  Proposals related to requests, principally from management, for
        approval of amendments that would alter an issuer's capital structure.
        As a general matter, the Proxy Committee will support requests that
        enhance the rights of common stockholders and oppose requests that
        appear to be unreasonably dilutive.

     o  Proposals related to requests for approval of amendments to an
        issuer's charter or by-laws. As a general matter, the Proxy Committee
        opposes poison pill provisions.

     o  Routine proposals related to requests regarding the formalities of
        corporate meetings.

     o  Proposals related to proxy issues associated solely with holdings of
        investment company shares. As with other types of companies, the Proxy
        Committee believes that a fund's Board of Directors (rather than its
        stockholders) is best-positioned to set fund policy and oversee
        management. However, the Proxy Committee opposes granting Boards of
        Directors authority over certain matters, such as changes to a fund's
        investment objective, that the 1940 Act envisions will be approved
        directly by stockholders.



                                      59
<PAGE>

     o  Proposals related to limiting corporate conduct in some manner that
        relates to the stockholder's environmental or social concerns. The
        Proxy Committee generally believes that annual stockholder meetings
        are inappropriate forums for discussion of larger social issues, and
        opposes stockholder resolutions "micromanaging" corporate conduct or
        requesting release of information that would not help a stockholder
        evaluate an investment in the corporation as an economic matter. While
        the Proxy Committee is generally supportive of proposals to require
        corporate disclosure of matters that seem relevant and material to the
        economic interests of stockholders, the Proxy Committee is generally
        not supportive of proposals to require disclosure of corporate matters
        for other purposes.

                            PORTFOLIO TRANSACTIONS

     Subject to policies established by the Board of Directors, the Investment
Adviser is primarily responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. The Fund has no obligation to
deal with any dealer or group of dealers in the execution of transactions in
portfolio securities of the Fund. Where possible, the Fund deals directly with
the dealers who make a market in the securities involved except in those
circumstances where better prices and execution are available elsewhere. It is
the policy of the Fund to obtain the best results in conducting portfolio
transactions for the Fund, taking into account such factors as price
(including the applicable dealer spread or commission), the size, type and
difficulty of the transaction involved, the firm's general execution and
operations facilities and the firm's risk in positioning the securities
involved. The cost of portfolio securities transactions of the Fund primarily
consists of dealer or underwriter spreads and brokerage commissions. While
reasonable competitive spreads or commissions are sought, the Fund will not
necessarily be paying the lowest spread or commission available.

     Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as quantitative and modeling
information assessments and statistical data and provide other similar
services) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory Agreement and the expense of the Investment Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information. Supplemental investment research obtained from such dealers might
be used by the Investment Adviser in servicing all of its accounts and such
research might not be used by the Investment Adviser in connection with the
Fund.

     Under the 1940 Act, persons affiliated with the Fund and persons who are
affiliated with such persons are prohibited from dealing with the Fund as
principal in the purchase and sale of securities unless a permissive order
allowing such transactions is obtained from the Commission. Since transactions
in the over-the-counter market usually involve transactions with dealers
acting as principal for their own accounts, affiliated persons of the Fund,
including Merrill Lynch and any of its affiliates, will not serve as the
Fund's dealer in such transactions. However, affiliated persons of the Fund
may serve as its broker in listed or over-the-counter transactions conducted
on an agency basis provided that, among other things, the fee or commission
received by such affiliated broker is reasonable and fair compared to the fee
or commission received by non-affiliated brokers in connection with comparable
transactions. In addition, the Fund may not purchase securities during the
existence of any underwriting syndicate for such securities of which Merrill
Lynch is a member or in a private placement in which Merrill Lynch serves as
placement agent except pursuant to procedures adopted by the Board of
Directors of the Fund that either comply with rules adopted by the Commission
or with interpretations of the Commission staff.

     Certain court decisions have raised questions as to the extent to which
investment companies should seek exemptions under the 1940 Act in order to
seek to recapture underwriting and dealer spreads



                                      60
<PAGE>

from affiliated entities. The Directors have considered all factors deemed
relevant and have made a determination not to seek such recapture at this
time. The Directors will reconsider this matter from time to time.

     Section 11(a) of the Securities Exchange Act of 1934 generally prohibits
members of the U.S. national securities exchanges from executing exchange
transactions for their affiliates and institutional accounts that they manage
unless the member (i) has obtained prior express authorization from the
account to effect such transactions, (ii) at least annually furnishes the
account with a statement setting forth the aggregate compensation received by
the member in effecting such transactions, and (iii) complies with any rules
the Commission has prescribed with respect to the requirements of clauses (i)
and (ii). To the extent Section 11(a) would apply to Merrill Lynch acting as a
broker for the Fund in any of its portfolio transactions executed on any such
securities exchange of which it is a member, appropriate consents have been
obtained from the Fund and annual statements as to aggregate compensation will
be provided to the Fund.

     The Fund has received an exemptive order from the Commission permitting
it to lend portfolio securities to Merrill Lynch or its affiliates. Pursuant
to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent (the "lending agent") for a
fee, including a fee based on a share of the returns on investment of cash
collateral. In connection with securities lending activities, the lending
agent may, on behalf of the Fund, invest cash collateral received by the Fund
for such loans in, among other things, a private investment company managed by
the lending agent or in registered money market funds advised by the
Investment Adviser or its affiliates. Pursuant to the same order, the Fund may
invest its uninvested cash in registered money market funds advised by the
Investment Adviser or its affiliates, or in a private investment company
managed by the lending agent. If the Fund acquires shares in either the
private investment company or an affiliated money market fund, stockholders
would bear both their proportionate share of the Fund's expenses and,
indirectly, the expenses of such other entities. However, in accordance with
the exemptive order, the investment adviser to the private investment company
will not charge any advisory fees with respect to shares purchased by the
Fund. Such shares also will not be subject to a sales load, redemption fee,
distribution fee or service fee, or, in the case of the shares of an
affiliated money market fund, the payment of any such sales load, redemption
fee, distribution fee or service fee will be offset by the Investment
Adviser's waiver of a portion of its advisory fee.

     Securities may be held by, or be appropriate investments for, the Fund as
well as other funds or investment advisory clients of the Investment Adviser
or its affiliates. Because of different investment objectives or other
factors, a particular security may be bought for one or more clients of the
Investment Adviser or an affiliate when one or more clients of the Investment
Adviser or an affiliate are selling the same security. If purchases or sales
of securities arise for consideration at or about the same time that would
involve the Fund or other clients or funds for which the Investment Adviser or
an affiliate act as investment adviser, transactions in such securities will
be made, insofar as feasible, for the respective funds and clients in a manner
deemed equitable to all. To the extent that transactions on behalf of more
than one client of the Investment Adviser or an affiliate during the same
period may increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price.

Portfolio Turnover

     Generally, the Fund does not purchase securities for short term trading
profits. However, the Fund may dispose of securities without regard to the
time they have been held when such actions, for defensive or other reasons,
appear advisable to the Investment Adviser. (The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the particular fiscal year



                                      61
<PAGE>

by the monthly average of the value of the portfolio securities owned by the
Fund during the particular fiscal year. For purposes of determining this rate,
all securities whose maturities at the time of acquisition are one year or
less are excluded.) A high portfolio turnover rate results in greater
transaction costs, which are borne directly by the Fund and also has certain
tax consequences for stockholders.

                          DIVIDENDS AND DISTRIBUTIONS

     In order to allow the Fund's common stockholders to realize a
predictable, but not guaranteed, level of cash flow and some periodic
liquidity on their investment without having to sell their shares, the Fund
has adopted a policy of paying regular distributions on its shares of common
stock. The Fund's Board of Directors has initially determined to pay quarterly
distributions on each share of common stock at an annualized rate of __% of
the initial public offering price per share ($__.____ per share, per quarter).
Quarterly dividends will be paid in __________, __________, __________, and
__________ of each year, commencing in __________ 2004. The Fund's Board of
Directors has determined to pay additional distributions on an annual basis
equal to any income earned by the Fund in excess of the quarterly
distributions as may be necessary to distribute substantially all of the
Fund's net investment company taxable income for that year. The Fund is not
required to maintain the Managed Distribution Policy and such policy may be
modified or terminated by the Fund's Board of Directors at any time without
notice.

     Under Section 19(b) of the 1940 Act and Rule 19b-1 thereunder, the Fund
generally is not permitted to distribute net realized long term capital gains
more than once per year without exemptive relief from the Commission. As a
result, the Fund and the Investment Adviser intend to apply to the Commission
for an exemption that will, among other things, permit the Fund to make
periodic distributions of realized long term capital gains to its
stockholders. Until such time, if any, as the exemptive relief is granted by
the Commission, the Fund intends to make distributions under the Managed
Distribution Policy from its net investment income on a quarterly basis and
from its net realized long term capital gains on an annual basis. No assurance
can be given that the Commission will grant this exemptive relief to the Fund
and the Investment Adviser. After such exemptive relief is granted by the
Commission, the Fund intends to make distributions under the Managed
Distribution Policy from its net investment income and its realized long term
capital gains on an quarterly basis. Therefore, after receipt of the
above-referenced exemptive relief, a larger pool of assets will be available
for distribution on a quarterly basis.

     If the total distributions paid by the Fund to its stockholders for any
calendar year exceed the Fund's net investment company taxable income and net
realized capital gain for that year, the excess will generally be treated as a
tax-free return of capital up to the amount of a stockholder's tax basis in
his or her stock. Any distributions that (based upon the Fund's full year
performance) constitute tax-free return of capital will reduce a stockholder's
tax basis in his or her stock, thereby increasing such stockholder's potential
gain or reducing such stockholder's potential loss on the sale of such stock.
In effect, a return of capital is the return of a stockholder's investment in
the Fund and may result in a corresponding decline in the Fund's net asset
value. Return of capital distributions also may have the effect of increasing
the Fund's operating expense ratio. Any amounts distributed to a stockholder
in excess of such stockholder's tax basis in his or her stock will generally
be taxable to the stockholder as capital gain.

     The Fund currently expects that the amount of distributions made under
the Managed Distribution Policy generally will be independent of, and not
contingent upon, the Fund's performance in any of the first three quarters of
the Fund's fiscal year. It also is currently expected that the Fund's
investment portfolio initially will not produce sufficient dividend and
interest income to fully fund distributions under the Managed Distribution
Policy due to the expected initial composition of the Fund's investment
portfolio. Consequently, if the Fund does not realize sufficient short term
capital gains and long term capital gains to make up any shortfall,
distributions to the Fund's common stockholders will include returns of
capital. Prior to receipt of the above-referenced exemptive order, long term
capital gains will be available to make up any shortfall in funding
distributions only on



                                      62
<PAGE>

an annual basis, thereby increasing the likelihood that distributions will
include returns of capital to stockholders. In order to make distributions
under the Managed Distribution Policy, the Fund may have to sell portfolio
securities at a time when independent investment considerations may dictate
against such action. See "Risk Factors and Special
Considerations--Distribution Risk."

     If the total distributions paid to the Fund's stockholders for any
taxable year exceed the Fund's net investment income and net realized capital
gains for that year but do not exceed its previously undistributed earnings
and profits from prior years, such excess generally will be treated as a
taxable dividend to the extent of the Fund's current and accumulated earnings
and profits. Finally, if the net investment income and net capital gains
earned or realized by the Fund for any taxable year exceed the amounts
distributed by the Fund to its stockholders for that year, the Fund intends to
pay such excess to its stockholders, but may, in its discretion, retain and
not distribute net long term capital gains to the extent of such excess. See
"Taxes."

     Pursuant to the requirements of the 1940 Act, in the event the Fund makes
distributions from sources other than income, a notice will accompany each
quarterly distribution with respect to the estimated source of the
distribution made. Such notices will describe the portion, if any, of the
quarterly dividend which, in the Fund's good faith judgment, constitutes long
term capital gain, short term capital gain, investment company taxable income
or a return of capital. The actual character of such dividend distributions
for federal income tax purposes, however, will only be determined finally by
the Fund at the close of its fiscal year, based on the Fund's full year
performance and its actual net investment company taxable income and net
capital gains for the year, which may result in a recharacterization of
amounts distributed during such fiscal year from the characterization in the
quarterly estimates.

     Notwithstanding the foregoing, while any indebtedness is outstanding, the
Fund may not declare any cash dividend or other distribution upon any class of
its capital stock, or purchase any such capital stock, unless the aggregate
indebtedness of the Fund has, at the time of the declaration of any such
dividend or distribution or at the time of any such purchase, an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. Notwithstanding the
foregoing, while any shares of the Fund's preferred stock are outstanding, the
Fund may not declare any cash dividend or other distribution on its common
stock, or purchase any such capital stock, unless at the time of such
declaration, (1) all accumulated preferred stock dividends have been paid and
(2) the net asset value of the Fund's portfolio (determined after deducting
the amount of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred stock (expected to be equal to
the original purchase price per share plus any accumulated and unpaid
dividends thereon).

     See "Automatic Dividend Reinvestment Plan" for information concerning the
manner in which dividends and distributions to common stockholders may be
automatically reinvested in shares of common stock. Dividends and
distributions are taxable to stockholders whether they are reinvested in
shares of the Fund or received in cash.

                                     TAXES

General

     The Fund intends to elect and to qualify for the special tax treatment
afforded RICs under the Code. As long as it so qualifies, in any taxable year
in which it distributes at least 90% of its income, the Fund (but not its
stockholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of



                                      63
<PAGE>

such income. If, in any taxable year, the Fund fails to qualify as a RIC under
the Code, the Fund would be taxed in the same manner as an ordinary
corporation and all distributions from earnings and profits to its
stockholders would be taxable as ordinary income.

     The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year end, plus certain
undistributed amounts from previous years. While the Fund intends to
distribute its income and capital gains in the manner necessary to minimize
imposition of the 4% excise tax, no assurance can be given that sufficient
amounts of the Fund's taxable income and capital gains will be distributed to
avoid entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.

     The Internal Revenue Service (the "IRS") has taken the position in a
revenue ruling that if a RIC has two classes of shares, it may designate
distributions made to each class in any year as consisting of no more than
such class' proportionate share of particular types of income, including net
long term capital gains, dividends eligible for the Dividends Received
Deduction, discussed below, and dividends eligible for the reduced Federal
income tax rate applicable to qualified dividend income. A class's
proportionate share of a particular type of income is determined according to
the percentage of total dividends paid by the RIC during such year that was
paid to such class. Consequently, if both common stock and preferred stock are
outstanding, the Fund intends to designate distributions made to the classes
as consisting of particular types of income in accordance with the classes'
proportionate shares of such income. Thus, capital gain dividends and any
dividends eligible for the foreign tax credit, the Dividends Received
Deduction and/or the reduced Federal income tax rate applicable to qualified
dividend income will be allocated between the holders of common stock and any
preferred stock in proportion to the total dividends paid to each class during
the taxable year, or otherwise as required by applicable law.

     Dividends paid by the Fund from its ordinary income or from an excess of
net short term capital gains over net long term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
stockholders as ordinary income. Distributions made from an excess of net long
term capital gains over net short term capital losses (including gains or
losses from certain transactions in futures and options) ("capital gain
dividends") are taxable to stockholders as long term capital gains, regardless
of the length of time the stockholder has owned Fund shares. Any loss upon the
sale or exchange of Fund shares held for six months or less will be treated as
long term capital loss to the extent of any capital gain dividends received by
the stockholder with respect to those shares. Earnings and profits are treated
as first being used to pay distributions on the Fund's preferred stock, if
any, and only the earnings and profits remaining after the distribution
preference of the Fund's preferred stock, if any, has been satisfied are
treated as being used to pay distributions on the Fund's common stock.
Distributions in excess of the Fund's earnings and profits (previously
described as returns of capital) will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming the shares are held as a
capital asset). The allocation of earnings and profits first to any preferred
stockholders may result in the receipt of a disproportionate amount of taxable
dividends by such preferred stockholders and returns of capital to common
stockholders. Generally not later than 60 days after the close of its taxable
year, the Fund will provide its stockholders with a written notice designating
the amounts of any capital gain dividends, as well as dividends eligible for
the foreign tax credit, Dividends Received Deduction and/or the reduced
Federal income tax rate applicable to the qualified dividend income described
below, if any.

     Dividends are taxable to stockholders even though they are reinvested in
additional shares of the Fund. If the Fund pays a dividend in January that was
declared in the previous October, November or December to stockholders of
record on a specified date in one of such months, then such dividend will be



                                      64
<PAGE>

treated for tax purposes as being paid by the Fund and received by its
stockholders on December 31 of the year in which the dividend was declared.

     A portion of the Fund's ordinary income dividends may be eligible for the
Dividends Received Deduction allowed to corporations under the Code, if
certain requirements are met. For this purpose, the Fund will allocate any
dividends eligible for the Dividends Received Deduction between the holders of
common stock and any preferred stock in proportion to the total dividends paid
to each class during the taxable year, or otherwise as required by applicable
law. A holder of shares of common stock (a) that is taxed as a corporation for
Federal income tax purposes, (b) meets applicable holding period and taxable
income requirements of section 246 of the Code, (c) is not subject to the
"debt-financed portfolio stock" rules of section 246A of the Code with respect
to its investment in common stock and (d) is otherwise entitled to the
Dividends Received Deduction can claim a deduction in an amount equal to 70%
of the dividends received on shares of common stock which are designated by
the Fund as qualifying for the Dividends Received Deduction.

     Recently enacted legislation reduces the tax rate on certain dividend
income and long term capital gain applicable to individuals. Fund
distributions comprised of dividends from domestic corporations and certain
foreign corporations (generally, corporations incorporated in a possession of
the United States, some corporations eligible for treaty benefits under a
treaty with the United States, and corporations whose stock is readily
tradable on an established securities market in the Unites States) are
eligible for taxation at a minimum rate of 15%, also applicable to capital
gains in the hands of individual shareholders. Capital gains dividends are
also taxed at the reduced rate for non-corporate taxpayers. In order for
dividends paid by the Fund to be qualified dividend income eligible for
taxation at the reduced rate, the Fund must meet holding period and other
requirements with respect to dividend paying stocks in its portfolio and the
individual stockholder must meet holding period and other requirements with
respect to the Fund's shares. The reduced tax rates are scheduled to apply
through 2008. To the extent the Fund's distributions are derived from income
on debt securities, certain types of preferred securities and short term
capital gain, the Fund's distributions will not be eligible for this reduced
dividend tax rate.

     If the Fund utilizes leverage through borrowings, it may be restricted by
loan covenants with respect to the declaration and payment of dividends in
certain circumstances. See "Risks and Special Considerations of Leverage."
Additionally, if any time when shares of preferred stock are outstanding the
Fund does not meet the asset coverage requirements of the 1940 Act, the Fund
will be required to suspend distributions to holders of common stock until the
asset coverage is restored. See "Dividends and Distributions." Limits on the
Fund's payment of dividends may prevent the Fund from distributing at least
90% of its net investment income and may therefore jeopardize the Fund's
qualification for taxation as a RIC and/or may subject the Fund to the 4%
excise tax described above. Upon any failure to meet the asset coverage
requirements of the 1940 Act, the Fund may, in its sole discretion, redeem
shares of preferred stock in order to maintain or restore the requisite asset
coverage and avoid the adverse consequences to the Fund and its stockholders
of failing to qualify as a RIC. No assurance, however, can be given that any
such action would achieve these objectives. The Fund will endeavor to avoid
restriction of its dividend payments.

     As noted above, the Fund must distribute annually at least 90% of its net
investment income. A distribution will only be counted for this purpose if it
qualifies for the dividends paid deduction under the Code. Some types of
preferred stock that the Fund has the authority to issue may raise an issue as
to whether distributions on such preferred stock are "preferential" under the
Code and therefore not eligible for the dividends paid deduction. In the event
the Fund determines to issue preferred stock, the Fund intends to issue
preferred stock that counsel advises will not result in the payment of a
preferential dividend. If the Fund ultimately relies on a legal opinion in the
event it issues such preferred stock, there is no assurance that the IRS would
agree that dividends on the preferred stock are not preferential. If the



                                      65
<PAGE>

IRS successfully disallowed the dividends paid deduction for dividends on the
preferred stock, the Fund could lose the benefit of the special treatment
afforded RICs under the Code.

     Upon the sale or exchange of Fund shares held as a capital asset, a
stockholder may realize a capital gain or loss, which will be long term or
short term depending on the stockholder's holding period for the shares.
Generally, gain or loss will be long term if the shares have been held for
more than one year. A loss realized on a sale or exchange of shares of the
Fund will be disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day period
beginning 30 days before and ending 30 days after the date on which the shares
are disposed. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.

     Under certain Code provisions, some stockholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Generally, stockholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Fund's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding.

     Ordinary income dividends paid to stockholders who are nonresident aliens
or foreign entities will be subject to a 30% U.S. withholding tax under
existing provisions of the Code applicable to foreign individuals and entities
unless a reduced rate of withholding or a withholding exemption is provided
under applicable treaty law. Nonresident stockholders are urged to consult
their own tax advisers concerning the applicability of the U.S. withholding
tax.

     Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Stockholders may be able to claim U.S. foreign tax credits with respect to
such taxes, subject to certain conditions and limitations contained in the
Code. For example, certain retirement accounts cannot claim foreign tax
credits on investments in foreign securities held in the Fund. In addition, a
foreign tax credit may be claimed with respect to withholding tax on a
dividend only if the stockholder meets certain holding period requirements.
The Fund also must meet these holding period requirements, and if the Fund
fails to do so, it will not be able to "pass through" to stockholders the
ability to claim a credit or a deduction for the related foreign taxes paid by
the Fund. If the Fund satisfies the holding period requirements and more than
50% in value of its total assets at the close of its taxable year consists of
securities of foreign corporations, the Fund will be eligible, and intends, to
file an election with the IRS pursuant to which stockholders of the Fund will
be required to include their proportionate shares of such withholding taxes in
their U.S. income tax returns as gross income, treat such proportionate shares
as taxes paid by them, and deduct their proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits
against their U.S. income taxes. No deductions for foreign taxes, moreover,
may be claimed by noncorporate stockholders who do not itemize deductions. A
stockholder that is a nonresident alien individual or a foreign corporation
may be subject to U.S. withholding tax on the income resulting from the Fund's
election described in this paragraph but may not be able to claim a credit or
deduction against such U.S. tax for the foreign taxes treated as having been
paid by such stockholder. The Fund will report annually to its stockholders
the amount per share of such withholding taxes and other information needed to
claim the foreign tax credit. For this purpose, the Fund will allocate foreign
taxes and foreign source income between common stock and any preferred shares
according to a method similar to that described above for the allocation of
capital gains and other types of income.

     The Fund may invest in debt instruments rated in the lower rating
categories of established rating agencies and in unrated securities, including
high yield bonds (commonly referred to as "junk" bonds).



                                      66
<PAGE>

Some of these junk bonds may be purchased at a discount and may therefore
cause the Fund to accrue and distribute income before amounts due under the
obligations are paid. In addition, a portion of the interest payments on such
junk bonds may be treated as dividends for Federal income tax purposes; in
such case, if the issuer of the junk bonds is a domestic corporation, such
amounts may be eligible for the Dividends Received Deduction to the extent of
the deemed dividend portion of such interest payments.

     Certain transactions of the Fund are subject to special tax rules of the
Code that may, among other things, (a) affect the character of gains and
losses realized, (b) disallow, suspend or otherwise limit the allowance of
certain losses or deductions and (c) accelerate the recognition of income
without a corresponding receipt of cash (with which to make the necessary
distributions to satisfy distribution requirements applicable to RICs).
Operation of these rules could, therefore, affect the character, amount and
timing of distributions to stockholders. Special tax rules also will require
the Fund to mark-to-market certain types of positions in its portfolio (i.e.
treat them as sold on the last day of the taxable year) and may result in the
recognition of income without a corresponding receipt of cash. The Fund
intends to monitor transactions, make appropriate tax elections and make
appropriate entries in it books and records to lessen the effect of these tax
rules and avoid any possible disqualification for the special treatment
afforded RICs under the Code.

     Further, special tax rules are applicable to the Fund's investment in
shares of certain investment companies (or similar entities having significant
passive income or assets) organized under foreign law (passive foreign
investment companies or "PFICs"). Unless an election is made, the rules impose
an additional tax in the nature of interest (the "interest charge") on a
portion of the distributions received by the Fund from a PFIC and on gain from
the disposition of shares of a PFIC (collectively, "excess distributions").
However, if an election to avoid the interest charge on excess distributions
is made, the Fund might be required to recognize income in a particular year
in excess of the distributions it received from PFICs.

     Under recently promulgated 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 amount over a combination of years), the
stockholder must file with the IRS a disclosure statement on Form 8886. Direct
holders of portfolio securities are, in many cases, exempted from this
reporting requirement, but under current guidance stockholders of regulated
investment companies are not exempted. The fact that a loss is reportable
under these regulations does not affect the legal determination of whether or
not the taxpayer's treatment of the loss is proper. Stockholders should
consult with their tax advisers to determine the applicability of these
regulations in light of their individual circumstances.

     The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.

     Ordinary income and capital gain dividends also may be subject to state
and local taxes. Certain states exempt from state income taxation dividends
paid by RICs that are derived from interest on U.S. government obligations.
State law varies as to whether dividend income attributable to U.S. government
obligations is exempt from state income tax.

     Stockholders are urged to consult their own tax advisers regarding
specific questions as to Federal, foreign, state or local taxes. Foreign
investors should consider applicable foreign taxes in their evaluation of an
investment in the Fund.



                                      67
<PAGE>

                     AUTOMATIC DIVIDEND REINVESTMENT PLAN

     Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
unless a stockholder is ineligible or elects otherwise, all dividend and
capital gains distributions are automatically reinvested by                 ,
as agent for stockholders in administering the Plan (the "Plan Agent"), in
additional shares of common stock of the Fund. Stockholders whose shares are
held in the name of a broker or nominee should contact such broker or nominee
to confirm that they are eligible to participate in the Plan. Stockholders who
are ineligible or who elect not to participate in the Plan will receive all
dividends and distributions in cash paid by check mailed directly to the
stockholder of record (or, if the shares are held in street or other nominee
name, then to such nominee) by                , as dividend paying agent. Such
stockholders may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to                           , as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise, such termination will be effective with respect to any
subsequently declared dividend or capital gains distribution.

     Whenever the Fund declares an ordinary income dividend or a capital gain
dividend (collectively referred to as "dividends") payable either in shares or
in cash, non-participants in the Plan will receive cash, and participants in
the Plan will receive the equivalent in shares of common stock. The shares are
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional
unissued but authorized shares of common stock from the Fund ("newly issued
shares") or (ii) by purchase of outstanding shares of common stock on the open
market ("open-market purchases") on the NYSE or elsewhere. If, on the dividend
payment date, the net asset value per share of the common stock is equal to or
less than the market price per share of the common stock plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares on behalf of the participant. The number of newly issued shares of
common stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the
then current market price per share on the date of issuance may not exceed 5%.
If on the dividend payment date the net asset value per share is greater than
the market value (such condition being referred to herein as "market
discount"), the Plan Agent will invest the dividend amount in shares acquired
on behalf of the participant in open-market purchases.

     In the event of a market discount on the dividend payment date, the Plan
Agent has until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of common stock exceeds the
net asset value per share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisition of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open market purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last purchase
date.



                                      68
<PAGE>

     The Plan Agent maintains all stockholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account, including
information needed by stockholders for tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in non-certificated form
in the name of the participant, and each stockholder's proxy will include
those shares purchased or received pursuant to the Plan. The Plan Agent will
forward all proxy solicitation materials to participants and vote proxies for
shares held pursuant to the Plan in accordance with the instructions of the
participants.

     In the case of stockholders such as banks, brokers or nominees that hold
shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record stockholders as representing the total amount registered
in the record stockholder's name and held for the account of beneficial owners
who are to participate in the Plan.

     There will be no brokerage charges with respect to shares issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of dividends.

     The automatic reinvestment of dividends and distributions will not
relieve participants of any Federal, state or local income tax that may be
payable (or required to be withheld) on such dividends. See "Taxes."

     Stockholders participating in the Plan may receive benefits not available
to stockholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is higher than the net asset value,
participants in the Plan will receive shares of the Fund at less than they
could otherwise purchase them and will have shares with a cash value greater
than the value of any cash distribution they would have received on their
shares. If the market price plus commissions is below the net asset value,
participants receive distributions of shares with a net asset value greater
than the value of any cash distribution they would have received on their
shares. However, there may be insufficient shares available in the market to
make distributions in shares at prices below the net asset value. Also, since
the Fund does not redeem its shares, the price on resale may be more or less
than the net asset value.

     Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.

     All correspondence concerning the Plan should be directed to .

                         MUTUAL FUND INVESTMENT OPTION

     Purchasers of shares of common stock of the Fund in this offering will
have an investment option consisting of the right to reinvest the net proceeds
from a sale of such shares (the "Original Shares") in Class A initial sales
charge shares of certain FAM/MLIM advised open-end mutual funds ("Eligible
Class A Shares") at their net asset value, without the imposition of the
initial sales charge, if the conditions set forth below are satisfied. First,
the sale of Fund shares must be made through Merrill Lynch or another
broker-dealer or other financial intermediary ("Selected Dealer") that
maintains an arrangement with the open-end fund's distributor for the purchase
of Eligible Class A Shares, and the net proceeds therefrom must be immediately
reinvested in Eligible Class A Shares. Second, the Fund shares must either
have been acquired in the Fund's initial public offering or represent
dividends paid on shares of common stock



                                      69
<PAGE>

acquired in such offering. Third, the Fund shares must have been continuously
maintained in a securities account held at Merrill Lynch or another Selected
Dealer. Fourth, there must be a minimum purchase of $250 to be eligible for
the investment option. The Eligible Class A Shares may be redeemed at any time
at the next determined net asset value, subject in certain cases to a
redemption fee.

                                NET ASSET VALUE

     Net asset value per share of common stock is determined Monday through
Friday as of the close of business on the NYSE (generally, the NYSE closes at
4:00 p.m., Eastern time), on each business day during which the NYSE is open
for trading. For purposes of determining the net asset value of a share of
common stock, the value of the securities held by the Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value
of any outstanding shares of preferred stock is divided by the total number of
shares of common stock outstanding at such time. Expenses, including the fees
payable to the Investment Adviser, are accrued daily.

     The Fund makes available for publication the net asset value of its
shares of common stock determined as of the last business day each week.
Currently, the net asset values of shares of publicly traded closed-end
investment companies investing in debt securities are published in Barron's,
the Monday edition of The Wall Street Journal and the Monday and Saturday
editions of The New York Times.

     Generally, portfolio securities that are traded on stock exchanges or the
Nasdaq National Market are valued at the last sale price or official close
price on the exchange on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available ask
price for short positions. In cases where securities are traded on more than
one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Directors. Long positions in
securities traded in the over-the-counter ("OTC") market, Nasdaq Small Cap or
Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the
Directors. Short positions in securities traded in the OTC market are valued
at the last available ask price. Portfolio securities that are traded in both
the OTC market and on a stock exchange are valued according to the broadest
and most representative market. When the Fund writes an option, the amount of
the premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based upon the last
sale price in the case of exchange-traded options or, in the case of options
traded in the OTC market, the last asked price. Options purchased by the Fund
are valued at their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price. The value
of swaps, including interest rate swaps, caps and floors, will be determined
by obtaining dealer quotations. Other investments, including futures contracts
and related options, are stated at market value. Obligations with remaining
maturities of 60 days or less are valued at amortized cost unless the
Investment Adviser believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus accrued
interest. The Fund employs certain pricing services to provide securities
prices for the Fund. Securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by the pricing services retained by the Fund, which may
use a matrix system for valuations. The procedures of a pricing service and
its valuations are reviewed by the officers of the Fund under the general
supervision of the Directors. Such valuations and procedures will be reviewed
periodically by the Directors.



                                      70
<PAGE>

     Generally trading in non-U.S. securities, as well as mortgage-backed
securities, U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of
business on the NYSE. The values of such securities used in computing the net
asset value of the Fund's shares are determined as of such times. Foreign
currency exchange rates are also generally determined prior to the close of
business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of business on the NYSE that may not be reflected
in the computation of the Fund's net asset value. If events (e.g., a company
announcement, market volatility or a natural disaster) occur during such
periods, that are expected to materially affect the value of such securities,
then those securities may be valued at their fair value as determined in good
faith by the Board of Directors of the Fund or by the Investment Adviser using
a pricing service and/or procedures approved by the Directors.

                         DESCRIPTION OF CAPITAL STOCK

     The Fund is authorized to issue 200,000,000 shares of capital stock, par
value $.10 per share, all of which shares initially are classified as common
stock. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock into one or more additional or
other classes or series as may be established from time to time by setting or
changing in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such shares of stock
and pursuant to such classification or reclassification to increase or
decrease the number of authorized shares of any existing class or series. The
Fund may reclassify an amount of unissued common stock as preferred stock and
at that time offer shares of preferred stock. See "Risks and Special
Considerations of Leverage."

Common Stock

     Shares of common stock, when issued and outstanding, will be fully paid
and non-assessable. Stockholders are entitled to share pro rata in the net
assets of the Fund available for distribution to stockholders upon liquidation
of the Fund. Stockholders are entitled to one vote for each share held.

     In the event that the Fund issues preferred stock and so long as any
shares of the Fund's preferred stock are outstanding, holders of common stock
will not be entitled to receive any net income of or other distributions from
the Fund unless all accumulated dividends on preferred stock have been paid,
and unless asset coverage (as defined in the 1940 Act) with respect to
preferred stock would be at least 200% after giving effect to such
distributions. See "Risks and Special Considerations of Leverage."

     The Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its stockholders.

     The Investment Adviser provided the initial capital for the Fund by
purchasing        shares of common stock of the Fund for $      . As of the
date of this prospectus, the Investment Adviser owned 100% of the outstanding
shares of common stock of the Fund. The Investment Adviser may be deemed to
control the Fund until such time as it owns less than 25% of the outstanding
shares of the Fund.

Preferred Stock

     It is anticipated that the Fund's shares of preferred stock will be
issued in one or more series, with rights as determined by the Board of
Directors, by action of the Board of Directors without the approval of the
holders of common stock. Under the 1940 Act, the Fund is permitted to have
outstanding more than one series of preferred stock so long as no single
series has a priority over another series as to the



                                      71
<PAGE>

distribution of assets of the Fund or the payment of dividends. Holders of
common stock have no preemptive right to purchase any shares of preferred
stock that might be issued. It is anticipated that the net asset value per
share of the preferred stock will equal its original purchase price per share
plus accumulated dividends per share.

     The Fund's Board of Directors has declared its intention to authorize an
offering of shares of preferred stock (representing approximately    % of the
Fund's capital immediately after the issuance of such preferred stock) within
approximately        months after completion of the offering of common stock,
subject to market conditions and to the Board's continuing to believe that
leveraging the Fund's capital structure through the issuance of preferred
stock is likely to achieve the benefits to the holders of common stock
described in the prospectus. Although the terms of the preferred stock,
including its dividend rate, voting rights, liquidation preference and
redemption provisions will be determined by the Board of Directors (subject to
applicable law and the Fund's Charter), the initial series of preferred stock
will be structured to carry either a relatively short term dividend rate, in
which case periodic redetermination of the dividend rate will be made at
relatively short intervals (generally seven or 28 days), or a medium term
dividend rate, in which case periodic redetermination of the dividend rate
will be made at intervals of up to five years. In either case, such
redetermination of the dividend rate will be made through an auction or
remarketing procedure. The Board also has indicated that it is likely that the
liquidation preference, voting rights and redemption provisions of the
preferred stock will be as stated below.

     Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of shares of
preferred stock will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus an
amount equal to accumulated and unpaid dividends whether or not earned or
declared) before any distribution of assets is made to holders of common
stock. After payment of the full amount of the liquidating distribution to
which they are entitled, the preferred stockholders will not be entitled to
any further participation in any distribution of assets by the Fund. A
consolidation or merger of the Fund with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the Fund
will not be deemed to be a liquidation, dissolution or winding up of the Fund.

     Voting Rights. Except as otherwise indicated in this prospectus and
except as otherwise required by applicable law, holders of shares of preferred
stock will have equal voting rights with holders of shares of common stock
(one vote per share) and will vote together with holders of common stock as a
single class. In connection with the election of the Fund's Directors, holders
of shares of preferred stock, voting as a separate class, will be entitled to
elect two of the Fund's Directors, and the remaining Directors will be elected
by all holders of capital stock, voting as a single class. So long as any
preferred stock is outstanding, the Fund will have not less than five
Directors. If at any time dividends on shares of the Fund's preferred stock
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding shares of preferred stock, voting as a separate
class, will be entitled to elect a majority of the Fund's Directors until all
dividends in default have been paid or declared and set apart for payment. The
affirmative vote of the holders of a majority of the outstanding shares of the
preferred stock, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to any
series of preferred stock with respect to payment of dividends or the
distribution of assets on liquidation or (ii) amend, alter or repeal the
provisions of the Charter, whether by merger, consolidation or otherwise, so
as to adversely affect any of the contract rights expressly set forth in the
Charter of holders of preferred stock.

     Redemption Provisions. It is anticipated that shares of preferred stock
will generally be redeemable at the option of the Fund at a price equal to
their liquidation preference plus accumulated but unpaid dividends to the date
of redemption plus, under certain circumstances, a redemption premium.



                                      72
<PAGE>

Shares of preferred stock will also be subject to mandatory redemption at a
price equal to their liquidation preference plus accumulated but unpaid
dividends to the date of redemption upon the occurrence of certain specified
events, such as the failure of the Fund to maintain asset coverage
requirements for the preferred stock specified by the established rating
services that issue ratings on the preferred stock.

Certain Provisions of the Charter and By-laws

     The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and 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. A Director may be removed from office
with or without cause but only by vote of the holders of at least 66 2/3% of
the shares entitled to vote in an election to fill that directorship.

     In addition, the Charter requires the favorable vote of the holders of at
least 66 2/3% of the Fund's shares to approve, adopt or authorize the
following:

     o  a merger or consolidation or statutory share exchange of the Fund with
        any other corporation;

     o  a sale of all or substantially all of the Fund's assets (other than in
        the regular course of the Fund's investment activities); or

     o  a liquidation or dissolution of the Fund;

unless such action has been approved, adopted or authorized by the affirmative
vote of at least two-thirds of the total number of Directors fixed in
accordance with the By-laws, in which case the affirmative vote of a majority
of the Fund's shares of capital stock is required. Following any issuance of
preferred stock by the Fund, it is anticipated that the approval, adoption or
authorization of the foregoing also would require the favorable vote of a
majority of the Fund's shares of preferred stock then entitled to be voted,
voting as a separate class.

     In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Charter. The amendment would have to
be declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the favorable vote of the
holders of at least 66 2/3% of the Fund's outstanding shares of capital stock
(including any preferred stock) entitled to be voted on the matter, voting as
a single class (or a majority of such shares if the amendment was previously
approved, adopted or authorized by two-thirds of the total number of Directors
fixed in accordance with the By-laws), and, assuming preferred stock is
issued, the affirmative vote of a majority of outstanding shares of preferred
stock of the Fund, voting as a separate class. Such a vote also would satisfy
a separate requirement in the 1940 Act that the change be approved by the
stockholders. Stockholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset
value, less such redemption charge, if any, as might be in effect at the time
of a redemption. All redemptions will be made in cash. If the Fund is
converted to an open-end investment company, it could be required to liquidate
portfolio securities to meet requests for redemption, and the common stock
would no longer be listed on a stock exchange.

     Conversion to an open-end investment company would also require changes
in certain of the Fund's investment policies and restrictions, such as those
relating to the borrowing of money and the purchase of illiquid securities.



                                      73
<PAGE>

     The Charter and By-laws provide that the Board of Directors has the
power, to the exclusion of stockholders, to make, alter or repeal any of the
By-laws (except for any By-law specified not to be amended or repealed by the
Board), subject to the requirements of the 1940 Act. Neither this provision of
the Charter, nor any of the foregoing provisions of the Charter requiring the
affirmative vote of 66 2/3% of shares of capital stock of the Fund, can be
amended or repealed except by the vote of such required number of shares.

     The Board of Directors has determined that the 66 2/3% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of stockholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.

     The Fund's By-laws generally require that advance notice be given to the
Fund in the event a stockholder desires to nominate a person for election to
the Board of Directors or to transact any other business at an annual meeting
of stockholders. With respect to an annual meeting following the first annual
meeting of stockholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Fund not
less than 60 calendar days nor more than 90 calendar days prior to the
anniversary date of the prior year's annual meeting (subject to certain
exceptions). In the case of the first annual meeting of stockholders, the
notice must be given no later than the tenth calendar day following the day
upon which public disclosure of the date of the meeting is first made. Any
notice by a stockholder must be accompanied by certain information as provided
in the By-laws.

                                   CUSTODIAN

     The Fund's securities and cash are held under a custodian agreement with
_____________________________________.

                                 UNDERWRITING

     The Fund intends to offer the shares through the underwriters.
               is acting as representative of the underwriters named below.
Subject to the terms and conditions contained in a purchase agreement between
the Fund and the Investment Adviser and the underwriters, the Fund has agreed
to sell to the underwriters, and each underwriter named below has severally
agreed to purchase from the Fund, the number of shares listed opposite their
names below.

                           Underwriters                               Number of
                           ------------                               ---------
                                                                        Shares
                                                                        ------


           Total...............................................

     The underwriters have agreed to purchase all of the shares sold pursuant
to the purchase agreement if any of these shares are purchased. If an
underwriter defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting underwriters may be increased or the purchase
agreement may be terminated.

     The Fund and the Investment Adviser have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.



                                      74
<PAGE>

     The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters
of officer's certificates and legal opinions. The underwriters reserve the
right to withdraw, cancel or modify offers to the public and to reject orders
in whole or in part.

Commissions and Discounts

     The underwriters have advised the Fund that they propose initially to
offer the shares to the public at the initial public offering price on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $    per share. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $    per share to other dealers. There is a
sales charge or underwriting discount of $    per share, which is equal to   %
of the initial public offering price per share. After the initial public
offering, the public offering price, concession and discount may be changed.
Investors must pay for the shares of common stock purchased in the offering on
or before             , 2004.

     The following table shows the public offering price, underwriting
discount and proceeds before expenses to the Fund. The information assumes
either no exercise or full exercise by the underwriters of their overallotment
option.

<TABLE>
<CAPTION>
                                                                    Per Share       Without Option     With Option
                                                                    ---------       --------------     -----------
<S>                                                                 <C>             <C>                <C>
Public offering price......................................           $20.00                   $                 $
Underwriting discount......................................             $                      $                 $
Proceeds, before expenses, to the Fund.....................             $                      $                 $
</TABLE>

     The expenses of the offering, excluding underwriting discount, are
estimated at $     and are payable by the Fund. The Fund has agreed to pay the
underwriters $     per share of common stock as a partial reimbursement of
expenses incurred in connection with the offering. The amount paid by the Fund
as this partial reimbursement to the underwriters will not exceed    % of the
total price to the public of the shares of common stock sold in this offering.
The Investment Adviser has agreed to pay the amount by which the offering
costs (other than the underwriting discount, but including the $     per share
partial reimbursement of expenses to the underwriters) exceed $     per share of
common stock. The Investment Adviser has agreed to pay all of the Fund's
organizational expenses.

Overallotment Option

     The Fund has granted the underwriters an option to purchase up to
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise the option from time to time for 45 days from
the date of this prospectus solely to cover any overallotments. If the
underwriters exercise this option, each will be obligated, subject to
conditions contained in the purchase agreement, to purchase a number of
additional shares proportionate to that underwriters' initial amount reflected
in the above table.

Price Stabilization, Short Positions and Penalty Bids

     Until the distribution of the shares is completed, Commission rules may
limit the underwriters and selling group members from bidding for and
purchasing the Fund's shares. However, the representative may engage in
transactions that stabilize the price of the shares, such as bids or purchases
to peg, fix or maintain that price.

     If the underwriters create a short position in the shares in connection
with the offering, i.e., if they sell more shares than are listed on the cover
of this prospectus, the representative may reduce that short



                                      75
<PAGE>

position by purchasing shares in the open market. The representative also may
elect to reduce any short position by exercising all or part of the
overallotment option described above. Purchases of the shares to stabilize its
price or to reduce a short position may cause the price of the shares to be
higher than it might be in the absence of such purchases.

     The representative also may impose a penalty bid on underwriters and
selling group members. This means that if the representative purchases shares
in the open market to reduce the underwriters' short position or to stabilize
the price of such shares, they may reclaim the amount of the selling
concession from the underwriters and the selling group members who sold those
shares. The imposition of a penalty bid also may affect the price of the
shares in that it discourages resales of those shares.

     Neither the Fund nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the shares. In addition,
neither the Fund nor any of the underwriters makes any representation that the
representative will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.

Stock Exchange Listing

     Prior to this offering, there has been no public market for the shares.
The Fund plans to apply to list its shares on the NYSE or another national
securities exchange under the symbol "   ," subject to official notice of
issuance. In order to meet the requirements for listing, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial
owners.

Other Relationships

     The Investment Adviser (and not the Fund) has agreed to pay a fee from
its own resources to quarterly at the annual rate of    % of an aggregate of (i)
the Fund's average daily net assets (including proceeds from the issuance of
any preferred stock) and (ii) the proceeds of any outstanding borrowings used
for leverage, during the continuance of the Investment Advisory Agreement. In
addition to acting as lead underwriter in the initial public offering of the
Fund's common stock,                     has agreed to provide, upon request,
certain after-market services to the Investment Adviser designed to maintain
the visibility of the Fund and to provide relevant information, studies or
reports regarding the Fund and the closed-end investment company industry on
an as-needed basis. The total amount of these additional payments will not
exceed    % of the total price to the public of the shares of common stock
sold in this offering.

     The sum total of all compensation to underwriters in connection with this
public offering of shares of common stock, including sales load and all forms
of additional compensation to underwriters, will be limited to 9.0% of the
total price to the public of the shares of common stock sold in this offering.

     The Fund anticipates that          and the other underwriters may from
time to time act as brokers in connection with the execution of its portfolio
transactions, and after they have ceased to be underwriters, the Fund
anticipates that underwriters other than                 may from time to time
act as dealers in connection with the execution of portfolio transactions. See
"Portfolio Transactions." Merrill Lynch is an affiliate of the Investment
Adviser.

     The address of                            is                         .



                                      76
<PAGE>

            TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR

     The transfer agent, dividend disbursing agent and registrar for the
Fund's shares is              .

                         ACCOUNTING SERVICES PROVIDER

     State Street Bank and Trust Company, 500 College Road East, Princeton,
New Jersey 08540, provides certain accounting services for the Fund.

                                LEGAL OPINIONS

     Certain legal matters in connection with the shares of common stock
offered hereby are passed on for the Fund by Sidley Austin Brown & Wood LLP,
New York, New York. Certain legal matters will be passed on for the
underwriters by                       .                may rely on the opinion
of Sidley Austin Brown & Wood LLP as to certain matters of Maryland law.

                       INDEPENDENT AUDITORS AND EXPERTS

     The statement of assets and liabilities of the Fund as of        , 2004
included in this prospectus has been audited by                           ,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given as experts in
accounting and auditing.

                            ADDITIONAL INFORMATION

     The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act and in accordance therewith is required
to file reports and other information with the Commission. Any such reports
and other information, including the Fund's Code of Ethics, can be inspected
and copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Pacific Regional Office, at 5670
Wiltshire Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest
Regional Office, at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials can be obtained
from the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web
site at http://www.sec.gov containing reports and information statements and
other information regarding registrants, including the Fund, that file
electronically with the Commission. Reports, proxy statements and other
information concerning the Fund may also be inspected at the offices of the
New York Stock Exchange, 20 Broad Street, New York, New York 10006.

     Additional information regarding the Fund is contained in the
Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.



                                      77
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To Stockholder and Board of Directors,
Capital and Income Strategies Fund, Inc.

     We have audited the accompanying statement of assets and liabilities of
Capital and Income Strategies Fund, Inc. (the "Fund") as of            , 2004.
This financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

     In our opinion, the financial statement referred to above presents
fairly, in all material respects, the financial position of the Fund, Inc. at
                  , 2004 in conformity with accounting principles generally
accepted in the United States of America.

                                                          /s/



               , 2004



                                      78
<PAGE>

<TABLE>
<CAPTION>
                                      Capital and Income Strategies Fund, Inc.

                                         STATEMENT OF ASSETS AND LIABILITIES

                                                                   , 2004
<S>                                                                                                               <C>
ASSETS:
 Cash.........................................................................................                    $
 Deferred offering costs (Note 1).............................................................
     Total assets.............................................................................
LIABILITIES:
 Liabilities and accrued expenses (Note 1)....................................................
NET ASSETS:                                                                                                       $
                                                                                                                  =
NET ASSETS CONSIST OF:
 Common Stock, par value $.10 per share; 200,000,000 shares authorized;          shares issued and
   outstanding (Note 1).......................................................................                    $
 Paid-in Capital in excess of par.............................................................
 Net Assets-Equivalent to $         net asset value per share based on          shares of capital
   stock outstanding (Note 1).................................................................                    $
                                                                                                                  =
</TABLE>

                 NOTES TO STATEMENT OF ASSETS AND LIABILITIES

Note 1.  Organization

     The Fund was incorporated under the laws of the State of Maryland on
February 5, 2004 and is registered under the Investment Company Act of 1940,
as a closed-end, diversified management investment company and has had no
operations other than the sale to Fund Asset Management, L.P. (the "Investment
Adviser") of an aggregate of               shares for $       on          ,
2004. The General Partner of the Investment Adviser is an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. Certain officers and/or directors of
the Fund are officers of the Investment Adviser.

     The Investment Adviser, on behalf of the Fund, will incur organizational
costs estimated at $     . The Investment Adviser also has agreed to pay the
amount by which the offering costs of the Fund (other than the underwriting
discount, but including the $     per share partial reimbursement of expenses
to the underwriters) exceeds $     per share of common stock. Direct costs
relating to the public offering of the Fund's shares will be charged to capital
at the time of issuance of shares.

Note 2.  Investment Advisory Arrangements

     The Fund has engaged the Investment Adviser to provide investment
advisory and management services to the Fund. The Investment Adviser will
receive a monthly fee for advisory and management services at an annual rate
equal to    % of an aggregate of (i) the Fund's average daily net assets
(including the proceeds from the issuance of any preferred stock offering),
and (ii) the proceeds of any outstanding borrowings used for leverage.



                                      79
<PAGE>

Note 3.  Federal Income Taxes

     The Fund intends to qualify as a "regulated investment company" and as
such (and by complying with the applicable provisions of the Internal Revenue
Code of 1986, as amended) will not be subject to Federal income tax on taxable
income (including realized capital gains) that is distributed to stockholders.

Note 4.  Accounting Principles

     The Fund's statement of assets and liabilities is prepared in conformity
with accounting principles generally accepted in the United States of America,
which may require the use of management accruals and estimates. Actual results
may differ from these statements.



                                      80
<PAGE>

                                  APPENDIX A

                             RATINGS OF SECURITIES

 Description of Moody's Investors Service, Inc.'s ("Moody's") Long Term Ratings

Aaa       Bonds and preferred stock which are 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 and preferred stock which are 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 in
          Aaa securities.

A         Bonds and preferred stock which are 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 sometime in the future.

Baa       Bonds and preferred stock which are 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 and preferred stock which are 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 and preferred stock which are rated B generally lack
          characteristics of the desirable investment. Assurance of interest
          and principal payment or of maintenance of other terms of the
          contract over any long period of time may be small.

Caa       Bonds and preferred stock which are 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 and preferred stock which are rated Ca represent obligations
          which are speculative in a high degree. Such issues are often in
          default or have other marked shortcomings.

C         Bonds and preferred stock which are 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



                                      A-1
<PAGE>

          real investment standing.

     Moody's bond ratings, where specified, are applicable to preferred stock,
financial contracts, senior bank obligations and insurance company senior
policyholder and claims obligations with an original maturity in excess of one
year. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated. Obligations of a
branch of a bank are considered to be domiciled in the country in which the
branch is located.

     Unless noted as an exception, Moody's rating on a bank's ability to repay
senior obligations extends only to branches located in countries which carry a
Moody's Sovereign Rating for Bank Deposits. Such branch obligations are rated
at the lower of the bank's rating or Moody's Sovereign Rating for the Bank
Deposits for the country in which the branch is located. When the currency in
which an obligation is denominated is not the same as the currency of the
country in which the obligation is domiciled, Moody's ratings do not
incorporate an opinion as to whether payment of the obligation will be
affected by the actions of the government controlling the currency of
denomination. In addition, risk associated with bilateral conflicts between an
investor's home country and either the issuer's home country or the country
where an issuer branch is located are not incorporated into Moody's ratings.

     Moody's makes no representation that rated bank obligations or insurance
company obligations are exempt from registration under the Securities Act of
1933, as amended, or issued in conformity with any other applicable law or
regulation. Moody's makes no representation that any specific bank or
insurance company obligation is a legally enforceable or a valid senior
obligation of a rated issuer.

     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.

Description of Standard & Poor's ("Standard & Poor's") Long Term Issue Credit
Ratings

     A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific financial
program (including ratings on medium term note programs and commercial paper
programs). It takes into consideration the creditworthiness of guarantors,
insurers, or other forms of credit enhancement on the obligation and takes
into account the currency in which the obligation is denominated. The issue
credit rating is not a recommendation to purchase, sell, or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability
for a particular investor.

     Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.

     Issue credit ratings can be either long term or short term. Short term
ratings are generally assigned to those obligations considered short term in
the relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days -- including commercial paper.
Short term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long term obligations. The result is a
dual rating, in which the short term rating addresses the put feature, in
addition to the usual long term rating. Medium term notes are assigned long
term ratings.



                                     A-2
<PAGE>

     Issue credit ratings are based in varying degrees, on the following
considerations:

          1. Likelihood of payment-capacity and willingness of the obligor to
     meet its financial commitment on an obligation in accordance with the
     terms of the obligation;

          2. Nature of and provisions of the obligation; and

          3. Protection afforded by, and relative position of, the obligation
     in the event of bankruptcy, reorganization, or other arrangement under
     the laws of bankruptcy and other laws affecting creditors' rights.

     The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority
in bankruptcy, as noted above. (Such differentiation applies when an entity
has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
Accordingly, in the case of junior debt, the rating may not conform exactly
with the category definition.

AAA       An obligation rated `AAA' has the highest rating assigned by
          Standard & Poor's. 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        Obligations rated `BB', `B', `CCC', `CC', and `C' are regarded as
B         having significant speculative B characteristics. `BB' indicates the
CCC       least degree of speculation and `C' the  highest. While such B CCC
CC        obligations will likely have some quality and protective
C         characteristics, these may be outweighed by CC 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.



                                     A-3
<PAGE>

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         The `C' rating may be used to cover a situation where a bankruptcy
          petition has been filed or similar action has been taken, but
          payments on this obligation are being continued.

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
          Standard & Poor's 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. Such rating will also be
          used upon the completion of a tender or exchange offer, whereby some
          or all of an issue is either repurchased for an amount of cash or
          replaced by other securities having a total value that is clearly
          less than par; or in the case of preferred stock or deferrable
          payment securities, upon non-payment of the dividend or deferral of
          the interest payments.

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

Local Currency and Foreign Currency Risks

     Country risk considerations are a standard part of Standard & Poor's
analysis for credit ratings on any issuer or issue. Currency of repayment is a
key factor in this analysis. An insurer's capacity to repay foreign currency
obligations may be lower than its capacity to repay obligations in its local
currency due to the sovereign government's own relatively lower capacity to
repay external versus domestic debt. These sovereign risk considerations are
incorporated in the debt ratings assigned to specific issues. Foreign currency
issuer ratings are also distinguished from local currency issuer ratings to
identify those instances where sovereign risks make them different for the
same issuer.

Description of Fitch Ratings ("Fitch") Long Term Credit Ratings

Investment Grade

AAA       Highest credit quality. `AAA' ratings denote the lowest expectation
          of credit risk. They are assigned only in case of exceptionally
          strong capacity for timely payment of financial commitments. This
          capacity is highly unlikely to be adversely affected by foreseeable
          events.

AA        Very high credit quality. `AA' ratings denote a very low expectation
          of credit risk. They indicate very strong capacity for timely
          payment of financial commitments. This capacity is not significantly
          vulnerable to foreseeable events.

A         High credit quality. `A' ratings denote a low expectation of credit
          risk. The capacity for timely payment of financial commitments is
          considered strong. This capacity may,


                                     A-4
<PAGE>

          nevertheless, be more vulnerable to changes in circumstances or in
          economic conditions than is the case for higher ratings.

BBB       Good credit quality. `BBB' ratings indicate that there is currently
          a low expectation of credit risk. The capacity for timely payment of
          financial commitments is considered adequate, but adverse changes in
          circumstances and in economic conditions are more likely to impair
          this capacity. This is the lowest investment-grade category.
          Speculative Grade

BB        Speculative. `BB' ratings indicate that there is a possibility of
          credit risk developing, particularly as the result of adverse
          economic change over time; however, business or financial
          alternatives may be available to allow financial commitments to be
          met. Securities rated in this category are not investment grade.

B         Highly speculative. `B' ratings indicate that significant credit
          risk is present, but a limited margin of safety remains. Financial
          commitments are currently being met; however, capacity for continued
          payment is contingent upon a sustained, favorable business and
          economic environment.

CCC,      High default risk. Default is a real possibility. Capacity for
CC,       meeting financial commitments is solely reliant upon sustained,
C         favorable business or economic developments. A `CC' rating indicates
          that default of some kind appears probable. `C' ratings signal
          imminent default.

DDD,      The ratings of obligations in this category are based on their
DD, and   prospects for achieving partial or full recovery in a reorganization
D         or liquidation of the obligor. While expected recovery values are
Default   highly speculative and cannot be estimated with any precision, the
          following serve as general guidelines. `DDD' obligations have the
          highest potential for recovery, around 90%-100% of outstanding
          amounts and accrued interest. `DD' indicates potential recoveries in
          the range of 50%-90%, and `D' the lowest recovery potential, i.e.,
          below 50%. Entities rated in this category have defaulted on some or
          all of their obligations. Entities rated `DDD' have the highest
          prospect for resumption of performance or continued operation with
          or without a formal reorganization process. Entities rated `DD' and
          `D' are generally undergoing a formal reorganization or liquidation
          process; those rated `DD' are likely to satisfy a higher portion of
          their outstanding obligations, while entities rated `D' have a poor
          prospect for repaying all obligations.

Notes to Long term ratings:

     Plus "(+)" or Minus "(-)" may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the
`AAA' Long term rating category, to categories below `CCC', or to Short term
ratings other than `F1'.

     `NR' indicates that Fitch does not rate the issuer or issue in question.

     `Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.



                                     A-5
<PAGE>

     Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction
of such change. These are designated as "Positive", indicating a potential
upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may
be raised, lowered or maintained. Rating Watch is typically resolved over a
relatively short period.

     A Rating Outlook indicates the direction a rating is likely to move over
a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch may be unable to identify the
fundamental trend. In these cases, the Rating Outlook may be described as
evolving.



                                     A-6
<PAGE>

=============================================================================

     Through and including               , 2004 (the 25th day after the date
of this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.




                                                             Shares

                   Capital and Income Strategies Fund, Inc.

                                 Common Stock



                         -----------------------------
                              P R O S P E C T U S
                        ------------------------------





                                                        , 2004



==============================================================================

<PAGE>

                           PART C. OTHER INFORMATION

Item 24.  Financial Statements And Exhibits.

(1)  Financial Statements

     Report of Independent Auditors

     Statement of Assets and Liabilities as of [                 ], 2004.

   Exhibits        Description
   --------        -----------
     (a)(1)  --    Articles of Incorporation of the Registrant.
     (a)(2)  --    Articles of Amendment to the Articles of Incorporation, as
                   amended on June 18, 2003.
        (b)  --    By-laws of the Registrant.
        (c)  --    Not applicable.
     (d)(1)  --    Portions of the Articles of Incorporation and By-laws of the
                   Registrant defining the rights of holders of shares of
                   common stock of the Registrant.(a)
     (d)(2)  --    Form of specimen certificate for shares of common stock of
                   the Registrant.
        (e)  --    Form of Automatic Dividend Reinvestment Plan.
        (f)  --    Not applicable.
        (g)  --    Form of Investment Advisory Agreement between the Registrant
                   and Fund Asset Management, L.P. ("FAM" or the "Investment
                   Adviser").
     (h)(1)  --    Form of Purchase Agreement between the Registrant and the
                   Investment Adviser and ________________.
     (h)(2)  --    Form of Merrill Lynch Standard Dealer Agreement.(b)
     (h)(3)  --    Form of Master Agreement Among Underwriters.(c)
        (i)  --    Not applicable.
        (j)  --    Form of Custodian Agreement between the Registrant and
                   _______________________.(d)
     (k)(l)  --    Form of Transfer Agency, and Service Agreement between the
                   Registrant and EquiServe Trust Company, N.A. and EquiServe,
                   L.P.(e)
     (k)(2)  --    Form of Administrative Services Agreement between the
                   Registrant and State Street.(f)
     (k)(3)  --    Form of Additional Compensation Agreement between FAM and
                   Merrill Lynch.
     (k)(4)  --    Form of Securities Lending Agency Agreement between the
                   Registrant and QA Advisors LLC (now MLIM LLC) dated
                   August 10, 2001.(g)
        (l)  --    Opinion and Consent of Sidley Austin Brown & Wood LLP.
        (m)  --    Not applicable.
        (n)  --    Consent of _______________, independent auditors for the
                   Registrant.
        (o)  --    Not applicable.
        (p)  --    Certificate of FAM.
        (q)  --    Not applicable.
        (r)  --    Code of Ethics.(h)

-----------------
(a)  Reference is made to Article IV (sections 2, 3, 4, 5, 6, 7 and 8),
     Article V (sections 3, 6 and 7), Article VI, Article VIII, Article IX,
     Article X, and Article XII of the Registrant's Articles of Incorporation,
     filed herewith; and to Article II, Article III (sections 3.01, 3.03, 3.05
     and 3.17), Article VI (section 6.02), Article VII, Article XII, Article
     XIII and Article XIV of the Registrant's By-laws, filed herewith.
(b)  Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment
     No. 3 to the Registration Statement on Form N-2 Preferred Income
     Strategies Fund, Inc. (File No. 333-102712), filed March 25, 2003 (the
     "Preferred Fund Registration Statement").
(c)  Incorporated by reference to Exhibit (h)(3) to the Preferred Fund
     Registration Statement.
(d)  Incorporated by reference to Exhibit 7 to Post-Effective Amendment No. 10
     to the Registration Statement on Form N-1A of Merrill Lynch Municipal
     Bond Fund of Merrill Lynch Multi-State Municipal Series Trust (File No.
     33-49873), filed on October 30, 2001.
(e)  Incorporated by reference to Exhibit 13 to Pre-Effective Amendment No. 2
     to the Registration Statement on Form N-14 of Corporate High Yield Fund,
     Inc. (File No. 333-10193), filed on December 31, 2002.


                                     C-1


<PAGE>


(f)  Incorporated by reference to Exhibit 8(d) to Post-Effective Amendment No.
     1 to the Registration Statement on Form N-1A of Merrill Lynch Focus
     Twenty Fund, Inc. (File No. 333-89775) filed on March 20, 2001.
(g)  Incorporated by reference to Exhibit 8(f) to Post-Effective Amendment No.
     5 to the Registration Statement on Form N-1A of Merrill Lynch Global
     Technology Fund, Inc. (File No. 333-48929), filed on July 24, 2002.
(h)  Incorporated by reference to Exhibit 15 to Pre-Effective Amendment No. 1
     to the Registration Statement on Form N-1A of Merrill Lynch Inflation
     Protected Fund (File No. 33-110936), filed on January 22, 2004.
*    To be provided by amendment.


Item 25.  Marketing Arrangements.

     See Exhibits (h)(1), (h)(2) and (h)3.

Item 26.  Other Expenses of Issuance and Distribution.

     The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:

Registration fees                                                 $
New York Stock Exchange listing fee
Printing (other than stock certificates)
Engraving and printing stock certificates
Legal fees and expenses
NASD fees
Underwriters. expense reimbursement
Miscellaneous
                                                                  -----------
Total                                                             $
                                                                  ===========

Item 27.  Persons Controlled by or Under Common Control with Registrant.

     The information in the prospectus under the captions "Investment Advisory
and Management Arrangements" and "Description of Capital Stock--Common Stock"
and in Note 1 to the Statement of Assets and Liabilities is incorporated
herein by reference.

Item 28.  Number of Holders of Securities.

     There will be one record holder of the Common Stock, par value $[0.10]
per share, as of the effective date of this Registration Statement.

Item 29.  Indemnification.

     Reference is made to Section 2-418 of the General Corporation Law of the
State of Maryland, Article V of the Registrant's Articles of Incorporation,
Article VI of the Registrant's By-laws and Section 6 of the Purchase
Agreement, which provide for indemnification.

     Article VI of the By-laws provides that each officer and director of the
Registrant shall be indemnified by the Registrant to the full extent permitted
under the Maryland General Corporation Law,


                                     C-2


<PAGE>


except that such indemnity shall not protect any such person against any
liability to the Registrant or any stockholder thereof to which such person
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office. Absent a court determination that an officer or director
seeking indemnification was not liable on the merits or guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, the decision by the Registrant
to indemnify such person must be based upon the reasonable determination of
independent legal counsel or the vote of a majority of a quorum of non-party
independent directors, after review of the facts, that such officer or
director is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.

     Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him or
her in connection with proceedings to which he or she is a party in the manner
and to the full extent permitted under the Maryland General Corporation Law;
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his or her good faith belief that the
standard of conduct necessary for the indemnification by the Registrant has
been met and a written undertaking to repay any such advance, if it ultimately
should be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (i) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his or her undertaking; (ii) the
Registrant is insured against losses arising by reason of the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Registrant at the time the advance is
proposed to be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.

     The Registrant may purchase insurance on behalf of an officer or director
protecting such person to the full extent permitted under the Maryland General
Corporation Law from liability arising from his or her activities as officer
or director of the Registrant. The Registrant; however, may not purchase
insurance on behalf of any officer or director of the Registrant that protects
or purports to protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.

     In Section 7 of the Purchase Agreement relating to the securities being
offered hereby, the Registrant agrees to indemnify Merrill Lynch and each
person, if any, who controls Merrill Lynch within the meaning of the
Securities Act of 1933 (the "1933 Act") against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus.

     Insofar as indemnification for liabilities arising under the 1933 Act may
be provided to directors, officers and controlling persons of the Registrant
and Merrill Lynch, pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the 1933 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 connection with any 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 1933 Act and will be governed by the final
adjudication of such issue.


                                     C-3


<PAGE>


Item 30.  Business And Other Connections Of The Investment Adviser.

     FAM (the "Investment Adviser"), acts as the investment adviser for a
number of affiliated open-end and closed-end registered investment companies.

     Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate of the
Investment Adviser, acts as the investment adviser for a number of affiliated
open-end and closed-end registered investment companies, and also acts as
sub-adviser to certain other portfolios.

     The address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.

     The address of the Investment Adviser, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10080. The
address of the Fund's transfer agent, Financial Data Services, Inc. ("FDS"),
is 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.

     Set forth below is a list of each executive officer and partner of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two fiscal years for his, her or its own account or
in the capacity of director, officer, employee, partner or trustee. Mr. Burke
is Vice President and Treasurer of all or substantially all of the investment
companies advised by FAM or its affiliates, and Mr. Doll is an officer of one
or more such companies.

<TABLE>
<CAPTION>
                                                                      Other Substantial Business,
Name                       Position(s) with FAM                   Profession, Vocation Or Employment
----                       --------------------                   ----------------------------------

<S>                        <C>                      <C>
ML & Co.                   Limited Partner          Financial Services Holding Company; Limited Partner of MLIM

Princeton Services         General Partner          General Partner of MLIM

Robert C. Doll, Jr.        President                President of MLIM; Co-Head (Americas Region) of MLIM from 2000
                                                    to 2001 and Senior Vice President thereof from 1999 to 2000;
                                                    Director of Princeton Services; Chief Investment Officer of
                                                    OppenheimerFunds, Inc. in 1999 and Executive Vice President
                                                    thereof from 1991 to 1999

Donald C. Burke            First Vice President     First Vice President, Treasurer and Director of Taxation of
                           and Treasurer            MLIM; Treasurer of Princeton Services; Senior Vice President and
                                                    Treasurer of Princeton Services from 1997 to 2002; Vice
                                                    President of FAMD; Senior Vice President of MLIM from 1999 to
                                                    2000; First Vice President of MLIM from 1997 to 1999

Brian A. Murdock           Chief Operating Officer  First Vice President of MLIM and Chief Operating Officer of
                                                    MLIM; Chief Investment Officer of EMEA Pacific Region and Global
                                                    CIO for Fixed Income and Alternative Investments; Head of MLIMs
                                                    Pacific Region and President of MLIM Japan, Australia and Asia


                                     C-4


<PAGE>


Andrew J. Donohue          General Counsel          General Counsel of MLIM and Princeton Services
</TABLE>

Item 31.  Location of Account and Records.

     All 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
promulgated thereunder are maintained at the offices of the Registrant (800
Scudders Mill Road, Plainsboro, New Jersey 08536), its investment adviser (800
Scudders Mill Road, Plainsboro, New Jersey 08536), and its custodian and
transfer agent.

Item 32.  Management Services.

     Not applicable.

Item 33.  Undertakings.

     (a) The Registrant undertakes to suspend the offering of the shares of
common stock covered hereby until it amends its prospectus contained herein
(1) subsequent to the effective date of this Registration Statement, its net
asset value per share of common stock declines more than 10% from its net
asset value per share of common stock as of the effective date of this
Registration Statement, or (2) its net asset value per share of common stock
increases to an amount greater than its net proceeds as stated in the
prospectus contained herein.

     (b) The Registrant undertakes that:

          (1) For purposes of determining any liability under the 1933 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 Rule 497(h) under
     the 1933 Act shall be deemed to be part of this Registration Statement as
     of the time it was declared effective.

          (2) For the purpose of determining any liability under the 1933 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.


                                     C-5


<PAGE>


                                  SIGNATURES

     Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 9th day of February, 2004.


                                   CAPITAL AND INCOME STRATEGIES FUND, INC.
                                   (Registrant)


                                   By:      /s/ Bradley J. Lucido
                                      -------------------------------------
                                            (Bradley J. Lucido, President)

     Each person whose signature appears below hereby authorizes Bradley J.
Lucido, Alice Pellegrino and Brian D. Stewart or any of them, as
attorney-in-fact, to sign on his behalf, individually and in each capacity
stated below, any amendments to this Registration Statement (including any
Post-Effective Amendments) and to file the same, with all exhibits thereto,
with the Securities and Exchange Commission.

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

<TABLE>
<CAPTION>
                   Signature                                       Title                               Date
                   ---------                                       -----                               ----

<S>                                              <C>                                             <C>
             /s/ Bradley J. Lucido               President (Princpal Executive Officer)          February 9, 2004
-----------------------------------------------  and Director
              (Bradley J. Lucido)

             /s/ Alice Pellegrino                Treasurer (Principal Financial and              February 9, 2004
-----------------------------------------------  Accounting Officer) and Director
              (Alice Pellegrino)

             /s/ Brian D. Stewart                Director                                        February 9, 2004
-----------------------------------------------
              (Brian D. Stewart)
</TABLE>


                                     C-6


<PAGE>


                                 EXHIBIT INDEX

(a)      Articles of Incorporation of the Registrant.
(b)      By-laws of the Registrant.


                                     C-7

</TEXT>
</DOCUMENT>
