<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>dn2.txt
<DESCRIPTION>FLOATING RATE INCOME STRATEGIES FUND, INC.
<TEXT>
<PAGE>

    As filed with the Securities and Exchange Commission on August 18, 2003
                                                   Securities Act File No. 333-
                                      Investment Company Act File No. 811-21413
================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                   FORM N-2

<TABLE>
      <S>                                                             <C>
          REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933     [X]
                        Pre-Effective Amendment No.                   [_]
                       Post-Effective Amendment No.                   [_]
                                  and/or
      REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
                               Amendment No.                          [_]
</TABLE>

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

                  FLOATING RATE 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
                  Floating Rate 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)

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

                                  Copies to:

 Bradley J. Lucido, Esq.                               Frank P. Bruno, Esq.
        Fund Asset                                        Sidley Austin
     Management, L.P.                                    Brown & Wood LLP
      P.O. Box 9011                                     787 Seventh Avenue
  Princeton, New Jersey                                 New York, New York
        08543-9011                                          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.   [_]

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

           CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT

================================================================================
<TABLE>
<CAPTION>
                                                  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)  66,667 shares       $15.00        $1,000,005         $81
</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 of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.

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

<PAGE>

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


      SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED AUGUST 18, 2003

PROSPECTUS

                                    Shares

                  Floating Rate Income Strategies Fund, Inc.

                                 Common Stock

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

   Floating Rate Income Strategies Fund, Inc. is a newly organized,
diversified, closed-end fund. The Fund's investment objective is to provide
stockholders with high current income and such preservation of capital as is
consistent with investment in a diversified portfolio of floating rate debt
securities and instruments ("debt securities"). Under normal market conditions
and after the initial investment period of up to approximately six months
following the completion of this offering, at least 80% of the Fund's net
assets (including proceeds from the issuance of any preferred stock), plus the
amount of any borrowings for investment purposes, will be invested in a
diversified portfolio of floating rate debt securities. The Fund anticipates
that a substantial portion of such investments generally will consist of senior
floating rate loans. The Fund may invest without limit and generally

                                                  (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.

<TABLE>
<CAPTION>
                                                        Per
                                                       Share  Total
                                                       ------ -----
             <S>                                       <C>    <C>
             Public offering price.................... $15.00   $
             Underwriting discount(1)................. $        $
             Proceeds, before expenses, to the Fund(2) $        $
</TABLE>
--------
(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 estimated organizational and offering expenses to be incurred by the
    Fund are $      . The Fund's investment adviser has agreed to pay the
    amount by which the organizational and 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 underwriters may also 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.

   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       , 2003.

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

                              Merrill Lynch & Co.

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

                 The date of this prospectus is       , 2003.

<PAGE>

(continued from previous page)

intends to invest a substantial portion of its assets in senior floating rate
loans and other floating or fixed rate debt securities that are rated below
investment grade by the 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
Fund's investment adviser to be of comparable quality. The Fund may not,
however, invest more than 10% of its total assets in securities that are rated
Caa1 or lower (if rated by Moody's) or CCC+ or lower (if rated by S&P or Fitch)
by each agency rating such security or, if unrated, are considered by the
Fund's investment adviser to be of comparable quality or are otherwise
considered to be distressed securities. Debt securities of below investment
grade quality are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and dividend income and to repay
principal, and are commonly referred to as "high yield" securities or "junk
bonds." There can be no assurance that the Fund's investment objective will be
realized.

   The Fund may leverage through borrowings, the issuance of debt securities,
the issuance of preferred stock or a combination thereof. The Fund currently
intends to borrow money in an initial amount up to approximately [      ]% of
the value of its total assets (including the amount obtained from leverage)
after the Fund has fully invested the net proceeds of the offering. Following
the investment of the net proceeds of the offering, the Fund may, depending on
market conditions and the relative costs and benefits associated with other
types of leverage, choose to leverage through the issuance of preferred stock
rather than through borrowings or the Fund may choose to leverage through a
combination of both. The use of leverage can create special risks.

   Because the Fund is newly organized, its shares have no history of public
trading. Shares 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.


                                      2

<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                  Page
                                                                  ----
          <S>                                                     <C>
          Prospectus Summary.....................................   4
          Risk Factors and Special Considerations................   9
          Fee Table..............................................  16
          The Fund...............................................  17
          Use Of Proceeds........................................  17
          Investment Objective and Policies......................  17
          Other Investment Policies..............................  29
          Investment Restrictions................................  43
          Directors and Officers.................................  44
          Investment Advisory and Management Arrangements........  49
          Portfolio Transactions.................................  54
          Dividends and Distributions............................  57
          Taxes..................................................  57
          Automatic Dividend Reinvestment Plan...................  61
          Mutual Fund Investment Option..........................  63
          Net Asset Value........................................  63
          Description of Capital Stock...........................  64
          Custodian..............................................  66
          Underwriting...........................................  67
          Transfer Agent, Dividend Disbursing Agent and Registrar  69
          Accounting Services Provider...........................  69
          Legal Opinions.........................................  69
          Independent Auditors and Experts.......................  69
          Additional Information.................................  69
          Report of Independent Auditors.........................  71
          Notes to Statement of Assets and Liabilities...........  72
          Appendix A--Ratings of Securities...................... A-1
</TABLE>

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

   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.

                                      3

<PAGE>

                              PROSPECTUS SUMMARY

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

The Fund....................  Floating Rate 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 $15.00 per
                              share through a group of underwriters led by
                              Merrill Lynch, Pierce, Fenner & Smith
                              Incorporated. 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 and
  Policies..................  The Fund's investment objective is to provide
                              stockholders with high current income and such
                              preservation of capital as is consistent with
                              investment in a diversified portfolio of floating
                              rate debt securities and instruments ("debt
                              securities"). The Fund seeks to achieve its
                              objective by investing primarily in a diversified
                              portfolio of floating rate debt securities. The
                              Fund anticipates that a substantial portion of
                              its investments in floating debt securities will
                              consist of senior floating rate loans ("senior
                              loans") that are rated below investment grade by
                              the established rating services. Such senior
                              loans may be either secured or unsecured. The
                              Fund may also invest in investment grade
                              securities. The Fund may invest in securities of
                              any maturity. The Fund may invest without limit
                              in illiquid securities. There can be no assurance
                              that the Fund's investment objective will be
                              realized.

                              High Yield Securities.  The Fund may invest
                              without limit and generally intends to invest a
                              substantial portion of its assets in below
                              investment grade, high yield securities,
                              including senior loans and other floating or
                              fixed rate debt securities that are rated below
                              investment grade by the 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 securities that
                              are rated Caa1 or lower (if rated by Moody's) or
                              CCC+ or lower (if rated by S&P or Fitch) by each
                              agency rating such security or, if unrated, are
                              considered by the Investment Adviser to be of
                              comparable quality or are otherwise considered to
                              be 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 and/or payment of interest at the time
                              of acquisition by the Fund or are rated in the
                              lowest rating categories (Ca or lower by Moody's,
                              CC or lower by S&P or CC or lower by Fitch) or,
                              if unrated, are considered by the Investment
                              Adviser to be of comparable quality ("Distressed
                              Securities"). High yield securities are generally
                              regarded

                                      4

<PAGE>

                              as having predominantly speculative
                              characteristics with respect to capacity to pay
                              interest and to repay principal and involve
                              greater volatility of price than securities in
                              the higher rating categories. Such securities are
                              commonly referred to as "high yield" securities
                              or "junk bonds." The Fund may also invest in
                              investment grade securities.

                              Floating Rate Debt Securities.  Under normal
                              market conditions and after the initial
                              investment period of up to approximately six
                              months following the completion of this offering,
                              at least 80% of the Fund's net assets (including
                              proceeds from the issuance of any preferred
                              stock), plus the amount of any borrowings for
                              investment purposes, will be invested in a
                              diversified portfolio of floating rate debt
                              securities. Floating rate debt securities include
                              floating or variable rate securities that pay
                              interest at rates that adjust whenever a
                              specified interest rate changes and/or which
                              reset on predetermined dates (such as the last
                              day of a month or calendar quarter). Interest
                              rates on floating rate loans generally adjust
                              periodically at a margin above a generally
                              recognized base lending rate such as the prime
                              rate of a designated U.S. bank, the Certificate
                              of Deposit rate or the London InterBank Offered
                              Rate ("LIBOR").

                              Senior Loans.  The Fund anticipates that a
                              substantial portion of its investments will
                              consist of senior loans. The Fund intends to
                              invest in senior loans issued either directly by
                              the borrower or in the form of participation
                              interests made by banks and other financial
                              institutions. Senior loans are typically direct
                              obligations of a borrower undertaken to finance
                              the growth of the borrower's business or a
                              capital restructuring. Such senior loans may be
                              either secured or unsecured. A significant
                              portion of such senior loans are highly leveraged
                              loans such as leveraged buy-out loans, leveraged
                              recapitalization loans and other types of
                              acquisition loans. Senior loans are normally
                              accessible only to financial institutions and
                              large corporate and institutional investors and
                              are not widely available to individual investors.

                              Credit Quality.  The Investment Adviser performs
                              its own analysis of the credit quality and risks
                              associated with individual debt securities
                              considered as investments for the Fund, rather
                              than relying exclusively on rating agencies or
                              third-party research. In evaluating senior loans
                              and other debt securities, the Investment Adviser
                              analyzes and takes into account the
                              legal/protective features associated with the
                              securities (such as their position in the
                              borrower's capital structure and any security
                              through collateral) in assessing their credit
                              characteristics.

                              Other Investments.  The Fund may invest up to 20%
                              of its total assets in securities other than
                              floating rate debt securities, including, but not
                              limited to, fixed rate debt securities such as
                              convertible securities, bonds, notes, fixed rate
                              loans and mortgage related and other asset backed
                              securities issued on a public or private basis.
                              The Fund may also invest in a variety of other
                              securities, including collateralized debt
                              obligations, preferred securities, commercial
                              paper, U.S. government securities, structured
                              notes, credit linked notes, credit linked trust
                              certificates and other hybrid instruments.

                                      5

<PAGE>

                              To a limited extent, incidental to and in
                              connection with its investment activities or
                              pursuant to a convertible feature in a security,
                              the Fund also may acquire warrants and other debt
                              and equity securities. The Fund may also acquire
                              other debt and equity securities of a borrower or
                              issuer in connection with an amendment, waiver,
                              conversion or exchange of a senior loan or other
                              debt security or in connection with a bankruptcy
                              or workout of a borrower or issuer.

                              Foreign Investments.  The Fund may invest without
                              limitation in debt securities of issuers
                              domiciled outside the United States. The Fund
                              will not, however, invest more than 10% of its
                              total assets in debt securities of issuers
                              located in emerging market countries. The Fund
                              will invest primarily in U.S. dollar denominated
                              debt securities. The Fund will not invest more
                              than 10% of its total assets in debt 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, credit default 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 Fund.  The Fund may leverage through borrowings, the
                              issuance of debt securities, the issuance of
                              shares of preferred stock 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 borrow money in an initial amount up
                              to approximately [  ]% of the value of its total
                              assets (including the amount obtained from
                              leverage) after the Fund has fully invested the
                              net proceeds of the offering. The Fund
                              anticipates that it will take up to approximately
                              six months to invest the net proceeds of the
                              offering. Following the investment of the net
                              proceeds of the offering, the Fund may, depending
                              on market conditions and the relative costs and
                              benefits associated with other types of leverage,
                              choose to leverage through the issuance of

                                      6

<PAGE>

                              preferred stock rather than through borrowings or
                              the Fund may choose to leverage through a
                              combination of both. While such leverage creates
                              an opportunity for increased net income, it also
                              creates special risks, including increased costs
                              and greater volatility in the net asset value and
                              market price of the common stock. The Fund may
                              borrow to finance additional investments when the
                              Investment Adviser believes that the potential
                              return on such additional investments will exceed
                              the costs incurred in connection with the
                              borrowing. When the Fund is utilizing leverage,
                              the fees paid to the Investment Adviser for
                              investment advisory and management services will
                              be higher than if the Fund did not utilize
                              leverage because the fees paid will be calculated
                              based on the Fund's net assets (including
                              proceeds from the issuance of any preferred
                              stock) plus the proceeds of any outstanding
                              borrowings used for leverage.

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 0.[  ]% of the
                              Fund's average daily net assets (including
                              proceeds from the issuance of any preferred
                              stock), plus the proceeds of any outstanding
                              borrowings used for leverage.

Dividends and Distributions.  The Fund intends to distribute dividends from its
                              net investment income monthly, and net realized
                              capital gains, if any, at least annually. The
                              Fund expects that it will commence paying
                              dividends within 90 days of the date of this
                              prospectus. Currently, in order to maintain a
                              more stable level of monthly dividend
                              distributions, the Fund intends to pay out less
                              than all of its net investment income or pay out
                              accumulated undistributed income in addition to
                              current net investment income.

Yield Considerations........  The yield on the Fund's common stock will vary
                              from period to period depending on factors
                              including, but not limited to, the length of the
                              initial investment period, market conditions, the
                              timing of the Fund's investment in portfolio
                              securities, the securities comprising the Fund's
                              portfolio, the ability of the issuers or
                              borrowers of the portfolio securities to pay
                              dividends or interest on such securities, changes
                              in interest rates, including changes in the
                              relationship between short term rates and long
                              term rates, the amount and timing of borrowings
                              and the issuance of the Fund's preferred stock or
                              debt securities, the effects of leverage on the
                              common stock discussed above under "--Use of
                              Leverage by the Fund," the timing of the
                              investment of leverage proceeds in portfolio
                              securities, the Fund's net assets and its
                              operating expenses. Consequently, the Fund cannot
                              guarantee any particular yield on its shares, and
                              the yield for any given period is not an
                              indication or representation of future yields on
                              Fund shares. The Fund's ability to achieve any
                              particular yield level

                                      7

<PAGE>

                              after it commences operations depends on future
                              interest rates and other factors mentioned above,
                              and the initial yield and later yields may be
                              lower. Any statements as to an estimated yield
                              are based on certain assumptions and conditions
                              and are as of the date made, and no guarantee can
                              be given that the Fund will achieve or maintain
                              any particular yield level.

Automatic Dividend
  Reinvestment Plan.........  Dividend and capital gains distributions
                              generally are used to purchase additional shares
                              of the Fund's common stock. However, an investor
                              can choose to receive 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.

Mutual Fund Investment Option Investors who purchase shares in this offering
                              and later sell their shares 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.


                                      8

<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. Net
asset value will be reduced following the offering by the underwriting discount
and the amount of offering expenses paid by the Fund.

   Market Risk and Selection Risk.  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
Fund management selects will underperform the relevant market indices or other
funds with a similar investment objective and investment strategies.

   Net Asset Value; Interest Rate Sensitivity; Credit Quality and Other Market
Conditions.  Generally, when interest rates go up, the value of fixed rate debt
securities goes down. Therefore, the net asset value of a fund that invests
primarily in fixed rate securities changes in response to interest rate
fluctuations. Because the Fund invests primarily in floating rate debt
securities, the Investment Adviser generally expects that the Fund will have
less interest rate risk (i.e., sensitivity to fluctuations in market interest
rate) and fluctuations in net asset value as a result of movements in interest
rates than a fund that invests primarily in fixed rate securities. However,
because floating rate debt securities may only reset periodically, the Fund's
net asset value may fluctuate from time to time due to interest rate movements
when there is an imperfect correlation between the interest rates on the
floating rate debt securities in the Fund's portfolio and prevailing interest
rates. A real or perceived decline in the credit quality or financial condition
of issuer or borrower in which the Fund invests may result in the value of the
floating rate debt securities held by the Fund, and hence the Fund's net asset
value, going down. A real or perceived serious deterioration in the credit
quality or financial condition of a issuer or borrower 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 floating rate debt securities held by the Fund. Given that the Fund
uses market prices to value many of its floating rate debt securities, any
decrease in the market value of the floating rate debt securities held by the
Fund will result in a decrease in the Fund's net asset value. Moreover, up to
20% of the Fund's total assets may be invested in debt securities with fixed
rates of interest, which generally will lose value in direct response to rising
interest rates. The Fund's use of leverage, as described below, will tend to
increase interest rate risk to the Fund's common stock.

   Non-Payment.  The debt securities in which the Fund invests are subject to
the risk of non-payment of interest and principal. When a borrower or issuer
fails to make scheduled interest or principal payments on a debt security, the
value of the security, and hence the value of the Fund's shares, may go down.
While a senior position in the capital structure of a borrower may provide some
protection with respect to the Fund's investments in senior loans, losses may
still occur.

   The senior loans in which the Fund invests can be expected to provide higher
yields than certain investment grade fixed rate securities, but such loans may
be subject to greater risk of loss of principal and income resulting from
non-payment of interest and principal by the borrower. Senior loan obligations
are frequently secured by

                                      9

<PAGE>

pledges of liens and security interests in the assets of the borrower, and the
holders of senior loans are frequently the beneficiaries of debt service
subordination provisions imposed on the borrower's bondholders. Such security
and subordination arrangements are designed to give senior loan investors
preferential treatment over high yield bond investors in the event of a
deterioration in the credit quality or default of the issuer. Even when these
arrangements exist, however, there can be no assurance that the principal and
interest owed on the senior loan will be repaid in full or in a timely manner.
When a borrower fails to make scheduled interest or principal payments on a
debt security, the value of the instrument, and hence the value of the Fund's
shares of common stock, may go down. While collateral may provide some
protection against devaluation due to a default on a collateralized loan,
losses may not be completely covered by the liquidation or sale of collateral.
To the extent the senior loan is secured by stock of the borrower and/or its
subsidiaries and affiliates, such stock may lose all of its value in the event
of a bankruptcy or insolvency of the borrower. The Fund may invest in either
secured or unsecured senior loans.

   Senior loans generally bear interest at rates set at a margin above a
generally recognized base lending rate that may fluctuate on a day-to-day
basis, in the case of the prime rate of a U.S. bank, or which may be adjusted
periodically, typically 30 days but generally not more than one year, in the
case of LIBOR. Consequently, the value of senior loans held by the Fund may
generally be expected to fluctuate less than the value of other fixed rate high
yield securities as a result of changes in the interest rate environment. On
the other hand, the secondary dealer market for certain senior loans may not be
as well developed as the secondary dealer market for other fixed income
securities, including high yield bonds, and therefore present increased market
risk relating to liquidity and pricing concerns.

   The Fund has no minimum credit rating for the senior loans in which it
invests. Investments rated below investment grade or, if unrated, are
considered by the Investment Advisor to be of similar credit quality, have a
higher risk of non-payment than investment grade investments.

   Senior loans made in connection with highly leveraged transactions are
subject to greater risks than other senior loans. For example, the risks of
default or bankruptcy of the borrower or the risks that other creditors of the
borrower may seek to nullify or subordinate the Fund's claims on any collateral
securing the loan are greater in highly leveraged transactions.

   High Yield Securities.  The Fund may invest without limit and generally
intends to invest a substantial portion of its assets in below investment
grade, high yield securities, including senior loans and other floating and
fixed rate debt securities. The Fund may not, however, invest more than 10% of
its total assets in securities that are rated Caa1 or lower (if rated by
Moody's) or CCC+ or lower (if rated by S&P or Fitch) by each agency rating such
security or, if unrated, are considered by the Investment Adviser to be of
comparable quality or are otherwise considered to be Distressed Securities.
Investments in high yield 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 debt 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 securities
which, at the time of investment, are in default or the issuers of which are in
bankruptcy. However, there can be no assurance 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 or borrower is usually more susceptible to a general economic

                                      10

<PAGE>

downturn or a sustained period of rising interest rates and high yield issuers
are more likely than investment grade issuers or borrowers 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. The combination of price volatility and the limited liquidity
of high yield securities, and in particular senior loans, 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. 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. When the market value of high yield
securities goes down, the Fund's net asset value will decrease. In addition,
the Fund may incur additional expenses if it is forced to seek recovery upon a
default or restructuring of a portfolio holding.

   High yield bonds (commonly referred to as "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.  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. The Fund may be required to bear certain extraordinary
expenses in order to protect and recover its investment.

   Leverage.  The Fund may leverage through borrowings, the issuance of debt
securities, the issuance of shares of preferred stock 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 borrow money in an initial amount up to approximately [  ]% of the value of
its total assets (including the amounts obtained from leverage) after the Fund
has fully invested the net proceeds of the offering. Following the investment
of the net proceeds of the offering, the Fund may, depending on market
conditions and the relative costs and benefits associated with other types of
leverage, choose to leverage through the issuance of preferred stock rather
than through borrowings or the Fund may choose to leverage through a
combination of both. It is currently anticipated that it will take up to
approximately six months to invest the net proceeds of the offering. However,
leverage involves risks, which can be significant. These risks include greater
volatility in the Fund's net asset value, fluctuations in the dividend

                                      11

<PAGE>

paid by the Fund and the market price of the Fund's common stock, the
possibility that the value of the assets acquired with such borrowing decreases
although the Fund's liability is fixed and increased operating costs which may
reduce the Fund's total return. To the extent the income or capital
appreciation derived from securities purchased with funds received from
leverage exceeds the cost of leverage, the Fund's return will be greater than
if leverage had not been used. Conversely, if the income or capital
appreciation from the securities purchased with such funds is not sufficient to
cover the cost of leverage or if the Fund incurs capital losses, the return of
the Fund will be less than if leverage had not been used, and therefore the
amount available for distribution to stockholders as dividends and other
distributions will be reduced.

   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, 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 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 not do
so. There can be no assurance that the Fund's portfolio strategies will be
effective. Some of the 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.

   Derivatives Risk.  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 indexes). 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 may also have exposure to derivatives
through investment in credit linked notes, credit 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.  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.  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 swap
transactions or credit default 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

                                      12

<PAGE>

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 swaps 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). The Fund is not required to enter into interest rate or credit
default swaps 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 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.

   Intermediary.  The Fund may invest in senior loans either by participating
as a co-lender at the time the loan is originated or by buying an interest in
the loan in the secondary market from an institution acting as agent, co-lender
or participant. The financial status of the institutions interposed between the
Fund and a borrower may affect the ability of the Fund to receive principal and
interest payments.

   The success of the Fund depends, to a great degree, on the skill with which
an agent bank administers the terms of the senior loan agreements, monitors
borrower compliance with covenants, collects principal, interest and fee
payments from borrowers and, where necessary, enforces creditor remedies
against borrowers. Agent banks typically have broad discretion in enforcing
senior loan agreements.

   Liquidity of Investments.  Certain debt securities, including in particular
senior loans, 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 be subject to wide
fluctuations in market value. The Fund may be subject to significant delays in
disposing of certain investments. As a result, the Fund may be forced to sell
these investments 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 investments.

   Issuer Risk.  The value of floating rate and other debt securities may
decline for a number of reasons which directly relate to the issuer or
borrower, such as a real or perceived management performance, financial
leverage and reduced demand for the issuer's or borrower's goods and services.

   Foreign Securities.  The Fund may invest without limitation in debt
securities of issuers domiciled outside the United States. The Fund will not,
however, invest more than 10% of its total assets in debt securities of issuers
located in emerging market countries. The Fund will invest primarily in U.S.
dollar denominated securities. The Fund will not invest more than 10% of its
total assets in debt securities denominated in currencies other than the U.S.
dollar or that do not provide for payment to the Fund in U.S. dollars.
Investments in non-U.S. debt securities may involve risks not typically
involved in domestic investment, including fluctuation in foreign interest
rates, currency risk, and future foreign political and economic developments
and the possible imposition

                                      13

<PAGE>

of exchange controls or other governmental laws or regulations. In connection
with the Fund's investments in foreign securities, the Fund may engage in
foreign exchange transactions to hedge the value of the Fund's portfolio
against adverse currency movements. The Fund is not required to enter into
foreign exchange transactions for hedging purposes and may choose not to do so.

   Emerging Market Countries Risk.  The Fund may invest up to 10% of its total
assets in debt securities of issuers located in emerging market countries.
Investing in securities of issuers based in underdeveloped emerging market
countries entails all of the risks of investing in securities of foreign
issuers to a heightened degree. These heightened risks include: (i) greater
risks of expropriation, confiscatory taxation, nationalization, and less
social, political and economic stability; (ii) the smaller size of the market
for such securities and a lower volume of trading, resulting in lack of
liquidity and in price volatility; (iii) certain national policies which may
restrict the Fund's investment opportunities, including restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; and (iv) the limited legal rights and remedies available to holders
following a default by the issuer.

   Reinvestment Risk.  Reinvestment risk is the risk that income from the
Fund's fixed income portfolio will decline if and when the Fund invests the
proceeds from matured, traded, or called securities at market interest or
dividend rates that are below the portfolio's current earnings rate. A decline
in income could affect the market price or the overall returns on the Fund's
common stock.

   Inflation Risk.  Inflation risk is the risk that the value of assets or
income from the Fund's investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real, or inflation
adjusted, value of the Fund's common stock and distributions can decline and
the interest payments on Fund borrowings, if any, may increase or the value of
dividend payments on the Fund's preferred stock, if any, may decline.

   Dividend Risk.  Because most of the debt securities held by the Fund will
have floating or variable interest rates, the amounts of the Fund's monthly
distributions to its stockholders are expected to vary with fluctuations in
market interest rates. Generally, when market interest rates fall, the amount
of the distributions to stockholders will likewise decrease.

   Mortgage Related and Asset Backed Risk.  The Fund may invest in a variety of
mortgage related and other asset backed securities, including both commercial
and residential mortgage securities and other mortgage backed instruments
issued on a public or private basis. 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.

   Like more 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 may also 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

                                      14

<PAGE>

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. In a period of rising interest rates, prepayments may occur
at a slower rate than expected. As a result, the average maturity of 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.

   Market Disruption.  The terrorist attacks in the United States on September
11, 2001 have had a disruptive effect on the securities markets, some of which
were closed for a four-day period. These terrorist attacks and related events,
including U.S. military actions in Iraq, 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 impact interest
rates, auctions, secondary trading, ratings, credit risk, inflation and other
factors relating to the Fund's common stock. High yield securities tend to be
more volatile than investment grade fixed income securities so that these
events and other market disruptions may have a greater impact on the prices and
volatility of high yield securities than on investment grade fixed income
securities. There can be no assurance that these events and other market
disruptions may not have other material and adverse implications for the high
yield securities markets.

   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 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.


                                      15

<PAGE>

                                   FEE TABLE

<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).....................................    %
   Other Expenses(c)..........................................................    %
                                                                               ----
       Total Annual Expenses(c)...............................................    %
                                                                               ====
</TABLE>
--------
(a) Organizational and offering costs will be paid by the Fund up to $[   ] per
    share. The Investment Adviser has agreed to pay the amount by which the
    organizational and 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 organizational and offering costs to be paid by the Fund are not
    included in the annual expenses shown in the table. Organizational and
    offering costs borne by common stockholders will result in a reduction of
    capital of the Fund attributable to common stock.
(b) See "Investment Advisory and Management Arrangements"--page [   ].
(c) Assumes leverage by borrowing in an amount equal to approximately [   ]% of
    the Fund's total assets (including the amount obtained from leverage) at an
    interest rate of [   ]%. 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. 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 None, Other Expenses would be [   ]% and Total Annual
    Expenses would be [   ]%. See "Risk Factors and Special
    Considerations--Leverage" and "Other Investment Policies--Leverage."

<TABLE>
<CAPTION>
                                                                               1 Year 3 Years 5 Years 10 Years
Example:                                                                       ------ ------- ------- --------
<S>                                                                            <C>    <C>     <C>     <C>
An investor would pay the following expenses (including the sales load of
$[   ] and estimated offering expenses of this offering of $[   ]) on a $1,000
investment, assuming total annual expenses of [   ]% (assuming leverage of
[   ]% of the Fund's total assets) and a 5% annual return throughout the
periods.......................................................................   $       $       $       $
</TABLE>

   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.

                                      16

<PAGE>

                                   THE FUND

   Floating Rate 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 August 14, 2003, 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 the Fund's Investment Adviser
with 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 organizational and 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 organizational and
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.

   Due to current scarcity of available securities in the high yield markets,
and in particular the senior loan market, investments that in the judgment of
the Investment Adviser are appropriate investments for the Fund may not be
immediately available. The Fund expects that there will be an initial
investment period of up to approximately six months following the completion of
its common stock offering, depending on market conditions and the availability
of appropriate securities, before it is invested in accordance with its
investment objective and policies. Pending such investment, it is anticipated
that all or a portion of the proceeds will be invested in high grade, short
term debt securities (both fixed and floating rate), money market funds, credit
linked notes, credit linked trust certificates and/or index futures contracts
or similar derivative instruments designed to give the Fund exposure to the
market in which it intends to invest while the Investment Adviser selects
specific securities. A relatively long initial investment period may negatively
impact the yield on the Fund's common stock and the return to stockholders. See
"Investment Objectives and Policies."

                       INVESTMENT OBJECTIVE AND POLICIES

   The Fund's investment objective is to provide stockholders with high current
income and such preservation of capital as is consistent with investment in a
diversified portfolio of floating rate debt securities and instruments ("debt
securities"). The Fund's investment objective of high current income and
preservation of capital is a fundamental policy and may not be changed without
the approval of a majority of the outstanding voting

                                      17

<PAGE>

securities of the Fund (as defined in the 1940 Act). There can be no assurance
that the Fund's investment objective will be realized.

   The Fund seeks to achieve its objective by investing primarily in a
diversified portfolio of floating rate debt securities. The Fund anticipates
that a substantial portion of its investments in floating rate debt securities
will consist of senior floating rate loans ("senior loans") made by banks or
other financial institutions that are rated below investment grade by the
established rating services. Such senior loans may be either secured or
unsecured. The secured loans may be either fully or partially secured at the
time of investment. The Fund may invest without limit in illiquid securities.
The Fund may also invest in investment grade securities. The Fund may invest in
securities of any maturity.

   The Fund may invest without limit and generally intends to invest a
substantial portion of its assets in high yield securities, including senior
loans and other floating and fixed rate debt securities that are rated below
investment grade by the established rating services (Ba or lower by Moody's
Investors Service, Inc. ("Moody's"), BB or lower by Standard & Poor's ("S&P"),
BB or lower by Fitch Ratings ("Fitch") or, if unrated, are considered by
Investment Adviser to be of comparable quality. Such securities are regarded as
having predominantly speculative characteristics with respect to capacity to
pay interest and to repay principal and are commonly referred to as "high
yield" securities or "junk bonds." The Fund may not, however, invest more than
10% of its total assets in securities that are rated Caa1 or lower (if rated by
Moody's) or CCC+ or lower (if rated by S&P or Fitch) by each agency rating such
security or, if unrated, are considered by the Investment Adviser to be of
comparable quality or are otherwise considered to be distressed securities
("Distressed Securities"). Securities rated Ba by Moody's, BB by S&P and BB by
Fitch are considered to have speculative elements and a greater vulnerability
to default than higher rated securities. Below investment grade securities and
comparable unrated securities involve substantial risk of loss, are considered
speculative with respect to the issuer's ability to pay interest and any
required redemption or principal payments and are susceptible to default or
decline in market value due to adverse economic and business developments.
Securities rated in the lowest rating categories (Ca or lower by Moody's, CC or
lower by S&P or CC or lower by Fitch) are regarded as having the highest degree
of speculative characteristics and are often in default and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
The descriptions of the investment rating categories by Moody's, S&P and Fitch,
including a description of their speculative characteristics, are set forth in
Appendix A. All references to securities ratings by Moody's, S&P and Fitch in
this prospectus shall, unless otherwise indicated, include all securities
within each such rating category (i.e., Ba1, Ba2 and Ba3 in the case of
Moody's, BB+ and BB- in the case of S&P and BB+ and BB- in the case of Fitch).
All percentage and ratings limitations on securities in which the Fund may
invest apply at the time of making an investment and shall not be considered
violated if an investment rating is subsequently downgraded to a rating that
would have precluded the Fund's initial investment in such security. In the
event that the Fund disposes of a portfolio security subsequent to its being
downgraded, the Fund may experience a greater risk of loss than if such
security had been sold prior to such downgrade.

   Under normal market conditions and after the initial investment period of up
to approximately six months following the completion of this offering, the Fund
will invest at least 80% of its net assets (including proceeds from the
issuance of any preferred stock), plus the amount of any borrowings for
investment purposes, in a diversified portfolio of floating rate debt
securities. This is a non-fundamental policy and may be changed by the Board of
Directors of the Fund provided that stockholders are provided with at least 60
days' prior notice of any change as required by the rules under the 1940 Act.

   The Fund may invest up to 20% of its total assets in securities other than
floating rate debt securities, including, but not limited to, fixed rate debt
securities such as convertible securities, bonds, notes, fixed rate loans and
mortgage related and other asset backed securities issued on a public or
private basis. The Fund also may invest in a variety of other securities,
including collateralized debt obligations, preferred securities, commercial
paper, U.S. government securities, structured notes, credit linked notes,
credit linked trust certificates and other hybrid instruments.

                                      18

<PAGE>

   To a limited extent, incidental to and in connection with its investment
activities or pursuant to a convertible feature in a security, the Fund also
may acquire warrants and other debt and equity securities. The Fund may also
acquire other debt and equity securities of a borrower or issuer in connection
with an amendment, waiver, conversion or exchange of a senior loan or other
debt security or in connection with a bankruptcy or workout of a borrower or
issuer.

   The Fund may invest without limitation in debt securities of issuers
domiciled outside the United States. The Fund, however will not invest more
than 10% of its total assets in debt securities of issuers located in emerging
market countries. The Fund will invest primarily in U.S. dollar denominated
debt securities. The Fund will not invest more than 10% of its total assets in
debt securities denominated in currencies other than the U.S. dollar or that do
not provide for payment to the Fund in U.S. dollars, including obligations of
non-U.S. governments and their respective subdivisions, agencies and government
sponsored enterprises.

   Investment in the common stock of the Fund offers the individual investor
several potential benefits. The Fund offers investors the opportunity to
receive current income by investing in a professionally managed portfolio
comprised primarily of floating rate debt securities, and in particular senior
loans, a type of investment typically not available to individual investors.
The Investment Adviser provides professional management, which includes the
extensive credit analysis needed to invest in senior loans, foreign securities,
junk bonds and distressed securities. In addition to using the credit rating
provided by independent rating agencies, the Investment Adviser independently
evaluates the creditworthiness of the portfolio securities held by the Fund.
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 yield 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 "Risk Factors and
Special Considerations--Leverage" and "Other Investment Policies--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, credit default swaps,
short selling and foreign exchange transactions. Each of these portfolio
strategies is described below. There can be no assurance 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 period in 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 fixed rate investment grade debt securities, including high grade
short term debt securities, or may hold its assets in cash. The yield on such
securities may be lower than the yield on the floating rate debt securities in
which the Fund normally invests. The Fund may not achieve its investment
objective when it does so.

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

Description of Floating Rate Debt Securities

   Under normal market conditions and after the initial investment period of up
to approximately six months following the completion of this offering, the Fund
will invest at least 80% of its net assets (including proceeds from the
issuance of any preferred stock), plus the amount of any borrowings for
investment purposes, in a diversified portfolio of floating rate debt
securities. Floating rate debt securities include floating or variable rate
securities that pay interest at rates that adjust whenever a specified interest
rate changes and/or which reset on predetermined

                                      19

<PAGE>

dates (such as the last day of a month or calendar quarter). In addition to
senior loans, these floating rate debt securities may include, without
limitation, instruments such as catastrophe and other event linked bonds, bank
capital securities, corporate bonds, notes, money market instruments and
certain types of mortgage related and other asset backed securities. Due to
their floating rate features, these instruments will generally pay higher
levels of income in a rising interest rate environment and lower levels of
income as interest rates decline. For the same reason, the market value of a
floating rate debt instrument is generally expected to have less sensitivity to
fluctuations in market interest rates than a fixed rate debt instrument,
although the value of a floating rate instrument may nonetheless decline as
interest rates rise and due to other factors, such as real or perceived changes
in credit quality or financial condition of the issuer or borrower, volatility
in the capital markets or other adverse market conditions.

Description of Senior Loans

   Under normal market conditions and after the initial investment period of up
to approximately six months following the completion of this offering, the Fund
anticipates investing a substantial portion of its floating rate debt assets in
senior loans. The senior loans in which the Fund invests primarily consist of
direct obligations of a borrower undertaken to finance the growth of the
borrower's business, internally or externally, or to finance a capital
restructuring. Senior loans may also include debtor in possession financings
pursuant to Chapter 11 of the U.S. Bankruptcy Code and obligations of a
borrower issued in connection with a restructuring pursuant to Chapter 11 of
the U.S. Bankruptcy Code. A significant portion of such senior loans are highly
leveraged loans such as leveraged buy-out loans, leveraged recapitalization
loans and other types of acquisition loans. Such senior loans may be structured
to include both term loans, which are generally fully funded at the time of the
Fund's investment, and revolving credit facilities or delayed draw term loans,
which would require the Fund to make additional investments in the senior loans
as required under the terms of the credit facility. Such senior loans may also
include receivables purchase facilities, which are similar to revolving credit
facilities secured by a borrower's receivables. Senior loans generally are
issued in the form of senior syndicated loans, but the Fund also may invest
from time to time in privately placed notes, credit linked notes, structured
notes or other instruments with credit and pricing terms which are, in the
opinion of the Investment Adviser, consistent with investments in senior loan
obligations.

   The Fund may invest without limitation in debt securities of issuers
domiciled outside the United States. The Fund, however, will not, invest more
than 10% of its total assets in debt securities of issuers located in emerging
market countries. The Fund will not invest more than 10% of its total assets in
debt securities denominated in currencies other than the U.S. dollar or that do
not provide for payment to the Fund in U.S. dollars. Investments in foreign
securities involves certain risks not involved in domestic investments. Loans
to such non-U.S. borrowers or U.S. borrowers may involve risks not typically
involved in domestic investment, including fluctuation in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S. governmental laws or
restrictions applicable to such loans. With respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
the Fund's investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment position. In
addition, information with respect to non-U.S. borrowers may differ from that
available with respect to U.S. borrowers, since foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
borrowers.

   The senior loans in which the Fund invests, in many instances, hold the most
senior position in the capitalization structure of the borrower. The senior
loans in which the Fund invests may be wholly or partially secured by
collateral, or may be unsecured. In the event of a default, the ability of an
investor to have access to any collateral may be limited by bankruptcy and
other insolvency laws. The value of the collateral also may decline subsequent
to the Fund's investment in the senior loan. Under certain circumstances, the
collateral may

                                      20

<PAGE>

be released with the consent of the Agent Bank and Co-lenders (each as defined
below), or pursuant to the terms of the underlying credit agreement with the
borrower. There is no assurance that the liquidation of the collateral will
satisfy the borrower's obligation in the event of nonpayment of scheduled
interest or principal, or that the collateral could be readily liquidated. As a
result, the Fund might not receive payments to which it is entitled and thereby
may experience a decline in the value of the investment, and possibly, its net
asset value.

   In the case of highly leveraged senior loans, a borrower is often required
to pledge collateral that may include (i) working capital assets, such as
accounts receivable and inventory, (ii) tangible fixed assets, such as real
property, buildings and equipment, (iii) intangible assets, such as trademarks,
copyrights and patent rights and/or (iv) security interests in securities of
subsidiaries or affiliates. Collateral also may include guarantees or other
credit support by subsidiaries or affiliates. In some cases the only collateral
for the senior loan is the stock of the borrower and/or its subsidiaries and
affiliates. To the extent a senior loan is secured by stock of the borrower
and/or its subsidiaries and affiliates, such stock may lose all of its value in
the event of a bankruptcy or insolvency of the borrower. In the case of senior
loans to privately held companies, the companies' owners may provide additional
credit support in the form of guarantees and/or pledges of other securities
that they own.

   In the case of project finance loans, the borrower is generally a special
purpose entity that pledges undeveloped land and other non-income producing
assets as collateral and obtains construction completion guaranties from third
parties, such as the project sponsor. Project finance credit facilities
typically provide for payment of interest from escrowed funds during a
scheduled construction period, and for the pledge of current and fixed assets
after the project is constructed and becomes operational. During the
construction period, however, the lenders bear the risk that the project will
not be constructed in a timely manner, or will exhaust project funds prior to
completion. In such an event, the lenders may need to take legal action to
enforce the completion guaranties, or may need to lend more money to the
project on less favorable financing terms, or may need to liquidate the
undeveloped project assets. There can be no assurance in any of such cases that
the lenders will recover all of their invested capital.

   The rate of interest payable on floating or variable rate senior loans is
established as the sum of a base lending rate plus a specified margin. These
base lending rates generally are the prime rate ("Prime Rate") of a designated
U.S. bank, London Interbank Offered Rate ("LIBOR"), the Certificate of Deposit
("CD") rate or another base lending rate used by commercial lenders. The
interest rate on Prime Rate-based senior loans floats daily as the Prime Rate
changes, while the interest rate on LIBOR-based and CD-based senior loans is
reset periodically, typically every 30 days to one year. Certain of the
floating or variable rate senior loans in which the Fund invests permit the
borrower to select an interest rate reset period of up to one year. A portion
of the Fund's portfolio may be invested in senior loans with interest rates
that are fixed for the term of the loan. Investment in senior loans with longer
interest rate reset periods or fixed interest rates may increase fluctuations
in the Fund's net asset value as a result of changes in interest rates.

   The Fund may receive and/or pay certain fees in connection with its lending
activities. These fees are in addition to interest payments received and may
include facility fees, commitment fees, amendment and waiver fees, commissions
and prepayment fees. When the Fund buys a senior loan it may receive a facility
fee, and when it sells a senior loan, it may pay a facility fee. In certain
circumstances, the Fund may receive a prepayment fee on the prepayment of a
senior loan by a borrower. In connection with the acquisition of senior loans
or other debt securities, the Fund also may acquire warrants and other debt and
equity securities of the borrower or issuer or its affiliates. The acquisition
of such debt and equity securities will only be incidental to the Fund's
purchase of an interest in a senior loan or other debt security. The Fund may
also acquire other debt and equity securities of the borrower or issuer in
connection with an amendment, waiver, conversion or exchange of a senior loan
or in connection with a bankruptcy or workout of the borrower or issuer.

   In making an investment in a senior loan, the Investment Adviser will
consider factors deemed by it to be appropriate to the analysis of the borrower
and the senior loan. The Investment Adviser performs its own independent credit
analysis of the borrower in addition to utilizing information prepared and
supplied by the

                                      21

<PAGE>

Agent Bank, Co-lender or Participant (each defined below) from whom the Fund
purchases its participation interest in a senior loan. Such factors include the
legal/protective features associated with the securities (such as their
position in the borrower's capital structure and any security through
collateral) in assessing their credit characteristics, financial ratios of the
borrower such as pre-tax interest coverage, leverage ratios, and the ratios of
cash flows to total debts and the ratio of tangible assets to debt. In its
analysis of these factors, the Investment Adviser also will be influenced by
the nature of the industry in which the borrower is engaged, the nature of the
borrower's assets and the Investment Adviser's assessments of the general
quality of the borrower. The Investment Adviser's analysis continues on an
ongoing basis for any senior loans in which the Fund has invested. Although the
Investment Adviser uses due care in making such analysis, there can be no
assurance that such analysis will disclose factors that may impair the value of
the senior loan.

   Senior loans made in connection with highly leveraged transactions are
subject to greater credit risks than other senior loans in which the Fund may
invest. These credit risks include a greater possibility of default or
bankruptcy of the borrower and the assertion that the pledging of collateral to
secure the loan constituted a fraudulent conveyance or preferential transfer
which can be nullified or subordinated to the rights of other creditors of the
borrower under applicable law.

   The secondary market for trading of senior loans continues to develop and
mature. One of the effects of a more active and liquid secondary market,
however, is that a senior loan may trade at a premium or discount to the
principal amount, or par value, of the loan. There are many factors that
influence the market value of a senior loan, including technical factors
relating to the operation of the loan market, supply and demand conditions,
market perceptions about the credit quality or financial condition of the
borrower or more general concerns about the industry in which the borrower
operates. The Fund participates in this secondary market for senior loans,
purchasing and selling loans that may trade at a premium or discount to the par
value of the loan.

   The Fund does not have a policy with regard to minimum ratings for senior
loans in which it may invest, except that the Fund may not invest more than 10%
of its total assets in securities that are rated Caa1 or lower (if rated by
Moody's) or CCC+ or lower (if rated by S&P or Fitch) by each agency rating such
security or, if unrated, are considered by the Fund's investment adviser to be
of comparable quality or are otherwise considered to be Distressed Securities.
Investments in senior loans are based primarily on the Investment Adviser's
independent credit analyses of a particular borrower. Moreover, the Investment
Adviser does not regard the ratings of other publicly held securities of a
borrower to be relevant to its investment considerations. See "Appendix
A--Ratings of Securities."

   A borrower must comply with various restrictive covenants contained in any
credit agreement between the borrower and the lending syndicate. Such
covenants, in addition to requiring the scheduled payment of interest and
principal, may include restrictions on dividend payments and other
distributions to stockholders, provisions requiring the borrower to maintain
specific financial ratios or relationships, limits on total debt and
restrictions on the borrower's ability to pledge its assets. In addition, the
senior loan agreement may contain a covenant requiring the borrower to prepay
the senior loan with any excess cash flow. Excess cash flow generally includes
net cash flow after scheduled debt service payments and permitted capital
expenditures, among other things, as well as the proceeds from asset
dispositions or sales of securities. A breach of a covenant (after giving
effect to any cure period) which is not waived by the Agent Bank and the
lending syndicate normally is an event of default (i.e., the Agent Bank has the
right to call the outstanding senior loan). Such covenants also may have the
effect of requiring the Fund to increase its investment in a borrower at a time
it might not be desirable to do so (including at a time when the borrower's
financial condition makes it unlikely that such amounts will be repaid).

   It is expected that a majority of the senior loans will have stated
maturities ranging from three to ten years. However, such senior loans usually
require, in addition to scheduled payments of interest and principal, the
prepayment of the senior loan from excess cash flow, as discussed above, and
typically permit the borrower to prepay at its election. The degree to which
borrowers prepay senior loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and

                                      22

<PAGE>

competitive conditions among lenders, among other factors. Accordingly,
prepayments cannot be predicted with accuracy. Upon a prepayment, the Fund may
receive both a prepayment fee from the prepaying borrower and a facility fee on
the purchase of a new senior loan with the proceeds from the prepayment of the
former. Such fees may mitigate any adverse impact on the yield on the Fund's
portfolio which may arise as a result of prepayments and the reinvestment of
such proceeds in senior loans bearing lower interest rates.

Description of Participation Interests

   A senior loan in which the Fund may invest typically is originated,
negotiated and structured by a syndicate of lenders ("Co-Lenders") consisting
of commercial banks, thrift institutions, insurance companies, finance
companies or other financial institutions one or more of which administers the
loan on behalf of the syndicate (the "Agent Bank"). Co-Lenders may sell senior
loans to third parties called "Participants." The Fund invests in a senior loan
either by participating in the primary distribution as a Co-Lender at the time
the loan is originated or by buying an interest in the senior loan in the
secondary market from a Co-Lender or a participant. Co-Lenders and participants
interposed between the Fund and a borrower, together with Agent Banks, are
referred to herein as "Intermediate Participants."

   The Fund may invest in a senior loan at origination as a Co-Lender or by
acquiring in the secondary market participations in, assignments of or
novations of a senior loan (collectively, "participation interests"). In a
novation, the Fund accepts all of the rights of the Intermediate Participants
in a senior loan, including the right to receive payments of principal and
interest and other amounts directly from the borrower and to enforce its rights
as a lender directly against the borrower and assumes all of the obligations of
the Intermediate Participants, including any obligations to make future
advances to the borrower. As a result, therefore, the Fund has the status of a
Co-Lender. As an alternative, the Fund may purchase an assignment of all or a
portion of an Intermediate Participant's interest in a senior loan, in which
case the Fund is required generally to rely on the assigning lender to demand
payment and enforce its rights against the borrower but would otherwise be
entitled to all of such lender's rights in the senior loan. The Fund also may
purchase a participation in a portion of the rights of an Intermediate
Participant in a senior loan by means of a participation agreement with such
Intermediate Participant. A participation in the rights of an Intermediate
Participant is similar to an assignment in that the Intermediate Participant
transfers to the Fund all or a portion of an interest in a senior loan. Unlike
an assignment, however, a participation does not establish any direct
relationship between the Fund and the borrower. In such a case, the Fund is
required to rely on the Intermediate Participant that sold the participation
not only for the enforcement of the Fund's rights against the borrower but also
for the receipt and processing of payments due to the Fund under the senior
loans. The Fund will not act as an Agent Bank, guarantor, sole negotiator or
sole structuror with respect to a senior loan.

   Because it may be necessary to assert through an Intermediate Participant
such rights as may exist against the borrower, in the event the borrower fails
to pay principal and interest when due, the Fund may be subject to delays,
expenses and risks that are greater than those that would be involved if the
Fund could enforce its rights directly against the borrower. Moreover, under
the terms of a participation, the Fund may be regarded as a creditor of the
Intermediate Participant (rather than of the borrower), so that the Fund may
also be subject to the risk that the Intermediate Participant may become
insolvent. Similar risks may arise with respect to the Agent Bank, as described
below. Further, in the event of the bankruptcy or insolvency of the borrower,
the obligation of the borrower to repay the senior loan may be subject to
certain defenses that can be asserted by such borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant.

   In a typical senior loan, the Agent Bank administers the terms of the credit
agreement and is responsible for the collection of principal and interest and
fee payments from the borrower and the apportionment of these payments to the
credit of all lenders which are parties to the credit agreement. The Fund
generally relies on the Agent Bank or an Intermediate Participant to collect
its portion of the payments on the senior loan. Furthermore, the Fund generally
relies on the Agent Bank to use appropriate creditor remedies against the
borrower. Typically, under credit agreements, the Agent Bank is given broad
discretion in enforcing the credit agreement, and is

                                      23

<PAGE>

obligated to use only the same care it would use in the management of its own
property. The borrower compensates the Agent Bank for these services. Such
compensation may include special fees paid on structuring and funding the
senior loan and other fees paid on a continuing basis.

   In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets
held by the Agent Bank under the credit agreement should remain available to
holders of senior loans.

   If, however, assets held by the Agent Bank for the benefit of the Fund were
determined by an appropriate regulatory authority or court to be subject to the
claims of the Agent Bank's general or secured creditors, the Fund might incur
certain costs and delays in realizing payment on a senior loan or suffer a loss
of principal and/or interest. In situations involving Intermediate
Participants, similar risks may arise, as described above.

   The Fund may have certain obligations pursuant to a credit agreement, which
may include the obligation to make future advances to the borrower in
connection with revolving credit facilities in certain circumstances. The Fund
currently intends to reserve against such contingent obligations by segregating
sufficient investments in liquid assets. The Fund will not invest in senior
loans that would require the Fund to make any additional investments in
connection with such future advances if such commitments would cause the Fund
to fail to meet the diversification requirements described under "Investment
Restrictions."

Description of High Yield Securities

   The Fund may invest without limit and generally intends to invest a
substantial portion of its assets in high yield securities, including senior
loans and other floating or fixed rate debt securities, that are rated below
investment grade by the established rating services (Ba or lower by Moody's, BB
or lower by S&P or BB or lower by 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 securities that are rated Caa1 or
lower (if rated by Moody's) or CCC+ or lower (if rated by S&P or Fitch) by each
agency rating such security or, if unrated, are considered by the Investment
Advisor to be of comparable quality or are otherwise considered to be
Distressed Securities. High yield bonds commonly are referred to as "junk"
bonds. See "Appendix A--Ratings of Securities" for information concerning
rating categories.

   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
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 which invest
in investment grade 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.

   Investments in high yield securities generally provide greater income than
investments in investment grade fixed income 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.

                                      24

<PAGE>

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, there can be no
assurance 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 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. Factors adversely affecting the market value of such securities are
likely to affect adversely the Fund's net asset value.

   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. This is
particularly the case in the senior loan market. 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 in
particular the senior loan 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 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, credit linked trust certificates or other
instruments evidencing interests in special purpose vehicles or trusts that
hold interests in high yield securities.

                                      25

<PAGE>

   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.

Description of Distressed Securities

   Distressed securities are high yield/high risk securities, including certain
senior loans purchased in the secondary market, that are the subject of
bankruptcy proceedings or otherwise in default as to the repayment of principal
and/or payment of interest at the time of acquisition by the Fund or are rated
in the lowest rating categories (Ca or lower by Moody's, CC or lower by S&P or
CC or lower by Fitch) or, if unrated, are considered by the Investment Adviser
to be of comparable quality. Investment in Distressed Securities is speculative
and involves significant risk. Distressed Securities frequently do not produce
income while they are outstanding and may require the Fund to bear certain
extraordinary expenses in order to protect and recover its investment. The Fund
also will be subject to significant uncertainty as to when and in what manner
and for what value the obligations evidenced by the Distressed Securities will
eventually be satisfied (e.g., through a liquidation of the obligor's assets,
an exchange offer or plan of reorganization involving the distressed securities
or a payment of some amount in satisfaction of the obligation). In addition,
even if an exchange offer is made or a plan of reorganization is adopted with
respect to Distressed Securities held by the Fund, there can be no assurance
that the securities or other assets received by the Fund in connection with
such exchange offer or plan of reorganization will not have a lower value or
income potential than may have been anticipated when the investment was made.
Moreover, any securities received by the Fund upon completion of an exchange
offer or plan of reorganization may be restricted as to resale. As a result of
the Fund's participation in negotiations with respect to any exchange offer or
plan of reorganization with respect to an issuer of Distressed Securities, the
Fund may be restricted from disposing of such securities.

Other Investments

   The Fund may invest up to 20% of its total assets in securities other than
floating rate debt securities. These securities include, but are not limited
to, fixed rate debt securities such as convertible securities, bonds, notes,
fixed rate loans and mortgage related and other asset backed securities issued
on a public or private basis. The Fund may also invest in a variety of other
securities, including collateralized debt obligations, preferred securities,
commercial paper, U.S. government securities, structured notes, credit linked
notes, credit linked trust certificates and other hybrid instruments.

   To a limited extent, incidental to and in connection with its investment
activities or pursuant to a convertible feature in a security, the Fund may
acquire warrants and other debt and equity securities. The Fund may also
acquire other debt and equity securities of a borrower or issuer in connection
with an amendment, waiver, conversion or exchange of a senior loan or other
debt security or in connection with a bankruptcy or workout of the borrower or
issuer.

Bonds

   The Fund may invest in bonds of varying maturities issued by U.S. and
non-U.S. corporations, banks and other business entities. Bonds can be variable
or fixed rate debt obligations, including bills, notes, debentures, money
market instruments and similar instruments and securities. Bonds generally are
used by corporations as well as governments and other issuers to borrow money
from investors. The issuer pays the investor a variable or fixed rate of
interest and normally must repay the amount borrowed on or before maturity.
Certain bonds are "perpetual" in that they have no maturity date. The Fund may
also invest in catastrophe or other "event linked" bonds.

                                      26

<PAGE>

   Zero-coupon bonds pay interest only at maturity rather than at intervals
during the life of the security. Like zero-coupon bonds, "step up" bonds pay no
interest initially but eventually begin to pay a coupon rate prior to maturity,
which rate may increase at stated intervals during the life of the security.
Payment-in-kind securities ("PIKs") are debt obligations that pay "interest" in
the form of other debt obligations, instead of in cash. Each of these
instruments is normally issued and traded at a deep discount from face value.
Zero-coupon bonds, step-ups and PIKs allow an issuer to avoid or delay the need
to generate cash to meet current interest payments and, as a result, may
involve greater credit risk than bonds that pay interest currently or in cash.
The Fund would be required to distribute the income on these instruments as it
accrues, even though the Fund will not receive the income on a current basis or
in cash. Thus, the Fund may have to sell other investments, including when it
may not be advisable to do so, to make income distributions to its stockholders.

Preferred Securities

   The Fund may invest in preferred securities, including preferred securities
that may be converted into common stock or other securities of the same or a
different issuer, and non-convertible preferred securities. 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 value are heavily dependent on the
profitability of the issuer rather than on any legal claims to specific assets
or cash flows. Certain preferred securities in which the Fund may invest have a
variable dividend, generally determined on a quarterly or other periodic basis,
either according to a formula based upon a specified premium or discount to the
yield on particular U.S. Treasury securities or based on an auction process,
involving bids submitted by holders and prospective purchasers of such
securities. Some preferred securities in which the Fund may invest offer a
fixed rate of return with no maturity date. Because they never mature, these
preferred securities act like long term bonds and can be more volatile than
other types of preferred securities and may have heightened sensitivity to
changes in interest rates. Because preferred securities represent an equity
ownership interest in a company, their value usually will react more strongly
than bonds and other debt securities to actual or perceived changes in a
company's financial condition or prospects, or to fluctuations in the equity
markets. The types of preferred securities in which the Fund may invest
includes trust preferred securities.

Convertible Debt Securities

   The Fund may invest in convertible debt securities. A convertible debt
security is a bond, debenture or note 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 debt security entitles the holder to receive interest
generally paid or accrued on debt 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 might 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.

Commercial and Other Mortgage Related and Asset Backed Securities

   Mortgage backed securities are "pass through" securities, meaning that
principal and interest payments made by the borrower on the underlying
mortgages are passed through to the Fund. The value of mortgage

                                      27

<PAGE>

backed securities, like that of traditional fixed income securities, typically
increases when interest rates fall and decreases when interest rates rise.
However, mortgage backed securities differ from traditional fixed income
securities because of their potential for prepayment without penalty. The price
paid by the Fund for its mortgage backed securities, the yield the Fund expects
to receive from such securities and the average life of the securities are
based on a number of factors, including the anticipated rate of prepayment of
the underlying mortgages. In a period of declining interest rates, borrowers
may prepay the underlying mortgages more quickly than anticipated, thereby
reducing the yield to maturity and the average life of the mortgage backed
securities. Moreover, when the Fund reinvests the proceeds of a prepayment in
these circumstances, it will likely receive a rate of interest that is lower
than the rate on the security that was prepaid.

   To the extent that the Fund purchases mortgage backed securities at a
premium, mortgage foreclosures and principal prepayments may result in a loss
to the extent of the premium paid. If the Fund buys such securities at a
discount, both scheduled payments of principal and unscheduled prepayments will
increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income. In a period of rising interest rates, prepayments of the underlying
mortgages may occur at a slower than expected rate, creating maturity extension
risk. This particular risk may effectively change a security that was
considered short or intermediate term at the time of purchase into a long term
security. Since long term securities generally fluctuate more widely in
response to changes in interest rates than short term securities, maturity
extension risk could increase the inherent volatility of the Fund.

   The mortgage backed securities in which the Fund may invest may be
guaranteed by the Government National Mortgage Association ("GNMA") or issued
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"). Certain of the asset backed securities in which
the Fund will invest may be guaranteed by the Small Business Administration
("SBA") or issued in programs originated by the Resolution Trust Corporation
("RTC"). GNMA, FNMA, FHLMC and SBA are agencies or instrumentalities of the
United States.

   The Fund may invest in pass through mortgage backed securities that
represent ownership interests in a pool of mortgages on single-family or
multi-family residences. Such securities represent interests in pools of
residential mortgage loans originated by U.S. governmental or private lenders
and guaranteed, to the extent provided in such securities, by the U.S.
Government, one of its agencies or instrumentalities or by private guarantors.
Such securities, which are ownership interests in the underlying mortgage
loans, differ from conventional debt securities, which provide for periodic
payment of interest in fixed amounts (usually semiannually) and principal
payments at maturity or on specified call dates. Mortgage pass through
securities provide for monthly payments that "pass through" the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees paid to the
guarantor of such securities and the servicer of the underlying mortgage loans.
The Fund may also invest in collateralized mortgage obligations ("CMOs") which
are debt obligations collateralized by mortgage loans or mortgage pass through
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. The value of
asset backed securities, like that of traditional fixed income securities,
typically increases when interest rates fall and decreases when interest rates
rise. However, asset backed securities differ from traditional fixed income
securities because of their potential for prepayment. The price paid by the
Fund for its asset backed securities, the yield the Fund expects to receive
from such securities and the average life of the securities are based on a
number of factors, including the anticipated rate of prepayment of the
underlying assets. In a period of declining interest rates, borrowers may
prepay the underlying assets more quickly than anticipated, thereby reducing
the yield to maturity and the average life of the asset backed securities.
Moreover, when the Fund reinvests the proceeds of a prepayment in these
circumstances, it will likely receive a rate of interest that is lower than the
rate on the security that was prepaid. To the extent that the Fund purchases
asset backed securities at a premium, prepayments may result in a loss to the
extent of the premium paid. If the Fund buys such securities at a discount,

                                      28

<PAGE>

both scheduled payments and unscheduled prepayments will increase current and
total returns and will accelerate the recognition of income which, when
distributed to shareholders, will be taxable as ordinary income. In a period of
rising interest rates, prepayments of the underlying assets may occur at a
slower than expected rate, creating maturity extension risk. This particular
risk may effectively change a security that was considered short or
intermediate term at the time of purchase into a long term security. Since long
term securities generally fluctuate more widely in response to changes in
interest rates than shorter term securities, maturity extension risk could
increase the inherent volatility of the Fund.

   New types of mortgage backed and asset backed securities, derivative
securities and hedging instruments are developed and marketed from time to
time. Consistent with its investment objective, policies and restrictions, the
Fund may invest in such new types of securities that the Investment Adviser
believes may assist the Fund in achieving its investment objective.

Illiquid Securities

   The Fund may invest in floating rate debt securities, senior loans, high
yield securities and other 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. Although senior loans are transferred among
certain financial institutions, the senior loans in which the Fund invests may
not have the liquidity of conventional debt securities traded in the secondary
market and may be considered illiquid. Although the market for senior loans has
developed significantly during recent years, certain of the senior loans in
which the Fund invests may still not have the liquidity of conventional debt
securities traded in the secondary market. 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 high yield 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.

                           OTHER INVESTMENT POLICIES

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

Leverage

   At times, the Fund expects to utilize leverage through borrowings, the
issuance of short term debt securities, the issuance of shares of preferred
stock or a combination thereof. 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
issuance). Under current market conditions, the Fund intends to utilize
borrowings in an initial amount up to approximately [  ]% of the value of its
total assets (including the amount obtained from leverage) after the Fund has
fully invested the net proceeds of the offering. There can be no assurance,
however, that the Fund will borrow in order to leverage its assets or if it
does what percentage of the Fund's assets such borrowings will represent.
Following the investment of the net proceeds of the offering, the Fund may,
depending on market conditions and the relative costs and benefits associated
with other types of leverage, choose to leverage through the issuance of
preferred stock rather than through borrowings or the Fund may choose to
leverage through a combination of both. The Fund generally will not utilize
leverage if it

                                      29

<PAGE>

anticipates that the Fund's leveraged capital structure would result in a lower
return to common stockholders than that obtainable if the common stock were
unleveraged for any significant amount of time. The Fund also may borrow money
as a temporary measure for extraordinary or emergency purposes, including the
payment of dividends and the settlement of securities transactions which
otherwise might require untimely dispositions of 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 from borrowings for leverage and
the issuance of preferred stock. When the Fund is utilizing leverage, the fees
paid to the Investment Adviser for investment advisory and management services
will be higher than if the Fund did not utilize leverage because the fees paid
will be calculated based on the Fund's net assets plus the proceeds of any
outstanding borrowings used for leverage and the issuance of any preferred
stock.

   The Fund's use of leverage is premised upon the expectation that the cost of
the leverage used to purchase additional assets will be lower than the return
the Fund achieves on its investments with the proceeds of the borrowings or the
issuance of preferred stock. Such difference in return may result from the
short term nature of the Fund's borrowing compared to the longer term nature of
its investments. Because the total assets of the Fund (including the assets
obtained from leverage) will generally be invested in the higher yielding
portfolio investments, the holders of common stock will be the beneficiaries of
the incremental return. Should the differential between the underlying assets
and cost of leverage narrow, the incremental return "pick up" will be reduced.
Furthermore, if long term rates rise, the common stock net asset value will
reflect the decline in the value of portfolio holdings resulting therefrom.

   Leverage creates certain risks for holders of common stock, including the
likelihood of greater volatility of net asset value and market price of shares
of common stock or fluctuations in dividends paid on common stock, the risk
that fluctuations in interest rates on borrowings and short term debt or in the
dividend rates on any preferred stock may affect the return to the holders of
common stock and increased operating costs which may reduce the Fund's total
return. To the extent the income or capital appreciation derived from
securities purchased with funds received from leverage exceeds the cost of
leverage, the Fund's return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased
with such funds is not sufficient to cover the cost of leverage, the return of
the Fund will be less than if leverage had not been used, and therefore the
amount available for distribution to stockholders as dividends and other
distributions will be reduced. In the latter case, the Investment Adviser in
its best judgment nevertheless may determine to maintain the Fund's leveraged
position if it expects that the benefits to the Fund's stockholders of
maintaining the leveraged position will outweigh the current reduced return.
Capital raised through leverage will be subject to interest costs or dividend
payments that may or may not exceed the income and appreciation on the assets
purchased. The Fund also may be required to maintain minimum average balances
in connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of
borrowing over the stated interest rate. The issuance of additional classes of
preferred stock involves offering expenses and other costs and may limit the
Fund's freedom to pay dividends on shares of common stock or to engage in other
activities. Borrowings and the issuance of a class of preferred stock create an
opportunity for greater return per share of common stock, but at the same time
such borrowing is a speculative technique in that it will increase the Fund's
exposure to capital risk. Unless the income and appreciation, if any, on assets
acquired with borrowed funds or preferred stock offering proceeds exceed the
cost of borrowing or issuing additional classes of preferred securities, the
use of leverage will diminish the investment performance of the Fund compared
with what it would have been without leverage.

   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
Investment Adviser does not anticipate that these covenants or restrictions
will adversely affect its ability to manage the Fund's portfolio in accordance
with the Fund's investment objective and policies. However, due to these
covenants or restrictions, the Fund may be forced to liquidate investments at
times and at

                                      30

<PAGE>

prices that are not favorable to the Fund, or the Fund may be forced to forgo
investments that the Investment Adviser otherwise views as favorable. The Fund
may be subject to certain restrictions on investments imposed by guidelines of
one or more nationally recognized rating organizations which may issue ratings
for the short term debt securities 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 there is no assurance that a
leveraging strategy will be successful during any period in which it is
employed.

   As discussed under "Investment Advisory and Management Arrangements" herein,
during periods when the Fund has outstanding borrowings for leverage or
preferred stock outstanding, the fees paid to the Investment Adviser for
investment advisory and management services will be higher than if the Fund did
not borrow or issue preferred stock because the fees paid will be calculated on
the basis of the Fund's average daily net assets (including proceeds from the
sale of preferred stock) plus 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.

   Assuming the utilization of leverage by borrowings in the amount of
approximately [  ]% of the Fund's total assets, and an annual interest rate of
[  ]% payable on such leverage based on market rates as of the date of this
prospectus, the annual return that the Fund's portfolio must experience (net of
expenses) in order to cover such interest payments would be [  ]%.

                                      31

<PAGE>

   The following table is designed to illustrate the effect on the return to a
holder of common stock of the leverage obtained by borrowings in the amount of
approximately [  ]% of the Fund's total assets, 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 greater than the cost of leverage and decreases the return when
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.

<TABLE>
     <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 borrows or issues shares of preferred stock, the Fund's
common stock will not be leveraged, and the risks and special considerations
related to leverage described in this 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.

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. 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 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 from a reduction in yield due
to falling interest rates and may

                                      32

<PAGE>

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's custodian.
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's custodian.

   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 nationally recognized
statistical rating organization 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. 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. 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 as ordinary income to stockholders. 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 three 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

                                      33

<PAGE>

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 three 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 nationally recognized statistical rating organization 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). The Fund will at
all times segregate with its custodian in connection with each such transaction
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 avoid any potential leveraging of the Fund's portfolio. Such segregation
will not limit the Fund's exposure to loss.

Credit Linked Trust Certificates

   Among the income producing securities in which the Fund may invest are
credit linked trust certificates, which are investments in a limited purpose
trust or other vehicle formed under State law 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 the high yield or
another fixed income market. For instance, the Fund may invest in credit linked
trust certificates as a cash management tool in order to gain exposure to the
high yield markets and/or to remain fully invested when more traditional income
producing securities are not available, including during the period when the
net proceeds of this offering and any offering of preferred stock are being
invested.

   Like an investment in a bond, investments in these credit 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, leverage risk and
management risk. It is also expected that the certificates will be exempt from
registration under the Securities Act of 1933. 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 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

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<PAGE>

the exercise price at any time during the option period. The 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 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 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. 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, the Fund will segregate with its
custodian in connection with each such transaction 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 the
underlying security at the exercise price, thus limiting the Fund's risk of
loss through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
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.

   The Fund also has authority to write (i.e., sell) put options on the types
of securities 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

                                      35

<PAGE>

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 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 a security at a net
cost below the current market value. The Fund has the obligation to buy the
securities at an agreed upon price if the securities decrease below the
exercise price. If the securities 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 at the exercise price. The Fund will segregate
with its custodian in connection with such transaction 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 income. A futures contract is an
agreement between two parties which 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 which
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 which 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 which 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 a decline in interest rates 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.

   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 which the Fund intends to purchase.

                                      36

<PAGE>

   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.

   Restrictions on the Use of Futures Transactions.  Under regulations of the
CFTC, the futures trading activity described herein will not result in the Fund
being deemed a "commodity pool," as defined under such regulations, provided
that the Fund adheres to certain restrictions. In particular, the Fund may
purchase and sell futures contracts and options thereon (i) for bona fide
hedging purposes and (ii) for non-hedging purposes, if the aggregate initial
margin and premiums required to establish positions in such contracts and
options do not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any such
contracts and options. Margin deposits may consist of cash or securities
acceptable to the broker and the relevant contract market.

   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 with the Fund's custodian 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.

   Restrictions on OTC Options.  The Fund will engage in transactions in OTC
options only with banks or dealers which 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 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
which 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

                                      37

<PAGE>

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, there can be no
assurance 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.

   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 which 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.

                                      38

<PAGE>

   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 may also 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 may also 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 leverage risk.

   Currency Options.  The Fund may also 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 may also 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 which it owns (including receivables
for unsettled securities sales), or has committed to or anticipates purchasing,
which 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 cross-hedge if the Manager 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 substantially greater liquidity
than executing a similar hedging transaction by means of the currency being
hedged.

Investments in Foreign Securities

   The Fund may invest without limitation in debt securities of issuers
domiciled outside the United States. The Fund will not, however, invest more
than 10% of its total assets in debt securities of issuers located in emerging
market countries. The Fund will invest primarily in U.S. dollar denominated
debt securities. The Fund will not invest more than 10% of its total assets in
debt 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.

                                      39

<PAGE>

issuer, and such foreign issuers may not be subject to accounting, auditing and
financial 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.

   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

                                      40

<PAGE>

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.

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 "Risk Factors and Special Considerations--Leverage"
and "--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 with the custodian
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 would bear the risk of loss
to the

                                      41

<PAGE>

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."

   When-Issued and Forward Commitment Securities.  The Fund may purchase
interests in senior loans and other portfolio securities on a "when-issued"
basis and may purchase or sell such interests or 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 such interests or 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 such interests or 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
with the custodian 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 Fund. There
is always a risk that such interests or 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 with the custodian cash or other
liquid instruments with a value equal to the purchase price of the securities
underlying the commitment.

   There can be no assurance 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

                                      42

<PAGE>

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.

Suitability

   The economic benefit of an investment in the Fund depends upon many factors
beyond the control of the Fund, the Investment Adviser and its affiliates.
Because of its emphasis on below investment grade debt securities including
senior loans, the Fund should be considered speculative and not as a balanced
investment program. The suitability for any particular investor of a purchase
of shares in the Fund will depend upon, among other things, such investor's
investment objectives and such investor's ability to accept the risks
associated with investing in high yield debt securities, including the risk of
loss of principal.

                            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 senior loans, as a
   Co-Lender or otherwise, or other debt securities or enters

                                      43

<PAGE>

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

   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).

      d. Change its policy of investing, under normal circumstances, at least
   80% of the value of its net assets (including proceeds from the sale of
   preferred stock), plus the amount of any borrowings for investment purposes,
   in floating rate debt securities      , unless the Fund provides its
   stockholders with at least 60 days' prior written notice.

   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 and Oversight
Committee (the "Committee"). The principal responsibilities of the Committee
are the appointment, compensation and oversight of the Fund's independent
auditors, including resolution of disagreements regarding financial reporting
between Fund

                                      44

<PAGE>

management and such auditors. The Board of the Fund has adopted a written
charter for the Committee. The Committee also reviews and nominates candidates
to serve as non-interested Directors. The Committee has retained independent
legal counsel to assist them in connection with these duties. The Committee has
not held any meetings since the Fund was incorporated on August 14, 2003.

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.

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

                                      45

<PAGE>

   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 FAM/
                                                                                                MLIM-Advised
                         Position(s)     Term of Office                                          Funds and
    Name, Address+      Held with the    and Length of      Principal Occupation(s) During       Portfolios        Public
       and Age              Fund          Time Served              Past Five Years                Overseen      Directorships
    --------------     --------------- ------------------ ---------------------------------- ------------------ -------------
<S>                    <C>             <C>                <C>                                <C>                <C>
Terry K. Glenn* (62).. President** and President and      Chairman of the FAM/MLIM-          [  ] registered        None
                       Director***     Director of the    advised funds; Chairman            investment
                                       Fund since 2003    (Americas Region) of the           companies
                                                          Investment Adviser from 2000 to    consisting of [  ]
                                                          2002; Executive Vice President of  portfolios
                                                          the Investment Adviser 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 President  Vice President and First Vice President of the        [  ] registered        None
                       and Treasurer   Treasurer of the   Investment Adviser and MLIM        investment
                                       Fund since 2003**  since 1997 and Treasurer thereof   companies
                                                          since 1999; Senior Vice President  consisting of [  ]
                                                          and Treasurer of Princeton         portfolios
                                                          Services since 1999; Vice
                                                          President of FAMD since 1999;
                                                          Vice President of the Investment
                                                          Adviser and MLIM from 1990 to
                                                          1997; Director of Taxation of
                                                          MLIM since 1990.

Kevin Booth (48)...... Vice President  Vice President     Director of MLIM since 1998;       [  ] registered        None
                       and Co-         since 2003**       Vice President of MLIM from        investment
                       Portfolio                          1991 to 1998.                      companies
                       Manager                                                               consisting of
                                                                                             [  ] portfolios

Joseph P. Matteo (39). Vice President  Vice President     Director of MLIM since 2001;       [  ] registered        None
                       and Co-         since 2003**       Vice President of MLIM 1997 to     investment
                       Portfolio                          2000; Vice President of The Bank   companies
                       Manager                            of New York from 1994 to 1997.     consisting of
                                                                                             [  ] portfolios

Bradley J. Lucido (37) Secretary       Secretary of the   Director of the Investment Adviser [  ] registered        None
                                       Fund since 2003**  since 2002; Vice President of the  investment
                                                          Investment Adviser from 1999 to    companies
                                                          2002; attorney with the Investment consisting of [  ]
                                                          Adviser since 1995; attorney in    portfolios
                                                          private practice from 1991 to
                                                          1995.
</TABLE>

                                      46

<PAGE>

--------
+  The address of Mr. Glenn and each officer listed is P.O. Box 9011,
   Princeton, New Jersey 08543-9011.
*  Mr. Glenn is a director, trustee or member of an advisory board of certain
   other FAM/MLIM-advised funds. 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 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,
2002 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:
     Terry K. Glenn..........         [To Be Provided By Amendment]
     Non-interested Director:
                                      [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."

   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 nor any of
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 and on the 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.

                                      47

<PAGE>

   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, 2002.

<TABLE>
<CAPTION>
                                      Pension               Aggregate
                                     Retirement            Compensation
                                      Benefits  Estimated   from Fund
                         Estimated   Accrued as   Annual    and other
                         Aggregate    Part of    Benefits   FAM/MLIM-
              Position  Compensation    Fund       upon      Advised
         Name with Fund  from Fund    Expense   Retirement    Funds
         ---- --------- ------------ ---------- ---------- ------------
         <S>  <C>       <C>          <C>        <C>        <C>
                            [To Be Provided By Amendment]
</TABLE>


                                      48

<PAGE>

                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            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 fixed income 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. The principal business address of the Investment Adviser is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.

   The Investment Advisory Agreement provides that, subject to the direction 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.

   The Fund's portfolio managers will consider analyses from various sources,
make the necessary investment decisions, and place orders for transactions
accordingly. The Investment Adviser will also be responsible for the
performance of certain management services for the Fund. The Fund will be
managed by a team of investment professionals from the Investment Adviser. The
co-portfolio managers primarily responsible for the Fund's day-to-day
management are Kevin Booth and Joseph P. Matteo, who together have more than
[      ] years of investment experience, including [      ]. The portfolio
managers will be supported by a team of [      ] high yield analysts and
             investment grade research analysts, who will independently
evaluate, rate, and monitor the portfolio securities and senior loans held by
the Fund.

<TABLE>
<S>                                    <C>
Kevin Booth is a Director of MLIM.     [MLIM to provide additional information]
Joseph P. Matteo is a Director of MLIM [MLIM to provide additional information]
</TABLE>

   For its services, the Fund pays the Investment Adviser a monthly fee at the
annual rate of [      ]% of the Fund's average daily net assets, plus 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.

                                      49

<PAGE>

   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 reviewed information 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 Completed 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 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 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.

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   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 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

                                      51

<PAGE>

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 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:

    .  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.

    .  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.

    .  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.

    .  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.

    .  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.

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

    .  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.

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<PAGE>

    .  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.

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<PAGE>

                            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.

   The Fund purchases senior loans in individually negotiated transactions with
commercial banks, thrifts, insurance companies, finance companies and other
financial institutions. In selecting such financial institutions, the
Investment Adviser may consider, among other factors, the financial strength,
professional ability, level of service and research capability of the
institution. See "Investment Objective and Policies--Description of
Participation Interests". While such financial institutions generally are not
required to repurchase participation interests in corporate loans which they
have sold, they may act as principal or on an agency basis in connection with
the Fund's disposition of corporate loans.

   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 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

                                      54

<PAGE>

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 for a fee, including a fee based on a
share of the returns on investment of cash collateral. That entity may, on
behalf of the Fund, invest cash collateral received by the Fund for such loans,
among other things, in a private investment company managed by that entity or
in registered money market funds advised by the Investment Adviser or its
affiliates.

   Securities, including senior loans, 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 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.

   Investments in high yield securities, including high yield bonds, senior
loans or other privately placed securities, may result in the Fund receiving
material nonpublic information ("inside information") concerning the borrower
or issuer. Accordingly, the Fund has established certain procedures reasonably
designed to prevent the unauthorized access, dissemination or use of such
inside information. Receipt of inside information concerning a borrower or
issuer may, under certain circumstances, prohibit the Fund, or other funds or
accounts managed by the same portfolio managers, from trading in the public
securities of the borrower or issuer. Conversely, the portfolio managers for
the Fund may, under certain circumstances, decline to receive inside
information made available by the borrower or issuer in order to allow the
Fund, or other funds or accounts managed by the same portfolio managers, to
continue to trade in the public securities of such borrower or issuer.

   The Fund may from time to time participate on committees formed by creditors
to negotiate with the management of financially troubled issuers of securities
held by the Fund. Such participation may subject the Fund to expenses such as
legal fees and may make the Fund an "insider" of the issuer for purposes of the
federal securities laws, and therefore may restrict the Fund's ability to trade
in or acquire additional positions in a particular security when it might
otherwise desire to do so. Participation by the Fund on such committees also
may expose the Fund to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Fund would
participate on such committees only when the Investment Adviser believes that
such participation is necessary or desirable to enforce the Fund's rights as a
creditor or to protect the value of securities held by the Fund.

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. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances,

                                      55

<PAGE>

should be less than 100%. (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.

                                      56

<PAGE>

                          DIVIDENDS AND DISTRIBUTIONS

   The Fund intends to distribute dividends from its net investment income
monthly to holders of common stock. It is expected that the Fund will commence
paying dividends to holders of common stock within approximately 90 days of the
date of this prospectus. From and after issuance of the preferred stock,
monthly dividends to holders of common stock normally will consist of net
investment income remaining after the payment of dividends on the preferred
stock. The Fund currently intends either to pay out less than the entire amount
of net investment income earned in any particular period or pay out such
accumulated undistributed income in addition to net investment income earned in
other periods in order to permit the Fund to maintain a more stable level of
dividend distributions. As a result, the dividend paid by the Fund to holders
of common stock for any particular period may be more or less than the amount
of net investment income earned by the Fund during such period. The Fund is not
required to attempt to maintain a more stable level of distributions to
stockholders and may choose not to do so. For Federal tax purposes, the Fund is
required to distribute substantially all of its net investment income for each
calendar year. All net realized capital gains, if any, will be distributed pro
rata at least annually to holders of common stock and any preferred stock.

   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.

   While any shares of 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
may be taxable to stockholders whether they are reinvested in shares of the
Fund or received in cash.

   The yield on the Fund's common stock will vary from period to period
depending on factors including, but not limited to, the length of the initial
investment period, market conditions, the timing of the Fund's investment in
portfolio securities, the securities comprising the Fund's portfolio, the
ability of the issuers of the portfolio securities to pay dividends or interest
on such securities, changes in interest rates including changes in the
relationship between short term rates and long term rates, the amount and
timing of borrowings and the issuance of the Fund's preferred stock or debt
securities, the effects of leverage on the common stock discussed above under
"Risk Factors and Special Considerations--Leverage," the timing of the
investment of leverage proceeds in portfolio securities, the Fund's net assets
and its operating expenses. Consequently, the Fund cannot guarantee any
particular yield on its shares and the yield for any given period is not an
indication or representation of future yields on Fund shares.

                                     TAXES

General

   The Fund intends to elect and to qualify for the special tax treatment
afforded regulated investment companies ("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

                                      57

<PAGE>

it distributes its net investment income and net realized capital gains. The
Fund intends to distribute substantially all of 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, there can be no assurance 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.

   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, if any, from the excess of net long term
capital gains over net short term capital losses derived from the sale of
securities or from certain transactions in interest rate swaps ("capital gain
dividends") are taxable as long term capital gains, regardless of the length of
time the stockholder has owned Fund shares. 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.
Any loss upon the sale or exchange of Fund shares held for six months or less
is treated as long term capital loss to the extent of any capital gain
dividends received by the stockholder. Distributions in excess of the Fund's
earnings and profits first reduce the adjusted tax basis of a holder's common
stock and, after such adjusted tax basis is reduced to zero, constitute capital
gains to such holder (assuming such common stock is held as a capital asset).

   Dividends are taxable to stockholders even though they are reinvested in
additional shares of the Fund. Distributions by the Fund, whether from ordinary
income or capital gains, generally are not eligible for the dividends received
deduction allowed to corporations under the Code. If the Fund pays a dividend
in January which 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 is treated for tax purposes as being paid and received on December 31
of the year in which the dividend was declared.

   The Internal Revenue Service (the "IRS") has taken the position in a revenue
ruling that if a RIC has two or more classes of shares, it may designate
distributions made to each class in any year as consisting of no more than such
class's proportionate share of particular types of income, including the
different categories of capital gains, discussed above. A class' proportionate
share of a particular type of income is determined according to the percentage
of total dividends paid by the RIC during the 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, as discussed above, will be
allocated among the holders of common stock and any series of preferred stock
in proportion to the total dividends paid to each class during the taxable
year, or otherwise as required by applicable law.

   Recently enacted legislation reduces the tax rate for individuals on certain
dividend income and net capital gain. Distribution allocable to such dividend
income and net capital gain received by individual stockholders of the Fund may
be subject to the reduced tax rate. However, to the extent the Fund's
distributions are derived from interest income on debt securities or certain
types of preferred securities which are treated as debt for federal income tax
purposes and from 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 "Risk Factors and Special Considerations--

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<PAGE>

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. There can be no assurance,
however, 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 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 that the shares are disposed of.
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 tax.

   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.

   Interest income from non-U.S. securities may be subject to withholding and
other taxes imposed by the country in which the issuer is located. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.

   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.

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<PAGE>

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 securities rated in the lower rating categories
of nationally recognized rating organizations and in unrated securities,
including high yield bonds (commonly referred to as "junk" bonds). 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.

   The Fund may invest up to 10% of its total assets in securities of other
investment companies. If the Fund purchases shares of an investment company (or
another entity having significant passive income or assets) organized under
foreign law, the Fund may be treated as owning shares in a passive foreign
investment company ("PFIC") for U.S. Federal income tax purposes. The Fund may
be subject to U.S. Federal income tax, and an additional tax in the nature of
interest (the "interest charge"), on a portion of the distributions from such a
company and on gain from the disposition of the shares of such a company
(collectively referred to as "excess distributions"), even if such excess
distributions are paid by the Fund as a dividend to its stockholders. The Fund
may be eligible to make an election with respect to certain PFICs in which it
owns shares that will allow it to avoid the taxes on excess distributions.
However, such election may cause the Fund to recognize income in a particular
year in excess of the distributions received from such PFICs. Alternatively,
the Fund could elect to "mark to market" at the end of each taxable year all
shares that it holds in PFICs. If it made this election, the Fund would
recognize as ordinary income any increase in the value of such shares over
their adjusted basis and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases. By making the mark-to-market
election, the Fund could avoid imposition of the interest charge with respect
to excess distributions from PFICs, but in any particular year might be
required to recognize income in excess of the distributions it received from
PFICs.

   The Federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received
under such arrangements as ordinary income and to amortize such payments under
certain circumstances. The Fund does not anticipate that its activity in this
regard will affect its qualification as a RIC.

   Certain of the Fund's transactions will be subject to special provisions of
the Code that, among other things, may affect the character (ordinary versus
capital) of gains and losses by the Fund, may accelerate recognition of income
to the Fund and may defer Fund losses. These rules could, therefore, affect the
character, amount and timing of distributions to stockholders.

                                      60

<PAGE>

   The Fund may write (i.e., sell) call and put options on securities, purchase
call and put options on securities and engage in transactions in financial
futures and related options on such futures. In general, unless an election is
available to the Fund or an exception applies, such options and futures
contracts that are "Section 1256 contracts" will be "marked to market" for
Federal income tax purposes at the end of each taxable year (i.e., each such
option or futures contract will be treated as sold for its fair market value on
the last day of the taxable year) and gain or loss from Section 1256 contracts
will be 60% long term and 40% short term capital gain or loss. Application of
these rules to Section 1256 contracts held by the Fund may alter the timing and
character of distributions to stockholders. The mark-to-market rules outlined
above, however, will not apply to certain transactions entered into by the Fund
solely to reduce the risk of changes in price or interest or currency exchange
rate with respect to its investments.

   Code Section 1092, which applies to certain "straddles," may affect the
taxation of the Fund's sales of securities and transactions in swaps, options
and futures. Under Section 1092, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain sales of securities
and certain closing transactions in swaps, options and futures.

   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 which 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.

                     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 EquiServe Trust
Company, N.A. ("EquiServe"), 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 EquiServe, 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 EquiServe, as dividend paying agent, at the address set
forth below. Participation

                                      61

<PAGE>

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.

   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 which 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.

                                      62

<PAGE>

   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 the Plan Agent
at P.O. Box 43011, Providence, RI 02940-3011.

                         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 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.

                                      63

<PAGE>

   The Fund's senior loans will be valued in accordance with guidelines
established by the Board of Directors. Under the Fund's current guidelines, the
Fund will utilize the valuations of senior loans furnished by an independent
third-party pricing service approved by the Board of Directors. The pricing
service typically values senior loans for which the pricing service can obtain
at least two price quotations from banks or dealers in senior loans by
calculating the mean of the last available bid and asked prices in the market
for such senior loans, and then using the mean of those two means. For those
senior loans for which the pricing service can obtain only one price quote, the
pricing service will value the senior loan at the mean between the bid and
asked price for such senior loan. For the limited number of senior loans for
which no reliable price quotes are available, such senior loans may be valued
by the pricing service through the use of pricing matrices to determine
valuations. If the pricing service does not provide a value for a senior loan,
the Investment Adviser will value the senior loan at fair value, which is
intended to be market value. In valuing a senior loan at fair value, the
Investment Adviser will consider, among other factors (i) the creditworthiness
of the borrower and any Intermediate Participants, (ii) the current interest
rate period until the next interest rate resets and maturity of the senior
loan, (iii) recent prices in the market for similar senior loans, if any, and
(iv) recent prices in the market for instruments of similar quality, rate
period until the next interest rate reset and maturity.

   Generally, other portfolio securities that trade in the over-the-counter
market may be valued on the basis of prices furnished by one or more pricing
services approved by the Board of Directors which determine prices for normal,
institutional-size trading units of such securities using market information,
transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders. Other
securities traded in the over-the-counter 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. Certain portfolio securities are
valued at the last sale price on the national securities exchange that is the
primary market for such securities or the official close price on the Nasdaq
National Market as of the close of business on the day such securities are
being valued. Listed securities in which there were no sales during the day are
valued at the last available bid price for long positions and the last
available ask price for short positions.

   The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. Positions in options are valued at the last sale price on the market
where any such option is principally traded. Positions in futures contracts are
valued at closing prices for such contracts established by the exchange on
which they are traded. Obligations with remaining maturities of 60 days or less
are valued at amortized cost unless this method no longer produces fair
valuations. Repurchase agreements are valued at cost plus accrued interest.
Rights or warrants to acquire stock, or stock acquired pursuant to the exercise
of a right or warrant, may be valued taking into account various factors such
as original cost to the Fund, earnings and net worth of the issuer, market
prices for securities of similar issuers, assessment of the issuer's future
prosperity, liquidation value or third party transactions involving the
issuer's securities. Securities for which there exist no price quotations or
valuations and all other assets are valued at fair value as determined in good
faith by or on behalf of the Board of Directors of the Fund.

                         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 "Risk Factors and Special
Considerations--Leverage."

                                      64

<PAGE>

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 "Risk
Factors and Special Considerations--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.

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:

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

    .  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

    .  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

                                      65

<PAGE>

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.

   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
                                                    .

                                      66

<PAGE>

                                 UNDERWRITING

   The Fund intends to offer the shares through the underwriters. Merrill
Lynch, Pierce, Fenner & Smith Incorporated 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.

<TABLE>
<CAPTION>
                                                       Number
                Underwriters                          of Shares
                ------------                          ---------
                <S>                                   <C>
                Merrill Lynch, Pierce, Fenner & Smith
                         Incorporated................
                   Total.............................
                                                        ====
</TABLE>

   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.

   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 [      ], 2003.

   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   Without  With
                                                 Share  Option  Option
                                                 ------ ------- ------
          <S>                                    <C>    <C>     <C>
          Public offering price................. $15.00    $      $
          Underwriting discount.................   $       $      $
          Proceeds, before expenses, to the Fund   $       $      $
</TABLE>

   The Fund's organizational expenses and 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 Investment Adviser has agreed to pay the amount by which the
organizational and 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.

                                      67

<PAGE>

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 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.

[      ] 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 "[      ] ."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) also has agreed to pay a fee to
Merrill Lynch quarterly at the annual rate of [  ]% of the Fund's average daily
net assets (including assets attributable to any preferred stock that may be
outstanding), plus the proceeds of any outstanding borrowings used for
leverage, during the continuance of the Investment Advisory Agreement. The
maximum amount of this fee, plus the amount of the $[      ] per common share
partial reimbursement of expenses paid by the Fund to the underwriters, will
not exceed [  ]% of the aggregate initial offering price of the common stock
offered hereby. Merrill Lynch has agreed to provide certain after-market
services to the Investment Adviser designed to maintain the visibility of the
Fund on an ongoing basis and to provide relevant information, studies or
reports regarding the Fund and the closed-end investment company industry.

   The Fund anticipates that Merrill Lynch 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

                                      68

<PAGE>

Fund anticipates that underwriters other than Merrill Lynch 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated is 4 World
Financial Center, New York, New York 10080.

            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

           independent auditors, have audited the statement of assets and
liabilities of the Fund as of [      ], 2003 which is included in this
prospectus and in the Registration Statement. The statement of assets and
liabilities is included in reliance upon their report, which is also included
in this prospectus and the Registration Statement, given on their authority 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
Wilshire 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 can also be inspected at the offices of the
[      ] Exchange, [      ].

   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

                                      69

<PAGE>

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.

                                      70

<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholder,
Floating Rate Income Strategies Fund, Inc.

   We have audited the accompanying statement of assets and liabilities of
Floating Rate Income Strategies Fund, Inc. (the "Fund") as of [      ] ,2003.
This statement of assets and liabilities is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets and liabilities based on our audit.

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

   In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Fund
at [      ] ,2003 in conformity with accounting principles generally accepted
in the United States.

          ,2003

                                      71

<PAGE>

                  FLOATING RATE INCOME STRATEGIES FUND, INC.

                  STATEMENT OF ASSETS AND LIABILITIES , 2003

<TABLE>
<S>                                                                                               <C>
ASSETS:
   Cash.......................................................................................... $
   Deferred organization and 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 August
14, 2003 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 [      ], 2003. 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 also has agreed to pay the amount by which the
organizational and 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 the Fund's average daily net assets (including the proceeds from any
preferred stock offering), plus the proceeds of any outstanding borrowings used
for leverage.

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.  Use of Estimates

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


                                      72

<PAGE>

                                  APPENDIX A

                             RATINGS OF SECURITIES

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

<TABLE>
<C> <S>

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 real investment standing.
</TABLE>

   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

                                      A-1

<PAGE>

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.

Moody's Short-Term Ratings

   Moody's short-term ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. Such obligations generally have an
original maturity not exceeding one year, unless explicitly noted.

   Moody's employs the following designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

<TABLE>
<C>       <S>

Prime-1   Issuers rated Prime-1 (or supporting institutions) have a superior ability for repayment of senior
          short-term debt obligations. Prime-1 repayment ability will often be evidenced by many of the
          following characteristics: leading market positions in well-established industries; high rates of
          return on funds employed; conservative capitalization structure with moderate reliance on debt
          and ample asset protection; broad margins in earnings coverage of fixed financial charges and
          high internal cash generation; well-established access to a range of financial markets and assured
          sources of alternate liquidity.

Prime-2   Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay senior short-term
          debt obligations. This will normally be evidenced by many of the characteristics cited above, but
          to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to
          variation. Capitalization characteristics, while still appropriate, may be more affected by external
          conditions. Ample alternate liquidity is maintained.

Prime-3   Issuers (or supporting institutions) rated Prime-3 have an acceptable ability for repayment of
          senior short-term obligations. The effect of industry characteristics and market compositions may
          be more pronounced. Variability in earnings and profitability may result in changes in the level of
          debt-protection measurements and may require relatively high financial leverage. Adequate
          alternate liquidity is maintained.

Not Prime Issuers rated Not Prime do not fall within any of the Prime rating categories.
</TABLE>

   Note: In addition, in certain countries the prime rating may be modified by
the issuer's or guarantor's senior unsecured long-term debt rating.

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

   A S&P 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

                                      A-2

<PAGE>

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 S&P from other sources it considers reliable. S&P 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.

   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.

<TABLE>
<C> <S>

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

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

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

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

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

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.
</TABLE>

                                      A-3

<PAGE>

<TABLE>
<C> <S>

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

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

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

C   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 S&P
    believes that such payments will be made during such grace period. The 'D' rating also will be used
    upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation
    are jeopardized. 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.
</TABLE>

   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.

Description of S&P Short Term Issue Credit Ratings

<TABLE>
<C> <S>

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

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

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

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

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

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

                                      A-4

<PAGE>

   Country risk considerations are a standard part of S&P analysis for credit
ratings on any issuer or issue. Currency of repayment is a key factor in this
analysis. An obligor'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.]

Local Currency and Foreign Currency Risks

   Country risk considerations are a standard part of S&P 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 Long Term Credit Ratings

Investment Grade

<TABLE>
<C> <S>

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, 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.
</TABLE>

Speculative Grade
<TABLE>
<C> <S>

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 meeting financial commitments is solely
CC  reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that
C   default of some kind appears probable. 'C' ratings signal imminent default.
</TABLE>

                                      A-5

<PAGE>

<TABLE>
<C>       <S>

DDD,      The ratings of obligations in this category are based on their prospects for achieving partial or full
DD and    recovery in a reorganization or liquidation of the obligor. While expected recovery values are
D 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.
</TABLE>

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 Ratings does not rate the issuer or issue in
question.

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

   Rating Watch: Ratings are placed on Ratings 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.

Description of Finch Ratings Short Term Credit Ratings

   A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
<TABLE>
<C> <S>

F1  Highest credit quality. Indicates the strongest capacity for timely payment of financial commitments; may
    have an added "+" to denote any exceptionally strong credit feature.

F2  Good credit quality. A satisfactory capacity for timely payment of financial commitments, but the margin
    of safety is not as great as in the case of the higher ratings.

F3  Fair credit quality. The capacity for timely payment of financial commitments is adequate; however,
    near-term adverse changes could result in a reduction to non-investment grade.

B   Speculative. Minimal capacity for timely payment of financial commitments, plus vulnerability to near-
    term adverse changes in financial and economic conditions.

C   High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely
    reliant upon a sustained, favorable business and economic environment.

D   Default. Denotes actual or imminent payment default.
</TABLE>

                                      A-6

<PAGE>

   "+" or "-" 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.

   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, companies whose 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.

[Dominion Bond Rating Service Limited ("DBRS")

   DBRS ratings are meant to give an indication of the risk that the borrower
will not fulfill its obligations in a timely manner. DBRS ratings do not take
factors such as pricing or market risk into consideration and are expected to
be used by purchasers as one part of their investment process. Every DBRS
rating is based on quantitative and qualitative considerations which are
relevant for the borrowing entity.

DBRS Bond and Long Term Debt Rating Scale

<TABLE>
<C> <S>

AAA Bonds rated "AAA" are of the highest credit quality, with exceptionally strong protection for the
    timely repayment of principal and interest. Earnings are considered stable, the structure of the industry
    in which the entity operates is strong, and the outlook for future profitability is favorable. There are
    few qualifying factors present which would detract from the performance of the entity, the strength of
    liquidity and coverage ratios is unquestioned and the entity has established a creditable track record of
    superior performance. Given the extremely tough definition which DBRS has established for this
    category, few entities are able to achieve a AAA rating.

AA  Bonds rated "AA" are of superior credit quality, and protection of interest and principal is considered
    high. In many cases, they differ from bonds rated AAA only to a small degree. Given the extremely
    tough definition which DBRS has for the AAA category (which few companies are able to achieve),
    entities rated AA are also considered to be strong credits which typically exemplify above-average
    strength in key areas of consideration and are unlikely to be significantly affected by reasonably
    foreseeable events.

A   Bonds rated "A" are of satisfactory credit quality. Protection of interest and principal is still
    substantial, but the degree of strength is less than with AA rated entities. While a respectable rating,
    entities in the "A" category are considered to be more susceptible to adverse economic conditions and
    have greater cyclical tendencies than higher rated companies.

BBB Bonds rated "BBB" are of adequate credit quality. Protection of interest and principal is considered
    adequate, but the entity is more susceptible to adverse changes in financial and economic conditions,
    or there may be other adversities present which reduce the strength of the entity and its rated securities.
</TABLE>

                                      A-7

<PAGE>

<TABLE>
<C>  <S>

BB   Bonds rated "BB" are defined to be speculative, where the degree of protection afforded interest and
     principal is uncertain, particularly during periods of economic recession. Entities in the BB area
     typically have limited access to capital markets and additional liquidity support and, in many cases,
     small size or lack of competitive strength may be additional negative considerations.

B    Bonds rated "B" are highly speculative and there is a reasonably high level of uncertainty which exists
     as to the ability of the entity to pay interest and principal on a continuing basis in the future, especially
     in periods of economic recession or industry adversity.

CCC  Bonds rated in any of these categories are very highly speculative and are in danger of default of
CC   interest and principal. The degree of adverse elements present is more severe than bonds rated "B."
C    Bonds rated below "B" often have characteristics which, if not remedied, may lead to default. In
     practice, there is little difference between the "C" to "CCC" categories, with "CC" and "C" normally
     used to lower ranking debt of companies where the senior debt is rated in the "CCC" to "B" range.

D    This category indicates Bonds in default of either interest or principal.

high "high" and "low" grades are used to indicate the relative standing of a credit within a particular rating
low  category. The lack of one of these designations indicates a rating which is essentially in the middle of
     the category. Note that "high" and "low" grades are not used for the AAA category.
</TABLE>

                                      A-8

<PAGE>

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

   Through and including [             ], 2003 (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

                  Floating Rate Income Strategies Fund, Inc.

                                 Common Stock

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

                              Merrill Lynch & Co.

                            [             ] , 2003

                                                                          -0903
================================================================================

<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              , 2003.

<TABLE>
<CAPTION>
Exhibits     Description
--------     -----------
<C>      <C> <S>

 (a)(1)  --  Articles of Incorporation of the Registrant.

    (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 Merrill
             Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch").*

 (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                               .*

 (k)(l)  --  Form of Transfer Agency, and Service Agreement between the Registrant                  .*

 (k)(2)  --  Form of Administrative Services Agreement between the Registrant and State Street Bank and
             Trust Company.(d)

 (k)(3)  --  Form of Additional Compensation Agreement between FAM and Merrill Lynch.*

 (k)(4)  --  Form of Securities Lending Agency Agreement.(e)

    (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.(f)
</TABLE>
--------
(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 as

                                      C-1

<PAGE>

   Exhibit (a) to this Registration Statement; 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 as Exhibit (b) to this Registration Statement.
(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 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.
(e) 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.
(f) Incorporated by reference to Exhibit 15 to Post-Effective Amendment No. 9
    to the Registration Statement on Form N-1A of Merrill Lynch Multi-State
    Limited Maturities Municipal Series Trust (File No. 33-50417), filed on
    November 22, 2000.
*  To be provided by amendment.

Item 25.  Marketing Arrangements.

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

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:

<TABLE>
                 <S>                                       <C>
                 Registration fees........................ $*
                 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................................. $
                                                           ==
</TABLE>
--------
*  To be provided by amendment.

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.


                                      C-2

<PAGE>

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, 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

                                      C-3

<PAGE>

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.

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"), 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>
       Name          Position(s) with FAM  Other Substantial Business, Profession, Vocation Or Employment
------------------- ---------------------- --------------------------------------------------------------
<C>                 <C>                    <S>
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
                    Treasurer and Director  MLIM; Treasurer of Princeton Services; Senior Vice
                    of Taxation             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
Lawrence D. Haber   First Vice President    First Vice President of MLIM; Senior Vice President and
                                            Treasurer of Princeton Services
Brian A. Murdock    Senior Vice President   Senior Vice President of MLIM and Chief Operating Officer
                    and Chief Operating     of MLIM Americas; Chief Investment Officer of EMEA
                    Officer                 Pacific Region and Global CIO for Fixed Income and
                                            Alternative Investments; Head of MLIM Pacific Region and
                                            President of MLIM Japan, Australia and Asia
Andrew J. Donohue   General Counsel         General Counsel of MLIM and Princeton Services
</TABLE>


                                      C-4

<PAGE>

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
18th day of August, 2003.

                                              FLOATING RATE 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 A. 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.

          Signature                        Title                   Date
          ---------                        -----                   ----

   /s/  BRADLEY J. LUCIDO      President (Principal           August 18, 2003
-----------------------------    Executive Officer) and
     (Bradley J. Lucido)         Director

  /s/  ALICE A. PELLEGRINO     Treasurer (Principal           August 18, 2003
-----------------------------    Financial and Accounting
    (Alice A. Pellegrino)        Officer) and Director

    /s/  BRIAN D. STEWART      Secretary and Director         August 18, 2003
-----------------------------
     (Brian D. Stewart)


                                      C-6

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
                <C> <S>

                (a) Articles of Incorporation of the Registrant.

                (b) By-Laws of the Registrant.
</TABLE>

                                      C-7

</TEXT>
</DOCUMENT>
