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          As filed with the Securities and Exchange Commission on July 24, 2003
===============================================================================
                                                  1933 Act File No. 333- 105495
                                                    1940 Act File No. 811-21357

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   Form N-2

      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
      [X]  Pre-Effective Amendment No. 2
           Post-Effective Amendment No. __

           and

      REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
      [X]  Amendment No. 2

               Franklin Templeton Limited Duration Income Trust
        (Exact Name of Registrant as Specified in Declaration of Trust)
                          c/o Franklin Advisers, Inc.
                             One Franklin Parkway
                       San Mateo, California 94403-1906
                   (Address of Principal Executive Offices)
                    (Number, Street, City, State, Zip Code)
                                (650) 312-2000
             (Registrant's Telephone Number, including Area Code)

                            Murray L. Simpson, Esq.
                             One Franklin Parkway
                       San Mateo, California 94403-1906
    (Name and Address (Number, Street, City, State, Zip Code) of Agent for
                                   Service)

                                With a copy to:
                             David A. Hearth, Esq.
                     Paul, Hastings, Janofsky & Walker LLP
                         55 Second Street, 24th Floor
                        San Francisco, California 94105

                 Approximate Date of Proposed Public Offering:
     As soon as practicable after the effective date of this Registration
                                   Statement

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

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

      It is proposed that this filing will become effective (check appropriate
box)

      [X] when declared effective pursuant to section 8(c)

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

       CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

                                 PROPOSED    PROPOSED
                                 MAXIMUM     MAXIMUM
                       AMOUNT    OFFERING    AGGREGATE   AMOUNT OF
TITLE OF SECURITIES    BEING     PRICE PER   OFFERING   REGISTRATION
BEING REGISTERED     REGISTERED    UNIT      PRICE/1/     FEE /2/
------------------------------------------------------------------------
Common Shares         5,000,000   $15.00    $75,000,000  $6,075.00
                       shares

/1/ Estimated solely for the purpose of calculating the registration fee.
-------------------------------------------------------------------------------

/2/ $1.21 of which was previously paid.

      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 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 dates as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================





                   SUBJECT TO COMPLETION, DATED JULY 24, 2003

PROSPECTUS

[FRANKLIN(R) TEMPLETON(R) INVESTMENTS LOGO]

                                5,000,000 SHARES
                FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
                                  COMMON SHARES
                                $15.00 PER SHARE

                                   ----------

     INVESTMENT OBJECTIVES. The Fund is a newly organized, diversified,
closed-end management investment company. The Fund's primary investment
objective is to seek high current income. Its secondary objective is to seek
capital appreciation to the extent it is possible and is consistent with the
Fund's primary objective.


     NO PRIOR HISTORY. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value, which creates a risk
of loss for the investors purchasing shares in the initial public offering. The
Fund expects that its common shares will be listed on the American Stock
Exchange under the symbol "FTF."


     DURATION AND CREDIT QUALITY. Under normal market conditions, Franklin
Advisers, Inc., the Fund's investment adviser, expects the Fund to maintain an
estimated average portfolio duration of between two and five years (including
the effect of anticipated leverage). Initially, the Fund is expected to have an
estimated average portfolio duration of approximately three years (including the
effect of anticipated leverage). Under normal market conditions, the Fund
expects to maintain a weighted average portfolio credit quality of investment
grade.


     MAIN INVESTMENT STRATEGIES. Under normal market conditions, the Fund will
seek to achieve its investment objectives by investing in debt securities and
other income-producing instruments, allocated primarily among three distinct
investment categories: (1) mortgage-backed securities and other asset-backed
securities; (2) bank loans made to corporate and other business entities; and
(3) below investment grade debt securities and other income-producing
instruments. There is no limitation on the percentage of the Fund's assets that
may be allocated to each of these investment categories; provided that, under
normal market conditions, the Fund will invest at least 25% of its total assets
in each category. Under normal circumstances, the Fund's allocation to the
investment category of mortgage-backed and other asset-backed securities will be
primarily composed of investments in mortgage-backed securities.

                                                (CONTINUED ON INSIDE COVER PAGE)

                                   ----------

     INVESTING IN THE FUND INVOLVES RISKS THAT YOU SHOULD CAREFULLY CONSIDER
BEFORE INVESTING IN THE FUND. PLEASE SEE "RISKS" BEGINNING ON PAGE 33 OF THIS
PROSPECTUS.

     Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

                                   ----------

                                                  PER SHARE        TOTAL(2)
                                                -------------    ------------

Public Offering Price                              $ 15.00           $
Sales Load                                         $                 $
Estimated Offering Expenses(1)                     $                 $
Proceeds to the Fund                               $                 $

----------
(1) The Fund will pay or reimburse organizational and offering expenses
    estimated at $341,365 from the proceeds of the offering. Franklin Advisers,
    Inc. has agreed to pay (i) the amount by which the Fund's offering costs
    (other than the sales load) exceed $0.03 per share and (ii) all of the
    Fund's organizational expenses, except that the Fund has agreed to reimburse
    Franklin Advisers, Inc. for such organizational expenses to the extent that
    the aggregate of such organizational expenses and offering costs (other than
    the sales load) does not exceed $0.03 per share.

(2) The Underwriters have been granted an option to purchase up to    additional
    Common Shares at the public offering price less the sales load within 45
    days of the date of this prospectus, solely to cover over-allotments, if
    any. If such option is exercised in full, the total public offering price,
    sales load, estimated offering expenses and proceeds to the Fund will be
    $   , $   , $   and $   , respectively. See "Underwriting."

                                   ----------

     The Underwriters (defined below) expect to deliver the Common Shares to
purchasers on or about    , 2003.

                                   ----------

CITIGROUP
MERRILL LYNCH & CO.
UBS INVESTMENT BANK
WACHOVIA SECURITIES
ADVEST, INC.
H&R BLOCK FINANCIAL ADVISORS, INC.
FERRIS, BAKER WATTS INCORPORATED
J.J.B. HILLIARD, W.L. LYONS, INC.
JANNEY MONTGOMERY SCOTT LLC
QUICK & REILLY, INC.
RBC CAPITAL MARKETS
STIFEL, NICOLAUS & COMPANY INCORPORATED
WELLS FARGO SECURITIES, LLC

           , 2003


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


(CONTINUED FROM PREVIOUS PAGE)

     Debt securities and income-producing instruments include all varieties of
fixed-income securities, including bonds, mortgage-backed and other asset-backed
securities, convertible securities, bank loans, and other instruments described
in this prospectus.

     The Fund anticipates that, under current market conditions, at least 25% of
its initial portfolio will consist of below investment grade debt securities and
other income-producing instruments. Below investment grade bonds, commonly
referred to as "junk bonds," are bonds that are rated below investment grade by
each of the nationally-recognized statistical rating organizations (each, a
"Rating Agency") such as Standard & Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), or Fitch Ratings ("Fitch"), that cover the
security, or, if unrated, are determined to be of comparable quality by the
portfolio managers. A debt security rated below the top four ratings categories
by a Rating Agency will be considered below investment grade. Securities of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. The Fund's strategies may result in an above average amount of risk
and volatility or loss of principal. The Fund cannot ensure that it will achieve
its investment objectives.

     The Fund will not invest more than 10% of its total assets in securities
that are rated CCC/Caa or lower by each Rating Agency rating the security or
that are unrated but judged by the portfolio managers to be of comparable
quality. The Fund may invest in debt securities or other obligations whose
issuers are in default. However, under normal conditions, the Fund will not
invest more than 5% of its total assets in debt securities or other obligations
whose issuers are in default at the time of purchase. The Fund may use swaps and
other derivative instruments. The Fund may invest in issuers located anywhere in
the world; however, the Fund will not invest more than 15% of its total assets
in securities or other income-producing instruments issued by companies and
governments in any foreign country. The Fund may also invest up to 5% of its
total assets in securities or other income-producing instruments denominated in
foreign currencies.

     Because the Fund's holdings will fluctuate in price, the value of your
investment in the Fund will go up and down. This means you could lose money over
short or even extended periods.

     LEVERAGE. The Fund presently intends to use leverage by issuing preferred
shares representing approximately 33% of the Fund's Managed Assets (as defined
on page four of this prospectus), although the Fund is permitted to use leverage
representing up to 38% of the Fund's Managed Assets. The Fund may also enter
into transactions that may give rise to a form of leverage, including among
others: loans of portfolio securities, swap contracts and other derivative
instruments, reverse repurchase agreements, as well as when-issued, delayed
delivery or forward commitment transactions. The Fund will segregate liquid
assets against or otherwise cover its future obligations under such
transactions, in order to provide that, immediately after entering into such a
transaction, the Fund's future commitments that it has not segregated liquid
assets against or otherwise covered, together with any outstanding preferred
shares, will not exceed 38% of the Fund's Managed Assets. By using leverage, the
Fund will seek to obtain a higher return for holders of common shares than if
the Fund did not use leverage. Leveraging is a speculative technique and there
are special risks involved. There can be no assurance that a leveraging strategy
will be used or that it will be successful during any period in which it is
employed. See "Preferred Shares and Related Leverage" and "Risks -- Leverage
Risk."

     You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest, and retain it for future reference.
A Statement of Additional Information dated      , 2003, as it may be
supplemented (the "Statement of Additional Information"), containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated by reference in its entirety into this
prospectus, which means that it is part of the prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 58 of this prospectus. You may request a free copy of the Statement of
Additional Information by calling 1-800/DIAL BEN(R) (1-800/342-5236), TDD
(Hearing Impaired) 1-800/851-0637, or by writing to the Fund. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following e-mail address: publicinfo@sec.gov. You also can obtain
information about the Fund by visiting the SEC's Public Reference Room in
Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database on the SEC's
Internet site at http://www.sec.gov.

     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 OR SOLICITING AN OFFER TO BUY THE SHARES HEREIN DESCRIBED IN ANY STATE,
JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT PERMITTED.

     NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not, and the Underwriters have not,
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. You
should not assume that the information contained in this prospectus is accurate
as of any date other than the date on the front of this prospectus. The Fund's
business, financial condition, results of operations and prospects may have
changed since that date.

                                TABLE OF CONTENTS

                                                                    PAGE
                                                                    ----
Summary                                                                1
Summary of Fund Expenses                                              15
The Fund                                                              16
Use of Proceeds                                                       16
Investment Objectives and Strategies                                  17
Portfolio Contents and Other Information                              19
Preferred Shares and Related Leverage                                 31
Risks                                                                 33
How the Fund Manages Risk                                             42
Management of the Fund                                                45
Net Asset Value                                                       46
Distributions                                                         47
Dividend Reinvestment Plan                                            47
Description of Shares                                                 49
Anti-Takeover and Other Provisions in the Declaration of Trust        51
Repurchase of Common Shares; Conversion to Open-End Fund              52
Tax Matters                                                           53
Underwriting                                                          55
Custodian                                                             57
Shareholder Servicing Agent and Transfer Agent                        57
Administrator                                                         58
Legal Matters                                                         58
Table of Contents for the Statement of Additional Information         58


                      [THIS PAGE INTENTIONALLY LEFT BLANK]


                                     SUMMARY

     THIS IS ONLY A SUMMARY. THIS SUMMARY DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE FUND'S SHARES. YOU
SHOULD REVIEW THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION, ESPECIALLY THE
INFORMATION UNDER THE HEADING "RISKS."

The Fund                             Franklin Templeton Limited Duration Income
                                     Trust (the "Fund") is a newly organized,
                                     diversified, closed-end management
                                     investment company. See "The Fund."


The Offering                         The Fund is offering     common shares of
                                     beneficial interest (the "Common Shares")
                                     at $15.00 per share through a group of
                                     underwriters (the "Underwriters") led by
                                     Citigroup Global Markets Inc., Merrill
                                     Lynch, Pierce, Fenner & Smith Incorporated,
                                     UBS Securities LLC, Wachovia Securities,
                                     LLC, Advest, Inc., H&R Block Financial
                                     Advisors, Inc., Ferris, Baker Watts,
                                     Incorporated, J.J.B. Hilliard, W.L. Lyons,
                                     Inc., Janney Montgomery Scott LLC, Quick &
                                     Reilly, Inc. A FleetBoston Financial
                                     Company, RBC Dain Rauscher, Inc., Stifel,
                                     Nicolaus & Company, Incorporated and Wells
                                     Fargo Securities, LLC. You must purchase at
                                     least 100 Common Shares. The Underwriters
                                     have been granted an option to purchase up
                                     to     additional Common Shares at the
                                     public offering price less the sales load
                                     within 45 days of the date of this
                                     prospectus, solely to cover
                                     over-allotments, if any. See
                                     "Underwriting." Franklin Advisers, Inc.,
                                     the Fund's investment adviser (the
                                     "Manager"), has agreed to pay (i) the
                                     amount by which the Fund's offering costs
                                     (other than the sales load) exceed $0.03
                                     per share and (ii) all of the Fund's
                                     organizational expenses, except that the
                                     Fund has agreed to reimburse the Manager
                                     for such organizational expenses to the
                                     extent that the aggregate of such
                                     organizational expenses and offering costs
                                     (other than the sales load) does not exceed
                                     $0.03 per share.

Investment Objectives                The Fund's primary investment objective is
                                     to seek high current income. Its secondary
                                     objective is to seek capital appreciation
                                     to the extent it is possible and is
                                     consistent with the Fund's primary
                                     objective. Under normal market conditions,
                                     the Fund will seek to achieve its
                                     investment objectives by investing in debt
                                     securities and other income-producing
                                     instruments, allocated primarily among
                                     three distinct investment categories: (1)
                                     mortgage-backed securities and other
                                     asset-backed securities; (2) bank loans
                                     made to corporate and other business
                                     entities; and (3) below investment grade
                                     debt securities and other income-producing
                                     instruments. There is no limitation on the
                                     percentage of the Fund's assets that may be
                                     allocated to each of these investment
                                     categories; provided that, under normal
                                     market conditions, the Fund will invest at
                                     least 25% of its total assets in each
                                     category. Under normal circumstances, the
                                     Fund's allocation to the investment
                                     category of mortgage-backed and other
                                     asset-backed securities will be primarily
                                     composed of investments in mortgage-backed
                                     securities.

Limited Duration                     Under normal market conditions, the Manager
                                     expects the Fund to maintain an estimated
                                     average portfolio duration of between two
                                     and five years (including the effect of
                                     anticipated leverage). This duration policy
                                     may only be changed following provision of
                                     60 days' prior notice to holders of Common
                                     Shares ("Common Shareholders"). Initially,
                                     the Fund is expected to have an estimated
                                     average portfolio duration of approximately
                                     three years (including the effect of
                                     anticipated leverage). In comparison to
                                     maturity (which is the date on which a debt
                                     instrument ceases and the issuer is
                                     obligated to repay the principal amount),
                                     duration is a measure of the price
                                     volatility of a debt instrument as a result
                                     of changes in market rates of interest,
                                     based on the weighted average timing of the
                                     instrument's expected principal and
                                     interest payments. Duration differs from
                                     maturity in that it considers a security's
                                     yield, coupon payments, principal payments
                                     and call features in addition to the amount
                                     of time until the security finally matures.
                                     As the value of a security changes over
                                     time, so will its duration. Prices of
                                     securities with longer durations tend to be
                                     more sensitive to interest rate changes
                                     than securities with shorter durations. In
                                     general, a portfolio of securities with a
                                     longer duration can be expected to be more
                                     sensitive to interest rate changes than a
                                     portfolio with a shorter duration.

Sector Allocation Strategy           The Fund will use an active sector
                                     allocation strategy to try to achieve its
                                     goals of income and capital appreciation.
                                     This means the Fund will allocate its
                                     assets among securities in various market
                                     sectors based on the Manager's assessment
                                     of changing economic, global market,
                                     industry, and issuer conditions.
                                     Consequently, the Fund, from time to time,
                                     may have significant positions in
                                     particular sectors. There can be no
                                     assurance that the Manager's assessments
                                     will be correct. See "Investment Objectives
                                     and Strategies -- Portfolio Management
                                     Strategies."

Credit Quality                       Under normal market conditions, the Fund
                                     will invest at least 25% of its assets in
                                     debt securities or other instruments rated
                                     below investment grade, sometimes called
                                     "junk bonds." The Fund may also invest in
                                     investment grade debt securities.
                                     Investment grade debt securities are rated
                                     in one of the top four ratings categories
                                     by a nationally-recognized statistical
                                     rating organization (a "Rating Agency")
                                     such as S&P, Moody's or Fitch. A debt
                                     security rated below the top four ratings
                                     categories by each Rating Agency rating the
                                     security will be considered below
                                     investment grade. The Fund may also buy
                                     unrated debt securities or other
                                     income-producing instruments.

                                     The Manager will monitor the credit quality
                                     and price of the Fund's holdings, as well
                                     as other investments that are available to
                                     the Fund. Under normal market conditions,
                                     the Fund expects to maintain a weighted
                                     average portfolio credit quality of
                                     investment grade, as determined by the
                                     Manager based on the credit quality of the
                                     Fund's portfolio holdings (as rated by the
                                     Rating Agencies or, if unrated, as
                                     determined by the Manager). For this
                                     purpose, when a portfolio holding is rated
                                     by more than one of these rating agencies,
                                     the Manager generally will use the highest
                                     rating.


                                     The Fund will not invest more than 10% of
                                     its total assets in securities that are, at
                                     the time of purchase, rated CCC/Caa or
                                     lower by each Rating Agency rating the
                                     security or that are unrated but judged by
                                     the portfolio managers to be of comparable
                                     quality. The Fund may invest in securities
                                     or other instruments whose issuers are in
                                     default or bankruptcy. Under normal
                                     conditions, the Fund will not invest more
                                     than 5% of its total assets in debt
                                     securities or other obligations whose
                                     issuers are in default at the time of
                                     purchase.

Independent Credit Analysis          The Manager will rely heavily on its own
                                     analysis of the credit quality and risks
                                     associated with individual debt obligations
                                     considered for the Fund, rather than
                                     relying exclusively on rating agencies or
                                     third-party research. The Manager will use
                                     this information in an attempt to minimize
                                     credit risk and identify issuers,
                                     industries or sectors that are undervalued
                                     or that offer attractive yields relative to
                                     the Manager's assessment of their credit
                                     characteristics. The Fund's success in
                                     achieving its investment objectives may
                                     depend more heavily on the Manager's credit
                                     analysis than if the Fund invested solely
                                     in higher-quality and rated securities.

Diversification                      Subject to the availability of suitable
                                     investment opportunities, the Manager will
                                     seek to diversify the Fund's investments
                                     broadly in an attempt to minimize the
                                     portfolio's sensitivity to credit and other
                                     risks associated with a particular issuer,
                                     industry or sector, or to the impact of a
                                     single economic, political or regulatory
                                     event.

Portfolio Contents                   The Fund's portfolio may include bonds,
                                     debentures, notes and other similar types
                                     of debt instruments, such as asset-backed
                                     securities, as well as bank loans and loan
                                     participations, commercial and
                                     agency-issued mortgage securities,
                                     payment-in-kind securities, zero-coupon
                                     securities, bank certificates of deposit,
                                     fixed time deposits and bankers'
                                     acceptances, structured notes and other
                                     hybrid instruments, preferred shares,
                                     municipal or U.S. government securities,
                                     debt securities issued by foreign
                                     corporations or supra-national government
                                     agencies, mortgage-backed securities issued
                                     on a public or private basis, and other
                                     types of asset-backed securities. The rate
                                     of interest on an income-producing
                                     security may be fixed, floating or
                                     variable. The Fund may use swaps and other
                                     derivative instruments. The Fund will not
                                     invest in inverse floating rate instruments
                                     or interest-only or principal-only mortgage
                                     securities.

                                     The Fund may hold equity securities;
                                     however, under ordinary circumstances, such
                                     investments will be limited to convertible
                                     securities, dividend-paying common or
                                     preferred stocks, or equity securities
                                     acquired in connection with a
                                     restructuring, bankruptcy, default, or the
                                     exercise of a conversion or purchase right.

                                     Since the Fund is diversified, with respect
                                     to 75% of its investment portfolio, the
                                     Fund generally may not hold more than 5% of
                                     its assets in the securities of a single
                                     issuer or hold more than 10% of the
                                     outstanding voting securities of an issuer.
                                     The Fund generally will not invest more
                                     than 25% of its total assets in securities
                                     of issuers in any one industry. See "How
                                     the Fund Manages Risk -- Investment
                                     Limitations."


Proposed Offering of
Preferred Shares and
Other Forms of Leverage              Subject to market conditions, approximately
                                     one to three months after completion of
                                     this offering, the Fund intends to offer
                                     preferred shares of beneficial interest
                                     ("Preferred Shares") representing
                                     approximately 33% of the Fund's Managed
                                     Assets, although the Fund is permitted to
                                     use leverage representing up to 38% of the
                                     Fund's Managed Assets. "Managed Assets"
                                     means the total assets of the Fund
                                     (including any assets attributable to
                                     leverage) minus the sum of accrued
                                     liabilitites (other than debt representing
                                     financial leverage). The issuance of
                                     Preferred Shares will leverage your
                                     investment in Common Shares. Leverage
                                     involves special risks. There can be no
                                     assurance that a leveraging strategy will
                                     be used or that it will be successful
                                     during any period in which it is employed.
                                     See "Risks -- Leverage Risk." The net
                                     proceeds the Fund obtains from selling the
                                     Preferred Shares will be invested in
                                     accordance with the Fund's investment
                                     objectives and policies as described in
                                     this prospectus. The Preferred Shares are
                                     expected to pay dividends based on
                                     short-term interest rates which would be
                                     reset periodically through an auction or
                                     remarketing procedure, although the terms
                                     of the Preferred Shares may also enable the
                                     Fund to lengthen such intervals. So long as
                                     the rate of return, net of applicable Fund
                                     expenses, on the debt obligations and other
                                     investments purchased by the Fund exceeds
                                     Preferred Share dividend rates, the
                                     investment of the proceeds of the Preferred
                                     Shares will generate more income than will
                                     be needed to pay dividends on the Preferred
                                     Shares. If so, the excess will be used to
                                     pay higher dividends to Common Shareholders
                                     than if the Fund were not so leveraged
                                     through the issuance of Preferred Shares.


                                     The Fund may also enter into transactions
                                     that may give rise to a form of leverage,
                                     including among others: loans of portfolio
                                     securities, swap contracts and other
                                     derivative instruments, reverse repurchase
                                     agreements, as well as when-issued, delayed
                                     delivery or forward commitment
                                     transactions. The Fund will segregate
                                     liquid assets against or otherwise cover
                                     its future obligations under such
                                     transactions, in order to provide that,
                                     immediately after entering into such a
                                     transaction, the Fund's future commitments
                                     that it has not segregated liquid assets
                                     against or otherwise covered, together
                                     with any outstanding Preferred Shares,
                                     will not exceed 38% of the Fund's
                                     Managed Assets. By using leverage, the Fund
                                     will seek to obtain a higher return for
                                     Common Shareholders than if the Fund did
                                     not use leverage. Leveraging is a
                                     speculative technique and there are special
                                     risks involved.

                                     The Fund's use of derivative instruments
                                     (other than swaps) will also be limited by
                                     the Fund's 15% limit on illiquid
                                     investments to the extent they are
                                     determined to be illiquid. See "Investment
                                     Objectives and Strategies -- Portfolio
                                     Contents and Other Information" and "Risks
                                     -- Liquidity Risk." The Fund cannot assure
                                     you that the issuance of Preferred Shares
                                     or the use of other forms of leverage will
                                     result in a higher yield on your Common
                                     Shares. Once Preferred Shares are issued
                                     and/or other forms of leverage are used,
                                     the net asset value and market price of the
                                     Common Shares and the yield to Common
                                     Shareholders will be more volatile. See
                                     "Preferred Shares and Related Leverage,"
                                     "Description of Shares -- Preferred Shares"
                                     and "Risks -- Leverage Risk." In addition,
                                     fees and expenses paid by the Fund are
                                     borne entirely by the Common Shareholders
                                     (and not by Preferred Shareholders, if
                                     any). These include costs associated with
                                     any offering of Preferred Shares by the
                                     Fund (which costs are estimated to be
                                     approximately 1.20% of the total dollar
                                     amount of a Preferred Share offering),
                                     which will be borne immediately by Common
                                     Shareholders (as will the costs associated
                                     with any borrowings or other forms of
                                     leverage utilized by the Fund) and result
                                     in a reduction of the net asset value of
                                     the Common Shares.


Investment Adviser                   Franklin Advisers, Inc. (the "Manager")
                                     serves as the investment adviser of the
                                     Fund. Subject to the supervision of the
                                     Board of Trustees, the Manager is
                                     responsible for managing the investment
                                     activities of the Fund, for which it will
                                     receive an annual fee, payable monthly, in
                                     an amount equal to 0.50% of the average
                                     daily value of the Fund's Managed Assets.
                                     The Manager and its affiliates
                                     (collectively known as "Franklin Templeton
                                     Investments") provide investment management
                                     and advisory services to closed-end and
                                     open-end investment company clients, as
                                     well as private accounts. As of June 30,
                                     2003, Franklin Templeton Investments had
                                     approximately $287 billion in assets under
                                     management for more than five million
                                     mutual fund shareholder and other accounts.

Administrator                        In addition to the fee paid to the Manager,
                                     the Fund pays a monthly fee equal to an
                                     annual rate of 0.20% of the Fund's average
                                     daily Managed Assets to Franklin Templeton
                                     Services, LLC ("FT Services"), an affiliate
                                     of the Manager. FT Services is the Fund's
                                     administrator and provides certain
                                     administrative services and facilities for
                                     the Fund. See "Administrator."


Portfolio Management Team            Christopher Molumphy, CFA, Eric G. Takaha,
                                     CFA, Roger Bayston, CFA, and Richard C.
                                     D'Addario will serve as the portfolio
                                     management team responsible for managing
                                     the Fund's portfolio investments. They are
                                     sometimes referred to herein as the
                                     "portfolio managers." Each of them has
                                     experience managing mutual funds and
                                     private accounts with Franklin Templeton
                                     Investments. See "Management of the Fund --
                                     Portfolio Management Team."

Distributions                        Commencing with the Fund's first dividend,
                                     the Fund intends to make regular monthly
                                     cash distributions to Common Shareholders
                                     based on the projected performance of the
                                     Fund. The dividend rate that the Fund pays
                                     on its Common Shares will depend on a
                                     number of factors, including dividends
                                     payable on any Preferred Shares and the
                                     expenses of any other leveraging
                                     transactions. As portfolio and market
                                     conditions change, the rate of dividends on
                                     the Common Shares and the Fund's dividend
                                     policy could change. At least annually, the
                                     Fund intends to distribute to Common
                                     Shareholders their pro rata share of any
                                     available net capital gains. Your initial
                                     distribution is expected to be declared
                                     within approximately 45 days, and paid
                                     within approximately 60 to 75 days, from
                                     the completion of this offering, depending
                                     on market conditions. The amount of any
                                     distributions will vary, and there is no
                                     guarantee the Fund will pay either income
                                     dividends or capital gain distributions.
                                     Unless you elect to receive distributions
                                     in cash, all of your distributions will be
                                     automatically reinvested in additional
                                     Common Shares under the Fund's Dividend
                                     Reinvestment Plan. See "Distributions" and
                                     "Dividend Reinvestment Plan."

Dividend Reinvestment Plan           Under the Fund's Dividend Reinvestment
                                     Plan, all Common Shareholders whose shares
                                     are registered in their own names will have
                                     all dividends, including any capital gain
                                     distributions, reinvested automatically in
                                     additional Common Shares by PFPC, Inc.,
                                     unless the Common Shareholder "opts out" of
                                     the plan and elects to receive cash. See
                                     "Dividend Reinvestment Plan."

Listing                              The Common Shares are expected to be listed
                                     on the American Stock Exchange (the "AMEX")
                                     under the symbol "FTF." See "Description of
                                     Shares -- Common Shares."

Custodian                            The Bank of New York acts as custodian of
                                     the Fund's securities and other assets. See
                                     "Custodian."

Shareholder Servicing and
Transfer Agent                       PFPC, Inc. is the Fund's shareholder
                                     servicing agent and acts as the Fund's
                                     transfer agent and dividend-paying agent.
                                     See "Shareholder Servicing and Transfer
                                     Agent."

Market Price of Shares               Shares of closed-end investment companies
                                     frequently trade at prices lower than net
                                     asset value. The Fund cannot assure you
                                     that the Common Shares will trade at a
                                     price higher than net asset value in the
                                     future. The Fund's net asset value will be
                                     reduced immediately following the offering
                                     by the sales load and the amount of
                                     organization and offering expenses paid by
                                     the Fund, and immediately following any
                                     offering of Preferred Shares by the costs
                                     of that offering paid by the Fund. See "Use
                                     of Proceeds." In addition to net asset
                                     value, market price may be affected by such
                                     factors relating to the Fund or its
                                     portfolio holdings as dividend levels
                                     (which are in turn affected by expenses,
                                     including the costs of leverage), dividend
                                     stability, portfolio credit quality and
                                     liquidity and call protection and market
                                     supply and demand. See "Preferred Shares
                                     and Related Leverage," "Risks,"
                                     "Description of Shares," and "Repurchase of
                                     Common Shares; Conversion to Open-End Fund"
                                     in this prospectus, and the Statement of
                                     Additional Information under "Repurchase of
                                     Common Shares; Conversion to Open-End
                                     Fund." The Common Shares are designed
                                     primarily for long-term investors, and you
                                     should not view the Fund as a vehicle for
                                     trading purposes.

                           SPECIAL RISK CONSIDERATIONS

Lack of Operating History            The Fund is a newly organized, diversified,
                                     closed-end management investment company
                                     with no history of operations.


Market Discount Risk                 As with any stock, the price of the Common
                                     Shares will fluctuate with market
                                     conditions and other factors. If Common
                                     Shares are sold, the price received may be
                                     more or less than the original investment.
                                     The Common Shares may trade at a price that
                                     is less than the initial offering price or
                                     at a discount from their net asset value.
                                     This risk may be greater for investors who
                                     sell their shares relatively shortly after
                                     completion of the initial offering. The
                                     Common Shares are designed for long-term
                                     investors.


Credit Risk                          An issuer of a debt security may be unable
                                     to make interest payments and repay
                                     principal. Changes in an issuer's financial
                                     strength or in a security's credit rating
                                     may affect a security's value and, thus,
                                     impact Fund performance. See "Risks --
                                     Credit Risk."

Mortgage-Related Risk                Rising interest rates tend to extend the
                                     duration of mortgage-related securities,
                                     which in turn could lengthen the average
                                     duration of the Fund's portfolio, making
                                     the portfolio more sensitive to changes in
                                     interest rates, and may reduce the market
                                     value of the portfolio's mortgage-related
                                     securities. This possibility is often
                                     referred to as extension risk. In addition,
                                     mortgage-related securities are subject to
                                     prepayment risk -- the risk that borrowers
                                     may pay off their mortgages sooner than
                                     expected, particularly when interest rates
                                     decline. See "Risks -- Mortgage-Related
                                     Risk."

Loan Risk                            Bank loans, loan participations and
                                     assignments involve credit risk, interest
                                     rate risk, liquidity risk, and the risks of
                                     being a lender, as well as other risks. If
                                     the Fund purchases a loan, it may be able
                                     to enforce its rights only through the
                                     lender, and may assume the credit risk of
                                     both the lender and the borrower.

                                     Corporate loans in which the Fund may
                                     invest may be unrated and generally will
                                     not be registered with the Securities and
                                     Exchange Commission (the "SEC") or listed
                                     on a securities exchange. Because the
                                     amount of public information available with
                                     respect to corporate loans generally is
                                     less extensive than that available for more
                                     widely rated, registered and
                                     exchange-listed securities, corporate loans
                                     can be more difficult to value. See "Risks
                                     -- Loan Risk."

High Yield Risk                      The Fund may invest in debt securities and
                                     other income-producing instruments that are
                                     rated below investment grade or unrated.
                                     These securities and instruments generally
                                     have more credit risk than higher-rated
                                     securities. The issuers of such securities
                                     or instruments typically do not have the
                                     track record needed to receive an
                                     investment grade rating, have borrowed to
                                     finance acquisitions or to expand their
                                     operations, are seeking to refinance their
                                     debt at lower rates, or have been
                                     downgraded due to financial difficulties.
                                     Due to the risks involved in investing in
                                     high yield debt securities and other
                                     income-producing instruments, an investment
                                     in the Fund should be considered
                                     speculative.

                                     Companies issuing high yield, fixed-income
                                     securities are not as strong financially as
                                     those issuing securities with higher credit
                                     ratings. These companies are more likely to
                                     encounter financial difficulties and are
                                     more vulnerable to changes in the economy,
                                     such as a recession or a sustained period
                                     of rising interest rates, that could affect
                                     their ability to make interest and
                                     principal payments. The high yield market
                                     has experienced a large number of defaults
                                     in recent years. If a company defaults
                                     because it stops making interest and/or
                                     principal payments, payments on the
                                     securities may never resume because such
                                     securities are generally unsecured and are
                                     often subordinated to other creditors of
                                     the issuer. These securities may be
                                     worthless and the Fund could lose its
                                     entire investment.

                                     The prices of high yield, fixed-income
                                     securities fluctuate more than
                                     higher-quality debt securities. Prices are
                                     especially sensitive to developments
                                     affecting the company's business and to
                                     changes in the ratings assigned by rating
                                     agencies. Prices often are closely linked
                                     with the company's stock prices and
                                     typically rise and fall in response to
                                     factors that affect stock prices. In
                                     addition, the entire high yield securities
                                     market can experience sudden and sharp
                                     price swings due to changes in economic
                                     conditions, stock market activity, large
                                     sustained sales by major investors, a
                                     high-profile default, or other factors.

                                     High yield securities generally are less
                                     liquid than higher-quality securities. Many
                                     of these securities do not trade
                                     frequently, and when they do their prices
                                     may be significantly higher or lower than
                                     expected. See "Risks -- High Yield Risk."

Interest Rate Risk                   Changes in interest rates may present risks
                                     to the Fund. When interest rates rise, debt
                                     security prices generally fall. The
                                     opposite is also true: debt security prices
                                     generally rise when interest rates fall.
                                     Because market interest rates are currently
                                     near their lowest levels in many years,
                                     there is a great risk that the Fund's
                                     investments will decline in value.


                                     The prices of fixed-rate securities with
                                     longer durations tend to be more sensitive
                                     to changes in interest rates than
                                     securities with shorter durations, usually
                                     making them more volatile. Because the Fund
                                     will normally have an estimated average
                                     portfolio duration of between two and five
                                     years (including the effects of anticipated
                                     leverage), the Common Shares' net asset
                                     value and market price will tend to
                                     fluctuate more in response to changes in
                                     market interest rates than if the Fund
                                     invested mainly in short-term debt
                                     securities and less than if the Fund
                                     invested mainly in longer-term debt
                                     securities.


                                     The Preferred Shares, if any are issued,
                                     are expected to pay dividends based on
                                     certain interest rates. If the Preferred
                                     Share dividend rate exceeds the rate of
                                     return on the debt obligations and other
                                     investments held by the Fund that were
                                     acquired during periods of generally lower
                                     interest rates, the returns to Common
                                     Shareholders may be reduced. The Fund's use
                                     of leverage, as described in the
                                     prospectus, will tend to increase Common
                                     Share interest rate risk.


                                     The Fund may employ certain strategies for
                                     the purpose of reducing the interest rate
                                     sensitivity of the portfolio and decreasing
                                     the Fund's exposure to interest rate risk,
                                     although entire there is no assurance that
                                     it will do so or that such strategies will
                                     be successful. See "Risks -- Interest Rate
                                     Risk."


Inflation Risk                       Inflation risk is the risk that the value
                                     of assets or income from the Fund's
                                     investments will be worth less in the
                                     future as inflation decreases the value of
                                     money.

Leverage Risk                        The Fund's use of leverage through the
                                     issuance of Preferred Shares, the lending
                                     of portfolio securities, and the use of
                                     swaps, other derivatives, reverse
                                     repurchase agreements, and when-issued,
                                     delayed delivery or forward commitment
                                     transactions, creates the opportunity for
                                     increased Common Share net income, but also
                                     creates special risks for Common
                                     Shareholders. To mitigate leverage risk
                                     from such transactions, the Fund will
                                     segregate liquid assets against or
                                     otherwise cover its future obligations
                                     under such transactions.

                                     So long as the Fund's securities portfolio
                                     provides a higher rate of return (net of
                                     Fund expenses) than the Preferred Share
                                     dividend rate, the leverage will allow
                                     Common Shareholders to receive a higher
                                     current rate of return than if the Fund
                                     were not leveraged. If, however, interest
                                     rates rise, which may be likely because
                                     interest rates are currently near their
                                     lowest levels in many years, the Preferred
                                     Share dividend rate could exceed the rate
                                     of return on the debt obligations and other
                                     investments held by the Fund that were
                                     acquired during periods of generally lower
                                     interest rates, reducing return to Common
                                     Shareholders. Preferred Shares are expected
                                     to pay cumulative dividends, which may
                                     increase leverage risk.

                                     The Fund's use of leverage may, during
                                     periods of rising interest rates, adversely
                                     affect the Fund's income, distributions and
                                     total returns to Common Shareholders.
                                     Leverage creates two major types of risks
                                     for Common Shareholders:

                                     - the likelihood of greater volatility of
                                       net asset value and market price of
                                       Common Shares, because changes in the
                                       value of the Fund's portfolio of
                                       income-producing securities (including
                                       securities bought with the proceeds of
                                       the Preferred Shares offering) are borne
                                       entirely by the Common Shareholders; and

                                     - the possibility either that Common Share
                                       income will fall if the Preferred Share
                                       dividend rate rises, or that Common Share
                                       income will fluctuate because the
                                       Preferred Share dividend rate varies.
                                       Because the fees received by the Manager
                                       are based on the Managed Assets of the
                                       Fund (including assets attributable to
                                       any Preferred Shares that may be
                                       outstanding), the Manager has a financial
                                       incentive for the Fund to issue
                                       Preferred Shares, which may create a
                                       conflict of interest between the Manager
                                       and the Common Shareholders.


                                     By using leverage, the Fund will seek to
                                     obtain a higher return for holders of
                                     Common Shares than if the Fund did not use
                                     leverage. Leveraging is a speculative
                                     technique and there are special risks
                                     involved. There can be no assurance that a
                                     leveraging strategy will be used or that it
                                     will be successful during any period in
                                     which it is employed. The Fund's use of
                                     leverage strategies could result in larger
                                     losses than if the strategies were not
                                     used.


Portfolio Security Issuer Risk       The value of the Fund's investments may
                                     decline for a number of reasons that
                                     directly relate to the issuer, such as
                                     management performance, financial leverage
                                     and performance and factors affecting the
                                     issuer's industry.

Management Risk                      The Fund is subject to management risk
                                     because it is an actively managed
                                     portfolio. The Manager will apply
                                     investment techniques and risk analyses in
                                     making investment decisions for the Fund,
                                     but there can be no guarantee that they
                                     will produce the desired results.


Foreign (Non-U.S.) Investment Risk   Investing in foreign securities, including
                                     securities of foreign governments,
                                     typically involves more risks than
                                     investing in U.S. securities. These risks
                                     can increase the potential for losses in
                                     the Fund and may include, among others,
                                     currency risks, country risks (political,
                                     diplomatic, regional conflicts, terrorism,
                                     war, social and economic instability,
                                     currency devaluations and policies that
                                     have the effect of limiting or restricting
                                     foreign investment or the movement of
                                     assets), different trading practices, less
                                     government supervision, less publicly
                                     available information, limited trading
                                     markets and greater volatility. See "Risks
                                     -- Foreign (Non-U.S.) Investment Risk."
                                     Investing in securities of issuers based in
                                     developing or emerging markets entails all
                                     of the risks of investing in securities of
                                     foreign issuers to a heightened degree as
                                     well as other risks. See "Risks -- Foreign
                                     (Non-U.S.) Investment Risk -- Developing
                                     Countries and Emerging Markets."

                                     Debt issued by foreign governments, their
                                     agencies or instrumentalities, or other
                                     government-related entities, is subject to
                                     several risks, such as the fact that there
                                     are generally no bankruptcy proceedings
                                     similar to those in the United States by
                                     which defaulted sovereign debt may be
                                     collected. Other risks include: potential
                                     limits on the flow of capital; political
                                     and economic risk; the extent and quality
                                     of financial regulations; tax risk; and the
                                     potential expropriation or nationalization
                                     of foreign issuers. See "Risks -- Foreign
                                     (Non-U.S.) Investment Risk -- Sovereign
                                     Issuers."


Derivatives Risk                     Derivatives (such as futures contracts and
                                     options thereon, options, swaps and short
                                     sales) are subject to a number of risks
                                     such as liquidity risk, interest rate risk,
                                     credit risk, leverage risk, volatility risk
                                     and management risk. They also involve the
                                     risk of mispricing or improper valuation,
                                     the risk of ambiguous documentation, and
                                     the risk that changes in the value of a
                                     derivative may not correlate perfectly with
                                     an underlying asset, interest rate or
                                     index. There can be no assurance that the
                                     Fund will engage in suitable derivative
                                     transactions to reduce exposure to other
                                     risks when that would be beneficial. See
                                     "Risks -- Derivatives Risk."

Counterparty Risk                    The Fund will be subject to credit risk
                                     with respect to the counterparties to any
                                     derivative contracts purchased by the Fund.
                                     If a counterparty becomes bankrupt or
                                     otherwise fails to perform its obligations
                                     under a derivative contract due to
                                     financial difficulties, the Fund may
                                     experience significant delays in obtaining
                                     any recovery under the derivative contract.
                                     See "Risks -- Counterparty Risk."


Volatility Risk                      The market values for some or all of the
                                     Fund's holdings may be volatile. The Fund's
                                     investment grade or long-term debt
                                     securities will generally be more sensitive
                                     to changing interest rates and less
                                     sensitive to changes in the economic
                                     environment. The Fund's investments may
                                     also be subject to liquidity constraints
                                     and as a result, higher price volatility.
                                     The Fund's use of leverage may increase the
                                     volatility of the Fund's investment
                                     portfolio. See "Risks -- Volatility Risk."

Reinvestment Risk                    The Fund may distribute or reinvest the
                                     proceeds from matured, traded or called
                                     debt obligations. If the Fund reinvests
                                     such proceeds at lower interest rates, the
                                     market price or the overall return of the
                                     Common Shares may decline. See "Risks --
                                     Reinvestment Risk."

Call Risk                            A debt security may be prepaid (called)
                                     before maturity. An issuer is more likely
                                     to call its securities when interest rates
                                     are falling, because the issuer can issue
                                     new securities with lower interest
                                     payments. If a debt security is called, the
                                     Fund may have to replace it with a
                                     lower-yielding security. At any time, the
                                     Fund may have a large amount of its assets
                                     invested in securities subject to call
                                     risk. A call of some or all of these
                                     securities may lower the Fund's income and
                                     yield and its distributions to
                                     shareholders. See "Risks -- Call Risk."

Liquidity Risk                       The Fund may invest up to 15% of its total
                                     assets in securities (excluding swaps)
                                     which are illiquid at the time of
                                     investment (securities that cannot be
                                     disposed of within seven days in the o
                                     rdinary course of business at approximately
                                     the value at which the Fund has valued the
                                     securities). Illiquid securities may trade
                                     at a discount from comparable, more liquid
                                     investments, and may be subject to wide
                                     fluctuations in market value. Also, the
                                     Fund may not be able to dispose of illiquid
                                     securities when that would be beneficial at
                                     a favorable time or price. See "Risks --
                                     Liquidity Risk."

Income Risk                          Because the Fund can distribute only what
                                     it earns, the Fund's distributions to
                                     shareholders may decline. See "Risks --
                                     Income Risk."

Zero-Coupon Securities Risk          Zero-coupon securities are especially
                                     sensitive to changes in interest rates, and
                                     their prices generally are more volatile
                                     than debt securities that pay interest
                                     periodically. Lower quality zero-coupon
                                     bonds are generally subject to the same
                                     risks as high yield debt securities. The
                                     Fund typically will not receive any
                                     interest payments on these securities until
                                     maturity. If the issuer defaults, the Fund
                                     may lose its entire investment, which will
                                     affect the Fund's share price. See "Risks
                                     -- Zero-Coupon Securities Risk."


Smaller Company Risk                 Although the Fund does not presently intend
                                     to invest a significant portion of its
                                     assets in smaller companies, the Fund may
                                     invest some of its assets in such
                                     companies. These companies may be subject
                                     to greater levels of credit, market and
                                     issuer risk than companies with larger
                                     market capitalizations. Also, securities of
                                     smaller companies may trade less frequently
                                     and in lesser volume than more widely held
                                     securities and their values may fluctuate
                                     more sharply than other securities. See
                                     "Risks -- Smaller Company Risk."

Real Estate Risk                     Since the Fund may invest in real estate
                                     investment trusts and mortgage securities
                                     secured by real estate, the Fund may be
                                     subject to risks similar to those
                                     associated with the direct ownership of
                                     real estate. These risks include declines
                                     in the value of real estate, general and
                                     local economic risk, management risk,
                                     interest rate risk, possible lack of
                                     availability of mortgage funds,
                                     overbuilding, extended vacancies of
                                     properties, increased competition,
                                     increases in property taxes and operating
                                     expenses, changes in zoning laws,
                                     environmental risk, casualty or
                                     condemnation losses, and rent controls.
                                     See "Risks -- Real Estate Risk."

Market Disruption and
Geopolitical Risk                    The war with Iraq, its aftermath, the
                                     continuing occupation of Iraq, terrorism
                                     and related geopolitical risks have led,
                                     and may in the future lead to increased
                                     short-term market volatility and may
                                     have adverse effects on U.S. and world
                                     economies and markets generally. These
                                     risks could also adversely affect
                                     individual issuers and securities markets,
                                     interest rates, auctions, secondary
                                     trading, ratings, credit risk, inflation
                                     and other factors relating to the Common
                                     Shares. See "Risks -- Market Disruption and
                                     Geopolitical Risk."


Anti-Takeover Provisions             The Fund's Amended and Restated Agreement
                                     and Declaration of Trust, dated June 19,
                                     2003 (the "Declaration"), includes
                                     provisions that could limit the ability of
                                     other entities or persons to acquire
                                     control of the Fund or convert the Fund to
                                     open-end status. Also, these provisions
                                     could have the effect of depriving the
                                     Common Shareholders of opportunities to
                                     sell their Common Shares at a premium over
                                     the then-current market price of the Common
                                     Shares. See "Anti-Takeover and Other
                                     Provisions in the Declaration of Trust."



                            SUMMARY OF FUND EXPENSES

     The following table and the expenses shown assume the issuance of Preferred
Shares in an amount equal to 33% of the Fund's Managed Assets, and show Fund
expenses as a percentage of Managed Assets attributable only to Common Shares.
Footnote 3 to the table also shows Fund expenses as a percentage of Managed
Assets attributable to Common Shares, but assumes that no Preferred Shares are
issued or outstanding (such as will be the case prior to the Fund's expected
issuance of Preferred Shares).

<Table>
<S>                                                                     <C>
SHAREHOLDER TRANSACTION EXPENSES
   Sales Load (as a percentage of offering price)                       4.50%
   Dividend Reinvestment Plan Fees                                      None(1)
</Table>


                                 PERCENTAGE OF MANAGED ASSETS
                                    ATTRIBUTABLE TO COMMON
                                     SHARES (ASSUMING THE
                               ISSUANCE OF PREFERRED SHARES)(3)
                               --------------------------------

ANNUAL EXPENSES
   Management Fees                          0.75%
   Other Expenses                           0.46%(2),(4)
                                            ----
   Total Annual Expenses                    1.21%(5)
                                            ====

----------
(1) You will pay brokerage charges if you direct the plan agent to sell your
    Common Shares held in a dividend reinvestment account.
(2) Other expenses include an administrative services fee of 0.20% of the Fund's
    Managed Assets, payable to FT Services, an affiliate of the Manager.
(3) The table presented below in this footnote estimates what the Fund's annual
    expenses would be, stated as percentages of the Fund's Managed Assets
    attributable to Common Shares but, unlike the table above, assumes that no
    Preferred Shares are issued or outstanding. This will be the case, for
    instance, prior to the Fund's expected issuance of Preferred Shares. In
    accordance with these assumptions, the Fund's expenses would be estimated to
    be as follows:


                                   PERCENTAGE OF MANAGED ASSETS
                                   ATTRIBUTABLE TO COMMON SHARES
                                   (ASSUMING NO PREFERRED SHARES
                                     ARE ISSUED OR OUTSTANDING)
                                   -----------------------------
ANNUAL EXPENSES
   Management Fees                             0.50%
   Other Expenses                              0.30%(2),(4)
                                               ----
   Total Annual Expenses                       0.80%(5)
                                               ====

----------
(4) If the Fund offers Preferred Shares, costs of that offering, estimated to be
    approximately 1.20% of the total dollar amount of the Preferred Share
    offering, will be borne immediately by Common Shareholders and result in a
    reduction of the net asset value of the Common Shares. Assuming the issuance
    of Preferred Shares in an amount equal to 33% of the Fund's Managed Assets
    (calculated after their issuance), these offering costs are estimated to be
    approximately 0.60% of the offering price. These offering costs are not
    included among the expenses shown in this table.
(5) The Manager has agreed to pay (i) the amount by which the Fund's offering
    costs (other than the sales load) exceed $0.03 per share (0.20% of the
    offering price) and (ii) all of the Fund's organizational expenses, except
    that the Fund has agreed to reimburse the Manager for such organizational
    expenses to the extent that the aggregate of such organizational expenses
    and offering costs (other than the sales load) does not exceed $0.03 per
    share. The offering costs to be paid by the Fund are not included among the
    expenses shown in the table. However, these expenses will be borne by Common
    Shareholders and result in a reduction of the net asset value of the Common
    Shares.

     The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The Other Expenses shown in the table and related footnotes are based on
estimated amounts for the Fund's first year of operations and assume that the
Fund issues approximately 33 million Common Shares. If the Fund issues fewer
Common Shares, all other things being equal, these expenses would increase. See
"Management of the Fund" and "Dividend Reinvestment Plan."

     As required by relevant SEC regulations, the following example illustrates
the expenses (including the sales load of $0.675 per Common Share, estimated
offering expenses of this offering of $0.01 per Common Share, and the estimated
offering costs of issuing Preferred Shares assuming the Fund issues Preferred
Shares representing 33% of the Fund's capital (calculated after their issuance)
of approximately $0.09 per Common Share) that you would pay on a $1,000
investment in Common Shares, assuming the sales load and the offering expenses
listed in the parenthetical above, and (a) total net annual expenses of 1.21% of
net assets attributable to Common Shares (assuming the issuance of Preferred
Shares) in years one through ten, and (b) a 5% annual return(1):

                             1 YEAR   3 YEARS    5 YEARS   10 YEARS
                             ------   -------    -------   --------
Total Expenses Incurred       $ 63     $ 88       $ 115     $ 191

----------
(1) THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
    EXPENSES. ACTUAL EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. The
    example assumes that the estimated Other Expenses set forth in the Annual
    Expenses table are accurate and that all dividends and distributions are
    reinvested at net asset value. Actual expenses may be greater or less than
    those assumed. Moreover, the Fund's actual rate of return may be greater or
    less than the hypothetical 5% annual return shown in the example.


                                    THE FUND

     The Fund is a newly organized, diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder (the "1940 Act"). The Fund was
organized as a Delaware statutory trust on May 8, 2003, pursuant to the
Declaration, which is governed by the laws of the State of Delaware. As a newly
organized entity, the Fund has no operating history. The Fund's principal office
is located at One Franklin Parkway, San Mateo, California 94403-1906, and its
telephone number is 1-800/DIAL-BEN (1-800/342-5236).


                                 USE OF PROCEEDS

     The net proceeds of the offering of Common Shares will be approximately
$    (or $    if the Underwriters exercise the over-allotment option in full)
after payment of the estimated organizational and offering costs. The Manager
has agreed to pay (i) the amount by which the Fund's offering costs (other than
the sales load) exceed $0.03 per share and (ii) all of the Fund's organizational
expenses, except that the Fund has agreed to reimburse the Manager for such
organizational expenses to the extent that the aggregate of such organizational
expenses and offering costs (other than the sales load) does not exceed $0.03
per share. The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objectives and policies as stated below. It is
presently anticipated that the Fund will be able to invest substantially all of
the net proceeds in debt obligations and other investments that meet its
investment objectives and policies within three months after the completion of
the offering. Pending such investment, it is anticipated that the proceeds will
be invested in high quality, short-term securities.

                      INVESTMENT OBJECTIVES AND STRATEGIES

INVESTMENT OBJECTIVES

     The Fund's primary investment objective is to seek high current income. Its
secondary objective is to seek capital appreciation to the extent it is possible
and is consistent with the Fund's primary objective. Under normal market
conditions, the Fund will seek to achieve its investment objectives by investing
in debt securities and other income-producing instruments, allocated primarily
among three distinct investment categories: (1) mortgage-backed and other
asset-backed securities; (2) bank loans made to corporate and other business
entities; and (3) below investment grade debt securities and other
income-producing instruments, as described under "Portfolio Contents and Other
Information." The Manager has broad discretion to allocate the Fund's assets
among the three principal investment categories. There is no limitation on the
percentage of the Fund's assets that may be allocated to each of these
investment categories; provided that, under normal market conditions, the Fund
will invest at least 25% of its total assets in each category. Under normal
circumstances, the Fund's allocation to the investment category of
mortgage-backed and other asset-backed securities will be primarily composed of
investments in mortgage-backed securities. The Fund cannot assure you that it
will achieve its investment objectives.

     Under normal market conditions, the Fund expects to maintain a weighted
average portfolio credit quality of investment grade, which will be determined
by the Manager based on the credit quality of the Fund's portfolio holdings (as
rated by the Rating Agencies, or if unrated, as determined by the Manager). For
this purpose, when a portfolio holding is rated by more than one of these rating
agencies, the Manager generally will use the highest rating.

     Under normal market conditions, the Manager expects the Fund to maintain an
estimated average portfolio duration of between two and five years (including
the effect of anticipated leverage). This duration policy may only be changed
following provision of 60 days' prior notice to Common Shareholders. Initially,
the Fund is expected to have an estimated average portfolio duration of
approximately three years (including the effect of anticipated leverage). In
comparison to maturity (which is the date on which a debt instrument ceases and
the issuer is obligated to repay the principal amount), duration is a measure of
the price volatility of a debt instrument as a result of changes in market rates
of interest, based on the weighted average timing of the instrument's expected
principal and interest payments. Duration differs from maturity in that it
considers a security's yield, coupon payments, principal payments and call
features in addition to the amount of time until the security finally matures.
As the value of a security changes over time, so will its duration. Prices of
securities with longer durations tend to be more sensitive to interest rate
changes than securities with shorter durations. In general, a portfolio of
securities with a longer duration can be expected to be more sensitive to
interest rate changes than a portfolio with a shorter duration.

     The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and any Preferred
Shares voting together as a single class, and of the holders of a "majority of
the outstanding" Preferred Shares voting as a separate class. A "majority of the
outstanding" shares (whether voting together as a single class or voting as a
separate class) means (i) 67% or more of such shares present at a meeting, if
the holders of more than 50% of those shares are present or represented by
proxy, or (ii) more than 50% of such shares, whichever is less. See "Description
of Shares -- Voting Rights" for additional information with respect to the
voting rights of holders of Preferred Shares.


     The Fund may not necessarily be leveraged at all times and the amount of
borrowing or leverage, if any, may vary depending upon a variety of factors,
including the Manager's outlook for the market for debt securities and other
income-producing instruments and the costs that the Fund would incur as a result
of such leverage.


     The Fund presently intends to use leverage by issuing Preferred Shares
representing approximately 33% of the Fund's Managed Assets (calculated after
their issuance), although the Fund is permitted to use leverage representing
up to 38% of the Fund's Managed Assets. The Fund may also enter into
transactions that may give rise to a form of leverage, including among
others: loans of portfolio securities, swap contracts and other derivative
instruments, reverse repurchase agreements, as well as when-issued, delayed
delivery or forward commitment transactions. The Fund will segregate liquid
assets against or otherwise cover its future obligations under such
transactions, in order to provide that, immediately after entering into such a
transaction, the Fund's future commitments that it has not segregated liquid
assets against or otherwise covered, together with any outstanding Preferred
Shares, will not exceed 38% of the Fund's Managed Assets. The Fund's use of
derivative instruments (other than swaps) will also be limited by the Fund's 15%
limit on illiquid investments to the extent they are determined to be illiquid.
See "Preferred Shares and Related Leverage" and "Risks -- Liquidity Risk."


     By using leverage, the Fund will seek to obtain a higher return for holders
of Common Shares than if the Fund did not use leverage. Leveraging is a
speculative technique and there are special risks involved. There can be no
assurance that a leveraging strategy will be used or that it will be successful
during any period in which it is employed.


PORTFOLIO MANAGEMENT STRATEGIES

     The Fund will use an active sector allocation strategy to try to achieve
its goals of income and capital appreciation. This means the Fund allocates its
assets among securities in various market sectors based on the Manager's
assessment of changing economic, global market, industry, and issuer conditions.
Consequently, the Fund, from time to time, may have significant positions in
particular sectors. The Manager will use a "top-down" analysis of macroeconomic
trends combined with a "bottom-up" fundamental analysis of market sectors,
industries, and issuers to try to take advantage of varying sector reactions to
economic events. The Manager will evaluate business cycles, yield curves, and
values between and within markets, as well as country risk and currency risk.
The Fund's ability to achieve its investment goals depends in part upon the
Manager's skill in determining the Fund's asset allocation mix and sector
weightings. There can be no assurance that the Manager's analysis of the outlook
for the economy and the business cycle will be correct.


     The Manager also intends to utilize a research driven, fundamental strategy
that relies on a team of analysts to provide in-depth industry expertise and
that uses both qualitative and quantitative analysis to evaluate companies.
Employing a "bottom-up" investment strategy, the Manager intends to focus on
individual securities. In selecting securities for the Fund's investment
portfolio, the Manager will not rely principally on the ratings assigned by
rating agencies, but will perform its own independent investment analysis to
evaluate the creditworthiness of the issuer. The Manager will consider a variety
of factors, including the issuer's experience and managerial strength, its
sensitivity to economic conditions, and its current financial condition.

     At the same time, the Manager will use a variety of techniques, described
below and elsewhere in the prospectus, designed to evaluate risk and manage the
Fund's exposure to investments that the Manager believes are more likely to
default or otherwise depreciate in value over time and detract from the Fund's
overall return to investors. The Fund cannot assure you that such securities
will ultimately continue to pay current income or be paid in full at maturity.

     When the Manager believes market or economic conditions are unfavorable for
investors, the Manager may invest up to 100% of the Fund's assets in a temporary
defensive manner by holding all or a substantial portion of its assets in cash,
cash equivalents or other high quality short-term investments. Temporary
defensive investments generally may include U.S. government securities,
commercial paper, repurchase agreements and other money market securities. The
Manager also may invest in these types of securities or hold cash while looking
for suitable investment opportunities or to maintain liquidity. In these
circumstances, the Fund may be unable to achieve its investment goals.


                    PORTFOLIO CONTENTS AND OTHER INFORMATION

     This section provides additional information regarding the types of
securities and other instruments in which the Fund will ordinarily invest. A
more detailed discussion of these and other instruments and investment
techniques that may be used by the Fund is provided under "Investment Objectives
and Policies" in the Statement of Additional Information.

     The Fund will invest in a diversified portfolio of debt securities and
other income-producing instruments of varying maturities. These may include
bonds, debentures, notes and other similar types of debt instruments, such as
asset-backed securities, as well as convertible securities, bank loans and loan
participations, commercial and agency-issued mortgage securities,
payment-in-kind securities, zero-coupon securities, bank certificates of
deposit, fixed time deposits and bankers' acceptances, structured notes and
other hybrid instruments, real estate investment trusts, preferred shares, U.S.
government securities, municipal securities, debt securities issued by foreign
corporations or supra-national government agencies, mortgage-backed securities
issued on a public or private basis, and other types of asset-backed securities.
The Fund will not invest in inverse floaters or interest-only or principal-only
mortgage securities.

     Certain debt instruments, such as convertible bonds, also may include the
right to participate in equity appreciation, and the Manager will generally
evaluate those instruments based primarily on their debt characteristics. The
Fund may hold equity securities; however, under ordinary circumstances, such
investments will be limited to convertible securities, dividend-paying common or
preferred stocks, or equity securities acquired in connection with a
restructuring, a bankruptcy, a default, or the exercise of a conversion or
purchase right. See "Additional Investment Practices -- Equity Securities."

     The rate of interest on an income-producing security may be fixed, floating
or variable. The principal and/or interest rate on some debt instruments may be
determined by reference to the performance of a benchmark asset or market, such
as an index of securities, or the differential performance of two assets or
markets, such as the level of exchange rates between the U.S. dollar and a
foreign currency or currencies.


     The Fund may invest in debt securities and other income-producing
instruments that are rated below investment grade. The Fund may invest up to 15%
of its total assets in securities or other income-producing instruments issued
by companies and governments in any foreign country, including developed or
developing countries.

     The Fund also may invest up to 5% of its total assets in securities or
other income-producing instruments denominated in foreign currencies, including
obligations of non-U.S. governments and their respective sub-divisions, agencies
and government-sponsored enterprises. The Fund also may utilize a variety of
derivative instruments for hedging, duration management, investment and risk
management purposes, such as options, futures contracts, swap agreements and
short sales, and may seek to obtain market exposure to the securities in which
it primarily invests by entering into a series of purchase and sales contracts.

     The Fund may invest up to 15% of its total assets in illiquid securities
(I.E., securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the value at which the Fund has valued the
securities). Given the current structure of the markets for Rule 144A
securities, the Fund may treat some of these securities as illiquid, except that
Rule 144A securities may be deemed liquid by the Manager under guidelines
adopted by the Board of Trustees. Although structured notes, bank loans and loan
participations are not necessarily illiquid, to the extent such investments are
deemed to be illiquid by the Manager, they will be subject to the Fund's
restrictions on investments in illiquid securities. The Fund's investment in
swaps will not be included as illiquid investments for purposes of determining
compliance with the 15% limit on illiquid investments. Accordingly, the Fund may
invest more than 15% of its total assets in swaps. However, the Fund's use of
derivative instruments (other than swaps) will be limited by the Fund's 15%
limit on illiquid investments to the extent such derivatives are determined to
be illiquid.

COMMERCIAL AND OTHER MORTGAGE-RELATED AND ASSET-BACKED SECURITIES

     Under normal market conditions, the Fund will invest at least 25% of its
assets in mortgage-backed and other asset-backed securities. Mortgage-related
securities are debt instruments which provide periodic payments consisting of
interest and/or principal that are derived from or related to payments of
interest and/or principal on underlying mortgages. Additional payments on
mortgage-related securities may be made out of unscheduled prepayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs that may be incurred. Under normal conditions,
the Fund's allocation to the investment category of mortgage-backed and other
asset-backed securities will be primarily composed of investments in
mortgage-backed securities.

     The Fund may invest a significant portion of its assets in commercial
mortgage-related securities issued by corporations. These are securities that
represent an interest in, or are secured by, mortgage loans secured by
commercial property, such as industrial and warehouse properties, office
buildings, retail space and shopping malls, multifamily properties and
cooperative apartments, hotels and motels, nursing homes, hospitals, and senior
living centers. They may pay fixed or adjustable rates of interest. The
commercial mortgage loans that underlie commercial mortgage-related securities
have certain distinct risk characteristics. Commercial mortgage loans generally
lack standardized terms, which may complicate their structure. Commercial
properties themselves tend to be unique and difficult to value. Commercial
mortgage loans tend to have shorter maturities than residential mortgage loans,
and may not be fully amortizing, meaning that they may have a significant
principal balance, or "balloon" payment, due on maturity. In addition,
commercial properties, particularly industrial and warehouse properties, are
subject to environmental risks and the burdens and costs of compliance with
environmental laws and regulations.

     Other mortgage-related securities in which the Fund may invest include
mortgage pass-through securities, mortgage dollar rolls, and other securities
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property. The Fund will not invest in
interest-only or principal-only mortgage securities.

     The Fund may invest in securities issued by trusts and special purpose
corporations with principal and interest payouts backed by, or supported by, any
of various types of assets. These assets typically include receivables related
to the purchase of manufactured housing, automobiles, credit card loans, and
home equity loans. These securities generally take the form of a structured type
of security, including pass-through, pay-through and senior subordinated payout
structures.

     The Fund may invest in other types of asset-backed securities that are
offered in the marketplace, including Enhanced Equipment Trust Certificates
("EETCs"). Although any entity may issue EETCs, to date, U.S. airlines are the
primary issuers. An airline EETC is an obligation secured directly by aircraft
or aircraft engines as collateral. EETCs tend to be less liquid than bonds.
Other asset-backed securities may be collateralized by the fees earned by
service providers. The value of asset-backed securities may be substantially
dependent on the servicing of the underlying asset pools and are therefore
subject to risks associated with the negligence of, or defalcation by, their
servicers. In certain circumstances, the mishandling of related documentation
may also affect the rights of the security holders in and to the underlying
collateral. The insolvency of entities that generate receivables or that utilize
the assets may result in added costs and delays in addition to losses associated
with a decline in the value of the underlying assets.

     Please see "Investment Restrictions and Additional Investment Information
-- Mortgage-Related and Other Asset-Backed Securities" in the Statement of
Additional Information and "Risks -- Mortgage-Related Risk" in this prospectus
for a more detailed description of the types of mortgage-related and other
asset-backed securities in which the Fund may invest and their related risks.

BANK LOANS AND LOAN PARTICIPATIONS

     Under normal market conditions, the Fund will invest at least 25% of its
total assets in bank loans made to corporate and other business entities. Such
bank loans typically pay interest at rates which are re-determined periodically
on the basis of a floating base lending rate such as the London Interbank
Offered Rate ("LIBOR") plus a premium. The Fund may acquire loan participations
and other related direct or indirect bank debt obligations (bank loans or loan
participations), in which the Fund will buy from a lender a portion of a larger
loan that the lender has made to a borrower. The Manager generally considers
loan participations to be liquid. To the extent loan participations are deemed
to be liquid by the Manager, they will not be subject to the Fund's restrictions
on investments in illiquid securities.


     Generally, loan participations are sold without guarantee or recourse to
the lending institution and are subject to the credit risks of both the borrower
and the lending institution. Loan participations, however, may enable the Fund
to acquire an interest in a loan from a financially strong borrower which it
could not do directly. While loan participations generally trade at par value,
the Fund may be permitted to buy loan participations that sell at a discount
because of the borrower's credit problems or other issues associated with the
credit risk of the loan. To the extent the credit problems are resolved, loan
participations may appreciate in value.

     Indebtedness of companies whose creditworthiness is poor involves
substantially greater risks, and may be highly speculative. Some companies may
never pay off their indebtedness, or may pay only a small fraction of the amount
owed. Consequently, when investing in indebtedness of companies with poor
credit, the Fund bears a substantial risk of losing the entire amount invested.
If the Fund purchases a loan, it may only be able to enforce its rights through
the lender, and may assume the credit risk of both the lender and the borrower.


     Bank loans and other floating-rate debt instruments are subject to the risk
of non-payment of scheduled interest or principal. Such non-payment would result
in a reduction of income to the Fund, a reduction in the value of the investment
and a potential decrease in the net asset value of the Fund. Some bank loans may
be secured by collateral; however, there can be no assurance that the
liquidation of any collateral securing a bank loan would satisfy the borrower's
obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated. In the event of
bankruptcy of a borrower, the Fund could experience delays or limitations with
respect to its ability to realize the benefits of any collateral securing a bank
loan. Collateral securing a bank loan may lose all or substantially all of its
value in the event of bankruptcy of a borrower. Some bank loans are subject to
the risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate the bank loans to presently existing or future indebtedness of
the borrower or take other action detrimental to the holders of the bank loans
including, in certain circumstances, invalidating such bank loans or causing
interest previously paid to be refunded to the borrower. If interest were
required to be refunded, it could negatively affect the Fund's performance.

     Many bank loans in which the Fund will invest may not be rated by a Rating
Agency, will not be registered with the SEC or any state securities commission
and will not be listed on any national securities exchange. The amount of public
information available with respect to bank loans will generally be less
extensive than that available for registered or exchange listed securities. In
evaluating the creditworthiness of borrowers, the Manager will consider, and may
rely in part, on analyses performed by others. Borrowers may have outstanding
debt obligations that are rated below investment grade by a Rating Agency. A
portion, and potentially all, of the bank loans in the Fund may be assigned
ratings below investment grade by a Rating Agency, or unrated but judged by the
Manager to be of comparable quality.

     No active trading market may exist for some bank loans and some loans may
be subject to restrictions on resale. A secondary market may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods, which may impair the ability to realize full value and thus cause a
material decline in the Fund's net asset value. In addition, the Fund may not be
able to readily dispose of its bank loans at prices that approximate those at
which the Fund could sell such loans if they were more widely-traded and, as a
result of such illiquidity, the Fund may have to sell other investments or
engage in borrowing transactions if necessary to raise cash to meet its
obligations. During periods of limited supply and liquidity of bank loans, the
Fund's yield may be lower. See "Risks -- Liquidity Risk."

HIGH YIELD INVESTMENTS

     Under normal market conditions, the Fund will invest at least 25% of its
total assets in debt securities and other income-producing instruments that are
rated below investment grade by Moody's, S&P or Fitch (below Baa by Moody's,
below BBB by S&P or Fitch) or that are unrated but judged by the portfolio
managers to be of comparable quality. These debt securities are sometimes
referred to as "high yield" securities or "junk bonds." Investing in high yield
securities and instruments involves greater risks (in particular, greater risk
of default) and special risks in addition to the risks associated with
investments in investment grade debt obligations. While offering a greater
potential opportunity for capital appreciation and higher yields, high yield
investments typically entail greater potential price volatility and default risk
and may be less liquid than higher-rated securities. Compared to issuers of
higher-rated securities, issuers of high yield securities or other
income-producing instruments may be perceived to have greater difficulty meeting
principal and interest payments. They also may be more susceptible to real or
perceived adverse economic and competitive conditions related to the issuer's
industry than higher-rated securities. High yield investments may be less liquid
than higher rated securities. The Fund may also invest in debt securities or
other obligations whose issuers are in bankruptcy. See "Risks -- Liquidity
Risk."

     The market values of high yield investments tend to reflect individual
developments of the issuer to a greater extent than do higher-quality
securities, which tend to react mainly to fluctuations in the general level of
interest rates. In addition, lower-quality debt securities tend to be more
sensitive to economic conditions. Certain "emerging market" governments that
issue high yield securities are among the largest debtors to commercial banks,
foreign governments and supra-national organizations such as the World Bank, and
may not be able or willing to make principal and/or interest payments as they
come due.

     The Fund may purchase unrated securities (which are not rated by a rating
agency) if the Manager determines that the securities are of comparable quality
to rated securities that the Fund may purchase. Unrated securities may be less
liquid than comparable rated securities and involve the risk that the Manager
may not accurately evaluate the security's comparative credit rating.

     The Fund will not invest more than 10% of its total assets in securities
that are, at the time of purchase, rated CCC/Caa or lower by each Rating Agency
rating the security or that are unrated but judged by the portfolio managers to
be of comparable quality. Lower rated securities generally provide higher yields
than more highly rated securities to compensate investors for the higher risk.
The Fund will seek to invest in securities offering the highest yield and
expected total return without taking on an excessive amount of risk. These lower
rated securities may also include defaulted securities for which payments of
interest or principal or both are unpaid and overdue or for which other defaults
have occurred. Under normal conditions, the Fund will not invest more than 5% of
its total assets in debt securities or other obligations whose issuers are in
default at the time of purchase.

     Because the securities the Fund holds fluctuate in price, the value of your
investment in the Fund will go up and down. This means you could lose money over
short or even extended periods.

  CREDIT RATINGS AND UNRATED SECURITIES

     Rating Agencies are private services that provide ratings of the credit
quality of debt obligations, including convertible securities, based on an
assessment of default risk. Appendix A to the Statement of Additional
Information describes the various ratings assigned to debt obligations by
Moody's, S&P and Fitch. Ratings assigned by a Rating Agency are the individual
agency's opinion of credit quality and do not evaluate market risks. Rating
Agencies may fail to make timely changes in credit ratings or may make an
inaccurate assessment of the factors affecting credit quality, and an issuer's
current financial condition may be better or worse than a rating indicates. The
Fund will not necessarily sell a security when its rating is reduced below its
rating at the time of purchase. As described below under "-- Independent Credit
Analysis," the Manager does not rely solely on credit ratings, and develops its
own analysis of issuer credit quality. The ratings of a debt security may change
over time. The Rating Agencies monitor and evaluate the ratings assigned to
securities on an ongoing basis. As a result, debt instruments held by the Fund
could receive a higher rating (which would tend to increase their value) or a
lower rating (which would tend to decrease their value) during the period in
which they are held.

  INDEPENDENT CREDIT ANALYSIS

     The Manager will rely heavily on its own analysis of the credit quality and
risks associated with individual debt obligations considered for the Fund,
rather than relying exclusively on rating agencies or third-party research. The
Manager will use this information in an attempt to minimize credit risk and
identify issuers, industries or sectors that are undervalued or that offer
attractive yields relative to the Manager's assessment of their credit
characteristics. The Manager will monitor the creditworthiness of the Fund's
portfolio. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher-quality debt obligations. The
Fund's success in achieving its investment objectives may depend more heavily on
the Manager's credit analysis than if the Fund invested solely in higher-quality
and rated securities.

ADDITIONAL INVESTMENT PRACTICES

  SWAPS

     As described under "Preferred Shares and Related Leverage," the Fund may
enter into swap contracts for hedging purposes, to change the duration of the
overall portfolio, to mitigate default risk, or to add leverage to the
portfolio; such swaps may include but are not limited to interest rate swaps,
credit default swaps or currency swaps. When used for hedging purposes, the Fund
would be the buyer of a swap contract. When the Fund is the seller of a swap
contract, the Fund will segregate assets in the form of cash and cash
equivalents in an amount equal to the aggregate market value of such swaps,
marked to market on a daily basis. The Fund's investment in swaps will not be
included as illiquid investments for purposes of determining compliance with the
15% limit on illiquid investments. Accordingly, the Fund may invest more than
15% of its total assets in swaps. However, the Fund's use of derivative
instruments (other than swaps) will be limited by the Fund's 15% limit on
illiquid investments to the extent such derivatives are determined to be
illiquid.


     INTEREST RATE SWAPS. An interest rate swap is the transfer between two
counterparties of interest rate obligations. One obligation has an interest rate
fixed to maturity while the other has an interest rate that changes with changes
in a designated benchmark, such as LIBOR, prime, commercial paper, or other
benchmarks. The obligations to make repayment of principal on the underlying
securities are not transferred. These transactions generally require the
participation of an intermediary, frequently a bank. The entity holding the
fixed rate obligation will transfer the obligation to the intermediary, and the
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity that
has a floating-rate obligation that substantially mirrors the obligation desired
by the first entity. In return for assuming a fixed obligation, the second
entity will pay the intermediary all sums that the intermediary pays on behalf
of the first entity, plus an arrangement fee and other agreed upon fees. To the
extent the Fund does not own the underlying obligation, the Fund will maintain,
in a segregated account with its custodian bank, cash or liquid debt securities
with an aggregate value equal to the amount of the Fund's outstanding swap
obligation.

     Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly available
in the credit market, while permitting the party desiring a fixed rate
obligation the opportunity to acquire a fixed rate obligation, also frequently
at a price lower than is available in the capital markets. The success of the
transaction depends in large part on the availability of fixed rate obligations
at a low enough coupon rate to cover the cost involved.

     CREDIT DEFAULT SWAPS. The Fund may purchase credit default swaps. In that
case, the Fund would be entitled to receive the par (or other agreed-upon) value
of a referenced debt obligation from the counterparty to the contract in the
event of a default by a third party, such as a U.S. or foreign issuer, on the
debt obligation. In return, the Fund would pay to the counterparty a periodic
stream of payments over the term of the contract provided that no event of
default has occurred. If no default occurs, the Fund would have spent the stream
of payments and received no benefit from the contract. When the Fund is the
seller of a swap contract, it receives the stream of payments but is obligated
to pay upon default of the referenced debt obligation. As the seller, the Fund
would effectively add leverage to its portfolio because, in addition to its
total assets, the Fund would be subject to investment exposure on the notional
amount of the swap.

  COMMERCIAL PAPER

     Commercial paper represents short-term unsecured promissory notes issued in
bearer form by corporations such as banks or bank holding companies and finance
companies. The rate of return on commercial paper may be linked or indexed to
the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.

  BANK OBLIGATIONS

     The Fund may invest in certain bank obligations, including certificates of
deposit, bankers' acceptances, and fixed time deposits. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
for a definite period of time and earning a specified return. Bankers'
acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are "accepted" by a
bank, meaning, in effect, that the bank unconditionally agrees to pay the face
value of the instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed rate. Fixed
time deposits may be withdrawn on demand by the investor, but may be subject to
early withdrawal penalties, which vary depending upon market conditions and the
remaining maturity of the obligation.

  ZERO-COUPON SECURITIES

     Zero-coupon or deferred interest securities are debt obligations that make
no periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the cash payment date), and therefore
are generally issued and traded at a discount from their face amount or par
value. The discount varies depending on the time remaining until maturity or the
cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.


     Because of the lack of current income, the value of zero-coupon securities
is generally more volatile than the value of other fixed-income securities that
pay interest periodically. Zero-coupon securities are also likely to respond to
changes in interest rates to a greater degree than other fixed-income securities
having similar maturities and credit quality. For federal income tax purposes,
holders of these bonds, such as the Fund, are deemed to receive interest over
the life of the bonds and are taxed as if interest were paid on a current basis
although the holder does not receive cash interest payments until the bonds
mature. Accordingly, during times when the Fund does not receive any cash
interest payments on its zero-coupon or deferred interest securities, it may
have to sell portfolio securities to meet distribution requirements and these
sales may be subject to the risk factors discussed above. The Fund is not
limited in the amount of its assets that may be invested in these types of
securities.

  PAY-IN-KIND SECURITIES

     Pay-in-kind securities pay interest by issuing more bonds. The Fund is
deemed to receive interest over the life of these bonds and is treated as if the
interest were paid on a current basis for federal income tax purposes, although
the Fund does not receive any cash interest payments until maturity or the cash
payment date. Accordingly, during times when the Fund does not receive any cash
interest payments on its pay-in-kind securities, it may have to sell portfolio
securities to meet distribution requirements and these sales may be subject to
the risk factors discussed above. The Fund is not limited in the amount of its
assets that may be invested in pay-in-kind securities.

  FOREIGN (NON-U.S.) INVESTMENTS AND CURRENCIES

     The Fund may invest up to 15% of its total assets in securities or other
income-producing instruments issued by companies and governments in any foreign
country, developed or developing. Foreign investments held by the Fund generally
will be traded on U.S. markets.

     The Fund also may invest up to 5% of its total assets in securities or
other income-producing instruments denominated in foreign currencies, including
obligations of non-U.S. governments and their respective sub-divisions, agencies
and government-sponsored enterprises. Investing in foreign securities involves
special risks and considerations not typically associated with investing in U.S.
securities. See "Risks -- Foreign (Non-U.S.) Investment Risk."


     FOREIGN CURRENCIES AND RELATED TRANSACTIONS. The Fund's investments in
securities that trade in, or receive revenues in, foreign currencies will be
subject to currency risk, which is the risk that fluctuations in the exchange
rates between the U.S. dollar and foreign currencies may negatively affect any
investment. The Fund may engage in a variety of transactions involving foreign
currencies in order to hedge against foreign currency risk, to increase exposure
to a foreign currency, or to shift exposure to foreign currency fluctuations
from one currency to another. For instance, the Fund may purchase foreign
currencies on a spot (cash) basis and enter into forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currencies and futures. Suitable hedging transactions may not be available in
all circumstances and there can be no assurance that the Fund will engage in
such transactions at any given time or from time to time. Also, these
transactions may not be successful and may eliminate any chance for the Fund to
benefit from favorable fluctuations in relevant foreign currencies. The Fund
will normally seek to hedge at least 75% of its exposure to foreign currencies.

     Please see "Investment Objectives and Policies -- Foreign (Non-U.S.)
Securities," "Investment Objectives and Policies -- Foreign Currency
Transactions" and "Investment Objectives and Policies -- Foreign Currency
Exchange-Related Securities" in the Statement of Additional Information for a
more detailed description of the types of foreign investments and foreign
currency transactions in which the Fund may invest and their related risks.


  DERIVATIVES

     The Fund may invest in a variety of derivatives without limit for hedging
purposes, and may invest up to 25% (but not more than 10% within 90 days of the
date of the prospectus) of its total assets in derivatives for non-hedging
purposes.  Generally, derivatives are financial contracts whose value
depends upon, or is derived from, the value of an underlying asset, reference
rate or index, and may relate to individual debt instruments, interest rates,
currencies or currency exchange rates, commodities, and related indexes.
Examples of derivative instruments that the Fund may use include options
contracts, futures contracts, options on futures contracts and swap agreements.
The Fund's use of derivative instruments (other than swaps) will be limited by
the Fund's 15% limit on illiquid investments to the extent they are determined
to be illiquid. The Fund's use of derivative instruments involves risks
different from, or possibly greater than, the risks associated with investment
directly in securities and other more traditional investments. See "Risks --
Derivatives Risk." Certain types of derivative instruments that the Fund may
utilize with some frequency are described elsewhere in this section, including
those described under "-- Structured Notes and Related Instruments" and "--
Swaps." Please see "Investment Objective and Policies -- Derivative Instruments"
in the Statement of Additional Information for additional information about
these and other derivative instruments that the Fund may use and the risks
associated with such instruments. There is no assurance that these derivative
strategies will be available at any time or that the Manager will determine to
use them for the Fund or, if used, that the strategies will be successful. In
addition, the Fund may be subject to certain restrictions on its use of
derivative strategies imposed by guidelines of one or more Rating Agencies that
may issue ratings for Preferred Shares issued by the Fund.


  EQUITY SECURITIES

     The Fund may invest in equity securities. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company's success through the receipt of dividends which are distributions of
earnings by the company to its owners; however, the Fund may hold equity
securities that do not issue dividends. Equity security owners may also
participate in a company's success or lack of success through increases or
decreases in the value of the company's shares as traded in the public trading
market for such shares. Equity securities generally take the form of common
stock or preferred stock. Preferred stockholders typically receive greater
dividends but may receive less appreciation than common stockholders and may
have greater voting rights as well. Equity securities may also include
convertible securities, warrants or rights. Warrants or rights give the holder
the right to purchase a common stock at a given time for a specified price.

     The Fund's equity investments generally will be limited to convertible
securities and dividend-paying common or preferred stocks. The Fund may also
acquire equity securities in connection with the Fund's other investment
activities, including through: the restructuring of loans or other debt
securities; the resolution of a bankruptcy or a default; the entry of an issuer
into receivership, a corporate or securities transaction by the issuer that
affects securities held by the Fund; or the exercise by the Fund of conversion
or purchase rights associated with a convertible or other fixed-income security
purchased by the Fund. These equity securities may have risk and other
characteristics of stocks or of both stocks and bonds. By holding and investing
in equity securities, the Fund may expose an investor to certain risks that
could cause the investor to lose money, particularly if there is a sudden
decline in a holding's share price or an overall decline in the stock market.
The value of an investment in the Fund could decline because of equity
securities held by the Fund based on the day-to-day fluctuation or the decline
in their value related to movements in the stock market, as well as in response
to the activities of individual companies. In addition, some of the equity
securities that the Fund would obtain as a result of the special circumstances
described above could be subject to restrictions on transfer or sale that may
reduce their market value compared to freely tradable securities.

     PREFERRED STOCKS. Preferred stock represents an equity interest in a
company that generally entitles the holder to receive, in preference to the
holders of other stocks such as common stocks, dividends and a fixed share of
the proceeds resulting from liquidation of the company. Some preferred stocks
also entitle their holders to receive additional liquidation proceeds on the
same basis as holders of a company's common stock, and thus also represent an
ownership interest in the company. Some preferred stocks offer a fixed rate of
return with no maturity date. Because they never mature, these preferred stocks
act like long-term bonds and can be more volatile than other types of preferred
stocks and may have heightened sensitivity to changes in interest rates. Other
preferred stocks 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 stocks. Because preferred stocks represent an equity
ownership interest in a company, their value usually will react more strongly
than bonds and other debt instruments to actual or perceived changes in a
company's financial condition or prospects, or to fluctuations in the equity
markets.

     CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. The Fund may
invest in convertible securities, which are generally a debt obligation or
preferred stock that may be converted within a specified period of time into a
certain amount of common stock of the same or a different issuer. A convertible
security provides a fixed income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because both interest rate and
market movements can influence its value, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.


  COLLATERALIZED OBLIGATIONS


     The Fund may invest in senior classes of collateralized bond obligations
("CBOs"), collateralized loan obligations ("CLOs") and other collateralized debt
obligations ("CDOs"), which are debt instruments backed solely by a pool of
other debt securities. The risks of an investment in a CBO, CLO or other CDO
depend largely on the type of the collateral securities (which would have the
risks described elsewhere in this document for that type of security) and the
class of the CBO, CLO or other CDO in which the Fund invests. Some CBOs, CLOs
and other CDOs have credit ratings, but are typically issued in various classes
with various priorities. Normally, CBOs, CLOs and other CDOs are privately
offered and sold (that is, not registered under the securities laws) and may be
characterized by the Fund as illiquid securities, but an active dealer market
may exist for CBOs, CLOs and other CDOs that qualify for Rule 144A transactions.
In addition to the normal interest rate, default and other risks of fixed income
securities discussed elsewhere in this document, CBOs, CLOs and other CDOs carry
additional risks, including the possibility that distributions from collateral
securities will not be adequate to make interest or other payments, the quality
of the collateral may decline in value or default, volatility in values, and the
complex structure of the security may not be fully understood at the time of
investment and produce disputes with the issuer or unexpected investment
results. The Fund will not invest in the equity classes of CBOs, CLOs or other
CDOs or in their junior classes that are subordinate to their senior classes.

  REPURCHASE AGREEMENTS

     The Fund generally will have a portion of its assets in cash or cash
equivalents for a variety of reasons, such as waiting for a suitable investment
opportunity or taking a defensive position. To earn income on this portion of
its assets, the Fund may enter into repurchase agreements. Under a repurchase
agreement, the Fund agrees to buy securities guaranteed as to payment of
principal and interest by the U.S. government or its agencies from a qualified
bank or broker-dealer and then to sell the securities back to the bank or
broker-dealer after a short period of time (generally, less than seven days) at
a higher price. The bank or broker-dealer must transfer to the Fund's custodian
securities with an initial market value of at least 102% of the dollar amount
invested by the Fund in each repurchase agreement. The Manager will monitor the
value of such securities daily to determine that the value equals or exceeds the
repurchase price. Repurchase agreements maturing in more than seven days are
considered to be illiquid securities.

     Repurchase agreements may involve risks in the event of default or
insolvency of the bank or broker-dealer, including possible delays or
restrictions upon the Fund's ability to sell the underlying securities. The Fund
will enter into repurchase agreements only with parties who meet certain
creditworthiness standards, I.E., banks or broker-dealers that the Manager has
determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.

  REVERSE REPURCHASE AGREEMENTS

     As described under "Preferred Shares and Related Leverage," the Fund may
utilize reverse repurchase agreements in order to add leverage to the portfolio.
In a reverse repurchase agreement, the Fund sells securities to a bank or
broker-dealer and agrees to repurchase the securities at a mutually agreed date
and price. Generally, the effect of such a transaction is that the Fund can
recover and reinvest all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement and
still be entitled to the returns associated with those portfolio securities.
Such transactions are advantageous if the interest cost to the Fund of the
reverse repurchase transaction is less than the returns it obtains on
investments purchased with the cash.

     Unless the Fund covers its positions in reverse repurchase agreements (by
segregating liquid assets at least equal in amount to the forward purchase
commitment), its obligations under the agreements will be subject to the Fund's
limitations on borrowings. Reverse repurchase agreements involve leverage risk
and also the market risk based on the value of the securities that the Fund is
obligated to repurchase. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities.

  U.S. GOVERNMENT SECURITIES

     The Fund may invest in U.S. Government securities, which are obligations
of, or guaranteed by, the U.S. Government, its agencies or government-sponsored
enterprises. U.S. Government securities include a variety of securities that
differ in their interest rates, maturities and dates of issue. Securities issued
or guaranteed by agencies or instrumentalities of the U.S. Government may or may
not be supported by the full faith and credit of the United States or by the
right of the issuer to borrow from the U.S. Treasury.

  MUNICIPAL BONDS

     Municipal bonds are generally issued by states, municipalities and other
political subdivisions, agencies, authorities and instrumentalities of states
and multi-state agencies or authorities. Like other debt obligations, municipal
bonds are subject to interest rate, credit and market risk. The ability of a
municipal issuer to make payments could be affected by litigation, legislation
or other political events or the bankruptcy of the issuer. Municipal bonds are
either general obligation or revenue bonds and typically are issued to finance
public projects (such as roads or public buildings), to pay general operating
expenses or to refinance outstanding debt. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source; revenue bonds may be repaid only from the
revenues of a specific facility or source. The Fund also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. The Fund also may invest in securities issued by
entities whose underlying assets are municipal bonds.

  WHEN ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS

     The Fund may buy debt securities on a "when-issued" or "delayed delivery"
basis. These transactions are arrangements under which the Fund buys securities
with payment and delivery scheduled for a future time.

Purchases of debt securities on a when-issued or delayed delivery basis are
subject to market fluctuation and to the risk that the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. Although the Fund will generally buy debt
securities on a when-issued basis with the intention of acquiring such
securities, it may sell them before the settlement date if it deems the sale to
be advisable. The Fund will not enter into these transactions for investment
leverage. When the Fund is the buyer in such a transaction, it will maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of its purchase
commitments until payment is made.

     In when-issued and delayed delivery transactions, the Fund relies on the
seller to complete the transaction. The other party's failure may cause the Fund
to miss a price or yield considered advantageous. Securities purchased on a
when-issued or delayed delivery basis do not generally earn interest until their
scheduled delivery date. The Fund is not subject to any percentage limit on the
amount of its assets which may be invested in when-issued debt securities.

  STRUCTURED NOTES AND RELATED INSTRUMENTS

     The Fund may invest in "structured" notes and other related instruments,
which are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset,
market or interest rate (an "embedded index"), such as selected securities, an
index of securities or specified interest rates, or the differential performance
of two assets or markets, such as indexes reflecting bonds. Structured
instruments may be issued by corporations, including banks, as well as by
governmental agencies. Structured instruments frequently are assembled in the
form of medium-term notes, but a variety of forms are available and may be used
in particular circumstances. The terms of such structured instruments normally
provide that their principal and/or interest payments are to be adjusted upwards
or downwards (but ordinarily not below zero) to reflect changes in the embedded
index while the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a structured product may
vary widely, depending on a variety of factors, including the volatility of the
embedded index and the effect of changes in the embedded index on principal
and/or interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.

     The Manager may utilize structured instruments for investment purposes and
also for risk management purposes, such as to reduce the duration and interest
rate sensitivity of the Fund's portfolio. While structured instruments may offer
the potential for a favorable rate of return from time to time, they also entail
certain risks. Structured instruments may be less liquid than other debt
securities, and the price of structured instruments may be more volatile. In
some cases, depending on the terms of the embedded index, a structured
instrument may provide that the principal and/or interest payments may be
adjusted below zero. Structured instruments also may involve significant credit
risk and risk of default by the counterparty. Certain issuers of structured
instruments may be deemed to be "investment companies" as defined in the 1940
Act. As a result, the Fund's investment in these structured instruments may be
limited by the restrictions contained in the 1940 Act. Although structured
notes, bank loans and loan participations are not necessarily illiquid, to the
extent such investments are deemed to be illiquid by the Manager, they will be
subject to the Fund's restrictions on investments in illiquid securities. Like
other sophisticated strategies, the Fund's use of structured instruments may not
work as intended. If the value of the embedded index changes in a manner other
than that expected by the Manager, principal and/or interest payments received
on the structured instrument may be substantially less than expected. Also, if
the Manager uses structured instruments to reduce the duration of the Fund's
portfolio, this may limit the Fund's return when having a longer duration would
be beneficial (for instance, when interest rates decline).

  SHORT SALES

     A short sale is a transaction in which the Fund sells an instrument that it
does not own in anticipation that the market price will decline. The Fund may
use short sales for investment and risk management purposes. When the Fund
engages in a short sale, it must borrow the security sold short and deliver it
to the counterparty. The Fund may have to pay a fee to borrow particular
securities and would often be 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 lender, which is usually a
broker-dealer, and/or with the Fund's custodian. The Fund may not receive any
payments (including interest) on its collateral. Short sales expose the Fund to
the risk that it will be required to cover its short position at a time when the
securities have appreciated in value, thus resulting in a loss to the Fund. The
Fund may engage in so-called "naked" short sales where it does not own or have
the immediate right to acquire the security sold short at no additional cost, in
which case the Fund's losses could theoretically be unlimited, provided that the
Fund will not engage in such naked short sales in excess of 5% of the Fund's
total assets.

  DOLLAR ROLL TRANSACTIONS

     The Fund may enter into mortgage dollar roll transactions. In a mortgage
dollar roll, the Fund sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially similar
(name, type, coupon, and maturity) securities on a specified future date. During
the period between the sale and repurchase (the "roll period"), the Fund forgoes
principal and interest paid on the mortgage-backed securities. The Fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the "drop"), as well
as by the interest earned on the cash proceeds of the initial sale.

     For each mortgage dollar roll transaction, the Fund will segregate on its
books an offsetting cash position or a position of liquid securities of
equivalent value. The manager will monitor the value of such securities daily to
determine that the value equals or exceeds the mortgage dollar roll contract
price.

     The Fund could suffer a loss if the contracting party fails to perform the
future transaction and the Fund is therefore unable to buy back the
mortgage-backed securities it initially sold.

     The Fund intends to enter into mortgage dollar rolls only with high quality
government securities dealers and member banks of the Federal Reserve System as
approved by the Fund's board of trustees. As a matter of non-fundamental policy,
the Fund does not consider the purchase and/or sale of a mortgage dollar roll to
be a borrowing, for purposes of the Fund's fundamental restrictions.

  REAL ESTATE INVESTMENT TRUSTS

     The Fund may invest in the equity or debt securities of publicly traded and
private real estate investment trusts ("REITs"). A REIT is an entity that
concentrates its assets in investments related to equity real estate and/or
interests in mortgages on real estate. The shares of publicly traded REITs are
traded on a national securities exchange or in the OTC market. Shares of private
REITs are not publicly traded, and will be treated as illiquid securities. The
Fund will limit its investments in illiquid securities, including private REITs,
to 15% of its total assets.

  OTHER INVESTMENT COMPANIES

     The Fund may invest in the securities of other investment companies to the
extent that such investments are consistent with the Fund's investment objective
and policies and permissible under the 1940 Act. Under the 1940 Act, the Fund
may not acquire the securities of other domestic or non-U.S. investment
companies if, as a result,
(i) more than 10% of the Fund's total assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than 3% of
the total outstanding voting securities of any one investment company being held
by the Fund, or (iii) more than 5% of the Fund's total assets would be invested
in any one investment company. These limitations do not apply to the purchase of
shares of any investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of another
investment company. Notwithstanding the foregoing, to the extent permitted by
exemptive orders received from the SEC, the Fund may invest cash balances in
shares of other money market funds advised by the Manager or its affiliates in
amounts up to 25% of the Fund's total assets. The Fund, as a holder of the
securities of other investment companies, will bear its pro rata portion of the
other investment companies' expenses, including advisory fees. These expenses
are in addition to the direct expenses of the Fund's own operations.

     Please see "Investment Objectives and Policies" in the Statement of
Additional Information for additional information regarding the investments of
the Fund and their related risks.


                      PREFERRED SHARES AND RELATED LEVERAGE

     Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund presently intends to
offer Preferred Shares representing approximately 33% of the Fund's Managed
Assets (calculated after their issuance), although the Fund is permitted to use
leverage representing up to 38% of the Fund's Managed Assets. The Fund may also
enter into transactions that may give rise to a form of leverage, including
among others: loans of portfolio securities, swap contracts and other derivative
instruments, reverse repurchase agreements, as well as when-issued, delayed
delivery or forward commitment transactions. The Fund will segregate liquid
assets against or otherwise cover its future obligations under such
transactions, in order to provide that, immediately after entering into such a
transaction, the Fund's future commitments that it has not segregated liquid
assets against or otherwise covered, together with any outstanding Preferred
Shares, will not exceed 38% of the Fund's Managed Assets. By using leverage, the
Fund will seek to obtain a higher return for holders of Common Shares than if
the Fund did not use leverage. Leveraging is a speculative technique and there
are special risks involved. There can be no assurance that a leveraging strategy
will be used or that it will be successful during any period in which it is
employed.

     The Preferred Shares will have complete priority upon distribution of
assets over the Common Shares. The issuance of Preferred Shares will leverage
the Common Shares. Although the timing and other terms of the offering of the
Preferred Shares will be determined by the Fund's Board of Trustees, the Fund
expects to invest the net proceeds of the Preferred Shares in debt obligations
and other instruments in accordance with the Fund's investment objectives and
policies. The Preferred Shares are expected to pay dividends based on short-term
interest rates which would be reset periodically through an auction or
remarketing procedure, although the terms of the Preferred Shares may also
enable the Fund to lengthen such intervals.


     So long as the Fund's portfolio is invested in securities that provide a
higher rate of return than the dividend rate of the Preferred Shares (after
taking expenses into consideration), the leverage will allow Common Shareholders
to receive a higher current rate of return than if the Fund were not leveraged.

     Changes in the value of the Fund's portfolio (including investments bought
with the proceeds of the Preferred Shares offering) will be borne entirely by
the Common Shareholders. If there is a net decrease (or increase) in the value
of the Fund's investment portfolio, the leverage will decrease (or increase) the
net asset value per Common Share to a greater extent than if the Fund were not
leveraged. During periods in which the Fund is using leverage, the fees paid to
the Manager will be higher than if the Fund did not use leverage because the
fees paid will be calculated on the basis of the Fund's Managed Assets,
including the proceeds from the issuance of Preferred Shares. Thus, the Manager
has a financial incentive for the Fund to issue Preferred Shares, which may
result in a conflict of interest between the Manager and the Common
Shareholders. Fees and expenses paid by the Fund are borne entirely by the
Common Shareholders (and not by Preferred Shareholders, if any).
These include costs associated with any offering of Preferred Shares by the Fund
(which costs are estimated to be approximately 1.20% of the total dollar amount
of a Preferred Share offering), which will be borne immediately by Common
Shareholders, as will the costs associated with any borrowings or other forms of
leverage utilized by the Fund.

     The Fund presently anticipates that any Preferred Shares that it intends to
issue would be initially given a rating of Aa/AA or better by Moody's, S&P
and/or Fitch, but no assurance can be given that such ratings will be obtained.
No minimum rating is required for the issuance of Preferred Shares by the Fund.
Moody's, S&P and Fitch receive fees in connection with their ratings issuances.
The Fund may be subject to certain restrictions imposed by guidelines of one or
more rating agencies that may issue ratings for Preferred Shares issued by the
Fund. These guidelines may impose asset coverage or portfolio composition
requirements that are more stringent than those imposed on the Fund by the 1940
Act. It is not anticipated that these covenants or guidelines will impede the
Manager from managing the Fund's portfolio in accordance with the Fund's
investment objectives and policies.


     Assuming that the Preferred Shares will represent approximately 33% of the
Fund's Managed Assets and pay dividends at an annual average rate of 1.35%, the
income generated by the Fund's portfolio (net of expenses) would have to exceed
0.45% in order to cover such dividend payments. Of course, these numbers are
merely estimates, used for illustration purposes only. Actual Preferred Share
dividend rates will vary frequently and may be significantly higher or lower
than the rate identified above.

     The following table is furnished in response to requirements of the SEC. It
is designed to illustrate the effect of leverage on the total return of the
Common Shares, assuming investment portfolio total returns (consisting of income
and changes in the value of investments held in the Fund's portfolio) of -10%,
-5%, 0%, 5% and 10%. These assumed investment portfolio returns are hypothetical
figures and are not necessarily indicative of the investment portfolio returns
expected to be experienced by the Fund. The table further assumes the issuance
of Preferred Shares representing approximately 33% of the Fund's Managed Assets
and the Fund's currently projected annual Preferred Share dividend rate of
1.35%. See "Risks."

<Table>
<S>                              <C>         <C>     <C>     <C>     <C>
Assumed Portfolio Total Return   -10.00%     -5.00%   0.00%  5.00%   10.00%
Common Share Total Return        -15.67%     -8.17%  -0.67%  6.82%   14.32%
</Table>


     Common Share total return is composed of two elements: the Common Share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying dividends on Preferred Shares) and
gains or losses on the value of the securities the Fund owns. As required by SEC
rules, the table assumes that the Fund is more likely to suffer capital losses
than to enjoy capital appreciation. For example, to assume a total return of 0%,
the Fund must assume that the interest it receives on its investments is
entirely offset by losses in the value of those investments.

OTHER FORMS OF LEVERAGE AND BORROWINGS

     The Fund may borrow money in order to repurchase its shares or as a
temporary measure for extraordinary or emergency purposes, including for the
payment of dividends or the settlement of securities transactions which
otherwise might require untimely dispositions of Fund securities.


     In addition to the issuance of Preferred Shares, the Fund may use a variety
of additional strategies that may give rise to a form of leverage. These include
lending portfolio securities, using swap contracts and other derivative
instruments, reverse repurchase agreements, and when-issued, delayed delivery or
forward commitment transactions. By adding additional leverage, these strategies
have the potential to increase returns to Common Shareholders, but also involve
additional risks. Additional leverage will increase the volatility of the Fund's
investment portfolio and could result in larger losses than if the strategies
were not used. The Fund may engage in additional transactions of the type
described above and similar investment management techniques which provide
leverage. However, the Fund will segregate liquid assets against or otherwise
cover its future obligations under such transactions, in order to provide that,
immediately after entering into such a transaction, the Fund's future
commitments that it has not segregated liquid assets against or otherwise
covered, together with any outstanding Preferred Shares, will not exceed 38% of
the Fund's Managed Assets.


     Although the Fund expects that the total liquidation value of Preferred
Shares issued by the Fund will represent approximately 33% (and no more than
38%) of the Fund's Managed Assets, the 1940 Act imposes certain potentially
broader asset coverage requirements which also apply to the Fund. The following
is a summary of the applicable asset coverage requirements of the 1940 Act.

     Under the 1940 Act, the Fund is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Fund's total net assets
is at least 200% of the liquidation value of the outstanding Preferred Shares
plus the aggregate amount of any senior securities of the Fund representing
indebtedness (I.E., such liquidation value plus the aggregate amount of senior
securities representing indebtedness may not exceed 50% of the Fund's total net
assets). In addition, the Fund is not permitted to declare any cash dividend or
other distribution on its Common Shares unless, at the time of such declaration,
the value of the Fund's total net assets satisfies the above-referenced 200%
coverage requirement. If Preferred Shares are issued, the Fund intends, to the
extent possible, to purchase or redeem Preferred Shares from time to time to the
extent necessary in order to maintain net asset coverage of at least 200%. If
the Fund has Preferred Shares outstanding, two of the Fund's Trustees will be
elected by the holders of Preferred Shares, voting separately as a class. The
remaining Trustees of the Fund will be elected by holders of Common Shares and
Preferred Shares voting together as a single class. In the event the Fund were
to fail to pay dividends on Preferred Shares for two years or other defaults,
Preferred Shareholders would be entitled to elect a majority of the Trustees of
the Fund.

     Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings (including through the use of reverse repurchase agreements, swaps
and other derivatives to the extent that these instruments constitute senior
securities) unless immediately after a borrowing the value of the Fund's total
assets less liabilities (other than the borrowing) is at least 300% of the
principal amount of such borrowing (I.E., such principal amount may not exceed
33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on Common Shares unless, at the
time of such declaration, the value of the Fund's total assets, less liabilities
other than borrowing, is at least 300% of such principal amount. If the Fund
borrows, it intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain asset coverage
requirements could result in an event of default and entitle Preferred
Shareholders to elect a majority of the Trustees of the Fund. Derivative
instruments used by the Fund will not constitute senior securities (and will not
be subject to the Fund's limitations on borrowings) to the extent that the Fund
segregates liquid assets at least equal in amount to its obligations under the
instruments, or enters into offsetting transactions or owns positions covering
its obligations. For instance, the Fund may cover its position in a reverse
repurchase agreement by segregating liquid assets at least equal in amount to
its forward purchase commitment.


                                      RISKS

     The net asset value of the Common Shares will fluctuate with and be
affected by, among other things, the Fund's lack of operating history, market
discount risk, credit risk, mortgage-related risk, loan risk, high yield risk,
interest rate risk, inflation risk, leverage risk, portfolio security issuer
risk, management risk, foreign (non-U.S.) investment risk, derivatives risk,
counterparty risk, volatility risk, reinvestment risk, call risk, liquidity
risk, income risk, zero-coupon securities risk, smaller company risk, real
estate risk, and market disruption and geopolitical risk. An investment in
Common Shares will also be subject to the risk associated with the fact that the
Fund is newly organized. These risks are summarized below.


LACK OF OPERATING HISTORY


     The Fund is a newly organized, diversified, closed-end management
investment company and has no operating history.

MARKET DISCOUNT RISK


     As with any stock, the price of the Fund's shares will fluctuate with
market conditions and other factors. If shares are sold, the price received may
be more or less than the original investment. Net asset value will be reduced
immediately following the initial offering by a sales load and organizational
and selling expenses paid by the Fund and immediately following any offering of
Preferred Shares by the costs of that offering paid by the Fund. The Common
Shares are designed for long-term investors and should not be treated as trading
vehicles. Shares of closed-end management investment companies frequently trade
at a discount from their net asset value. The Fund's shares may trade at a price
that is less than the initial offering price. This risk may be greater for
investors who sell their shares relatively shortly after completion of the
initial offering.


CREDIT RISK

     An issuer of a debt security, including a governmental issuer, may be
unable to make interest payments and repay principal. The Fund could lose money
if the issuer of a debt obligation, or the counterparty to a derivatives
contract, repurchase agreement, loan of portfolio securities or other
obligation, is, or is perceived to be, unable or unwilling to make timely
principal and/or interest payments, or to otherwise honor its obligations. The
downgrade of a security may further decrease its value. For mortgage-backed
securities, factors contributing to these risks include the effects of general
and local economic conditions on home values, the financial conditions of
homeowners, and other market factors. This risk is mitigated by a U.S.
government agency's or instrumentality's guarantee of the underlying debt
obligation.

MORTGAGE-RELATED RISK

     The Fund may invest in a variety of mortgage-related securities, including
commercial mortgage securities and agency-issued securities and other
mortgage-backed instruments. Rising interest rates tend to extend the duration
of mortgage-related securities, which in turn could lengthen the average
duration of the Fund's portfolio, making the portfolio more sensitive to changes
in interest rates, and may reduce the market value of the portfolio's
mortgage-related securities. This possibility is often referred to as extension
risk. Extending the average life of a mortgage-related security increases the
risk of depreciation due to future increases in market interest rates. In
addition, mortgage-related securities are subject to prepayment risk -- the risk
that borrowers may pay off their mortgages sooner than expected, particularly
when interest rates decline. This can reduce the Fund's returns because the Fund
may have to reinvest that money at lower prevailing interest rates. The Fund's
investments in other asset-backed securities are subject to risks similar to
those associated with mortgage-backed securities, as well as additional risks
associated with the nature of the assets and the servicing of those assets.

     Certain government agencies or instrumentalities, such as the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC"),
provide a guarantee as to timely payment of principal and interest for
mortgage-backed instruments each entity issues, backs or otherwise guarantees.
Guarantees may or may not be backed by the full faith and credit of the U.S.
government.

LOAN RISK

     Bank loans, loan participations and assignments involve credit risk,
interest rate risk, liquidity risk, and the risks of being a lender.
Indebtedness of companies whose creditworthiness is poor involves substantially
greater risks, and may be highly speculative. Some companies may never pay off
their indebtedness, or may pay only a small fraction of the amount owed.
Consequently, when investing in indebtedness of companies with poor credit, the
Fund bears a substantial risk of losing the entire amount invested. If the Fund
purchases a loan, it may only be able to enforce its rights through the lender,
and may assume the credit risk of both the lender and the borrower.

     Corporate loans in which the Fund may invest may be unrated and generally
will not be registered with the SEC or listed on a securities exchange. In
addition, the amount of public information available with respect to corporate
loans generally will be less extensive than that available for more widely
rated, registered and exchange-listed securities. As a result, corporate loans
generally are more difficult to value than more widely rated, registered and
exchange-listed securities.

HIGH YIELD RISK

     In general, lower rated debt securities carry a greater degree of risk that
the issuer will be unable to make interest and principal payments when due,
which could have a negative impact on the Fund's net asset value or dividends.
The Fund may invest in debt securities and other income-producing instruments
that are rated below investment grade by each Rating Agency rating the security
(below Baa by Moody's or below BBB by S&P or Fitch) or that are unrated but
judged by the portfolio managers to be of comparable quality, including debt
securities or other income-producing instruments that are in default or the
issuers of which are in bankruptcy. The prices of these lower grade bonds and
income-producing instruments are more sensitive to negative developments, such
as a decline in the issuer's revenues or a general economic downturn, than are
the prices of higher grade securities. In addition, the secondary market on
which high yield securities or similar instruments are traded may be less liquid
than the market for investment grade securities, meaning these holdings are
subject to greater liquidity risk than investment grade securities. Because the
Fund may invest a significant portion of its assets in below investment grade
debt securities and income-producing instruments, the Manager's investment
decisions and analytical capabilities in this area will be particularly
important. The Fund will not invest more than 10% of its total assets in
securities that are, at the time of purchase, rated CCC/Caa or lower by each
Rating Agency rating the security or that are unrated but judged by the
portfolio managers to be of comparable quality. The Fund may invest in debt
securities or other obligations that are in default or the issuers of which are
in bankruptcy. Under normal conditions, the Fund will not invest more than 5% of
its total assets in debt securities or other obligations whose issuers are in
default at the time of purchase.

INTEREST RATE RISK

     Changes in interest rates may present risks to the Fund. When interest
rates rise, debt security prices generally fall. The opposite is also true: debt
security prices generally rise when interest rates fall. Because market interest
rates are currently near their lowest levels in many years, there is a great
risk that the Fund's portfolio will decline in value. Generally, debt securities
will decrease in value when interest rates rise and increase in value when
interest rates decline. This means that the net asset value of the Common Shares
may fluctuate with interest rate changes and the corresponding changes in the
value of the Fund's holdings. Because market interest rates are currently near
their lowest levels in many years, there is a greater risk that the Fund's
portfolio will decline in value. The prices of short-term debt obligations
generally fluctuate less than the prices of long-term debt obligations as
interest rates change.

     The prices of fixed-rate securities with longer durations tend to be more
sensitive to changes in interest rates than securities with shorter durations,
usually making them more volatile. Because the Fund will normally have an
estimated dollar-weighted average duration of between two and five years
(including the effects of anticipated leverage), the Common Shares' net asset
value and market price will tend to fluctuate more in response to changes in
market interest rates than if the Fund invested mainly in short-term debt
securities and less than if the Fund invested mainly in longer-term debt
securities.

     The Preferred Shares, if any are issued, are expected to pay dividends
based on certain interest rates. If the Preferred Share dividend rate exceeds
the rate of return on the debt obligations and other investments held by the
Fund that were acquired during periods of generally lower interest rates, the
returns to Common Shareholders may be reduced.

     The Fund's use of leverage, as described above, will tend to increase
Common Share interest rate risk. The Fund may utilize certain strategies,
including investments in structured notes and interest rate swaps and caps, for
the purposes of changing the duration of the overall portfolio, reducing the
interest rate sensitivity of the portfolio or decreasing the Fund's exposure to
interest rate risk, although there is no assurance that the Fund will do so or
that such strategies will be successful. See "How the Fund Manages Risk --
Hedging and Related Strategies."

     The Fund may utilize certain strategies, including but not limited to
purchasing shorter duration or floating rate securities, or investing in
structured notes or interest rate swap or cap transactions, for the purpose of
reducing the interest rate sensitivity of the portfolio and decreasing the
Fund's exposure to interest rate risk, although there is no assurance that it
will do so or that such strategies will be successful. The Fund's use of
leverage, as described below, will tend to increase Common Share interest rate
risk.

INFLATION RISK

     Inflation risk is the risk that the value of assets or income from the
Fund's investments will be worth less in the future as inflation decreases the
value of money. As inflation increases, the real value of the Common Shares and
distributions thereon can decline. In addition, during any periods of rising
inflation, dividend rates of Preferred Shares, if any are issued, would likely
increase, which would tend to further reduce returns to Common Shareholders.
This risk is mitigated to some degree by the Fund's investments in bank loans
made to corporate and other business entities.


LEVERAGE RISK

     Leverage risk includes the risk associated with the issuance of the
Preferred Shares, if any, or lending of portfolio securities, the use of swaps,
other derivatives, reverse repurchase agreements, and when-issued, delayed
delivery or forward commitment transactions. There can be no assurance that the
Fund's leveraging strategies involving Preferred Shares or other leverage
vehicles will be successful. Once the Preferred Shares are issued or other forms
of leverage are used, the net asset value and market value of Common Shares will
be more volatile, and the yield and total return to Common Shareholders will
tend to fluctuate more in response to changes in interest rates and with changes
in the short-term dividend rates on the Preferred Shares. The Fund anticipates
that the Preferred Shares, at least initially, would likely pay cumulative
dividends at rates determined over relatively short-term periods (such as seven
or 28 days), by providing for the periodic redetermination of the dividend rate
through an auction or remarketing procedures. See "Description of Shares --
Preferred Shares." The rates of return on intermediate- and long-term debt
obligations are typically, although not always, higher than the rates of return
on short-term debt obligations. If the dividend rate on the Preferred Shares
approaches the net rate of return on the Fund's investment portfolio, the
benefit of leverage to Common Shareholders will be reduced. If the dividend rate
on the Preferred Shares exceeds the net rate of return on the Fund's portfolio,
the leverage will result in a lower rate of return to Common Shareholders than
if the Fund were not leveraged. Because the longer-term bonds included in the
Fund's portfolio will typically pay fixed rates of interest while the dividend
rate on the Preferred Shares will be adjusted periodically, this could occur
even when both long-term and short-term interest rates rise. In addition, the
Fund will pay (and Common Shareholders will bear) any costs and expenses
relating to the issuance and ongoing maintenance of the Preferred Shares. The
Fund cannot assure you that it will issue Preferred Shares or use other forms of
leverage or, if used, that these strategies will result in a higher yield or
return to Common Shareholders.

     Similarly, any decline in the net asset value of the Fund's investments
will be borne entirely by Common Shareholders. Therefore, if the market value of
the Fund's portfolio declines, any leverage will result in a greater decrease in
net asset value to Common Shareholders than if the Fund were not leveraged. Such
greater net asset value decrease will also tend to cause a greater decline in
the market price for the Common Shares. The Fund might be in danger of failing
to maintain the required 200% asset coverage or of losing its expected ratings
of Aa/AA or better on the Preferred Shares or, in an extreme case, the Fund's
current investment income might not be sufficient to meet the dividend
requirements on the Preferred Shares (See "Preferred Shares and Related
Leverage"). In order to counteract such an event, or in order to meet its other
obligations, including obligations under swaps, the Fund might need to liquidate
investments in order to fund a redemption of some or all of the Preferred
Shares. Liquidation at times of low debt obligation prices may result in capital
loss and may reduce returns to Common Shareholders. The Fund will seek to
mitigate this risk by segregating assets in the form of cash and cash
equivalents in an amount equal to the aggregate market value of the swaps of
which it is the seller, marked to market on a daily basis.

     While the Fund may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that this
risk outweighs the likelihood of achieving the desired reduction to volatility
in income and Common Share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.

     Because the fees received by the Manager are based on the Managed Assets of
the Fund (including assets attributable to any Preferred Shares that may be
outstanding), the Manager has a financial incentive for the Fund to issue
Preferred Shares, which may create a conflict of interest between the Manager
and the holders of the Common Shares.


PORTFOLIO SECURITY ISSUER RISK

     The value of the Fund's investments may decline for a number of reasons
that directly relate to the issuer, such as management performance, financial
leverage and performance and factors affecting the issuer's industry (such as
reduced demand for the issuer's goods and services).


MANAGEMENT RISK

     The Fund is subject to management risk because it is an actively managed
investment portfolio. The Manager will apply investment techniques and risk
analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.

FOREIGN (NON-U.S.) INVESTMENT RISK

     Investing in securities or other income-producing instruments issued by
companies and governments in foreign countries typically involves more risks
than investing in U.S. securities. Certain of these risks also may apply to
securities of U.S. companies with significant foreign operations. These risks
can increase the potential for losses in the Fund and affect its share price.
The political, economic and social structures of some foreign countries may be
less stable and more volatile than those in the U.S. It is possible that a
government may take over the assets or operations of a company or impose
restrictions on the exchange or export of currency or other assets. Some
countries also may have different legal systems that may make it difficult
for the Fund to pursue legal remedies with respect to its foreign investments.


     You should consider carefully the substantial risks involved in securities
of companies of foreign nations, which are in addition to the usual risks
inherent in domestic investments. The Fund may buy foreign securities that are
traded in the U.S. or securities of U.S. issuers that are denominated in a
foreign currency. The Fund may invest up to 15% of its total assets in
securities or other income-producing instruments issued by companies and
governments in any foreign country, including developed or developing countries.
The Fund also may invest up to 5% of its total assets in securities or other
income-producing instruments denominated in foreign currencies, including
obligations of non-U.S. governments and their respective sub-divisions, agencies
and government-sponsored enterprises.


     There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value. Foreign markets have
substantially less volume than the New York Stock Exchange (the "NYSE") and
securities of some foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Commission rates in foreign countries,
which are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the U.S.

  DEVELOPING COUNTRIES AND EMERGING MARKETS

     Investments in companies domiciled in developing countries or based in
underdeveloped emerging markets may be subject to potentially higher risks than
investments in developed countries or mature markets. These risks include: (i)
greater risks of expropriation, confiscatory taxation, nationalization, and less
social, political, and economic stability; (ii) the small current size of the
markets for such securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater price volatility;
(iii) certain national policies which may restrict the Fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; and (vi) the
absence or early stage of development of a capital market structure or
market-oriented economy.

     In addition, many countries in which the Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.

  FOREIGN CURRENCY

     The Fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the Fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the Fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.

     The Fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.

     Certain of these currencies have experienced a steady devaluation relative
to the U.S. dollar. Any devaluations in the currencies in which the Fund's
portfolio securities are denominated may have a detrimental impact on the Fund.
Through the Fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the Fund's investments.

     The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.

  FORWARD CURRENCY EXCHANGE CONTRACTS

     The Fund may enter into forward currency exchange contracts (forward
contracts) to attempt to minimize the risk to the Fund from adverse changes in
the relationship between currencies or to enhance income. A forward contract is
an obligation to buy or sell a specific currency for an agreed price at a future
date which is individually negotiated and is privately traded by currency
traders and their customers. The Fund will either cover its position in such a
transaction or maintain, in a segregated account with its custodian bank, cash
or high-grade marketable securities having an aggregate value equal to the
amount of any such commitment until payment is made.


  SOVEREIGN ISSUERS

     The Fund also may invest in sovereign debt issued by foreign governments,
their agencies or instrumentalities, or other government-related entities,
including debt of developing or "emerging market" issuers. As a holder of
sovereign debt, the Fund may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. In addition,
there are generally no bankruptcy proceedings similar to those in the United
States by which defaulted sovereign debt may be collected. Sovereign debt is
subject to other risks, including: the possibility that a sovereign country
might prevent capital, in the form of U.S. dollars, from flowing across its
borders; adverse political and economic developments; the extent and quality of
government regulation of financial markets and institutions; the imposition of
foreign withholding taxes; and the expropriation or nationalization of foreign
issuers.

DERIVATIVES RISK

     Derivatives are financial contracts 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, such as options, futures contracts, swap agreements and short
sales. The Fund may use derivatives as a substitute for taking a position in an
underlying debt instrument or other asset and/or as part of a strategy designed
to reduce exposure to other risks, such as interest rate or currency risk. The
Fund also may use derivatives to add leverage to the portfolio or to manage the
duration of 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 described elsewhere in this prospectus, such as
liquidity risk, interest rate risk, credit risk, leverage risk, volatility 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. 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. The use of derivatives also may increase the amount of
taxes payable by shareholders. In addition to the risks applicable to
derivatives generally, swaps involve special risks because they are difficult to
value, are highly susceptible to liquidity and credit risk, and generally
provide 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).


COUNTERPARTY RISK

     The Fund will be subject to credit risk with respect to the counterparties
to the derivative contracts purchased by the Fund. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in a bankruptcy
or other reorganization proceeding. The Fund may obtain only a limited recovery
or may obtain no recovery in such circumstances.

VOLATILITY RISK

     The market values for some or all of the Fund's holdings may be volatile.
The Fund's investment grade or long-term debt securities, will generally be more
sensitive to changing interest rates and less sensitive to changes in the
economic environment. The Fund's high yield investments will typically be less
sensitive to changing interest rates than investment grade debt securities, but
they may be more sensitive to a deteriorating economic environment. The Fund's
investments may be subject to liquidity constraints and as a result, higher
price volatility. The Fund's use of leverage may increase the volatility of the
Fund's investment portfolio and could result in larger losses than if the
strategies were not used.


REINVESTMENT RISK


     The Fund may reinvest the proceeds from matured, traded or called debt
obligations. If the Fund reinvests such proceeds at lower interest rates, the
market price or the overall return of the Common Shares may decline.
Reinvestment risk is the risk that income from the Fund's bond portfolio will
decline if and when the Fund invests the proceeds from matured, traded or called
bonds at market interest rates that are below the portfolio's current earnings
rate. A decline in income could affect the Common Shares' market price or their
overall returns.

CALL RISK


     A debt security may be prepaid (called) before maturity. An issuer is more
likely to call its securities when interest rates are falling, because the
issuer can issue new securities with lower interest payments. If a debt security
is called, the Fund may have to replace it with a lower-yielding security.
High-yield bonds frequently have call features that allow the issuer to redeem
the security at dates prior to its stated maturity at a specified price only if
certain prescribed conditions are met ("call protection"). An issuer may redeem
a high-yield bond if, for example, the issuer can refinance the debt at a lower
cost due to declining interest rates or an improvement in the credit standing of
the issuer. Corporate loans and mortgage-related securities typically have no
such call protection. For premium bonds (bonds acquired at prices that exceed
their par or principal value) purchased by the Fund, call risk may be enhanced.
At any time, the Fund may have a large amount of its assets invested in
securities subject to call risk. A call of some or all of these securities may
lower the Fund's income and yield and its distributions to shareholders.


LIQUIDITY RISK

     The Fund may invest up to 15% of its total assets in securities (excluding
swaps) which are illiquid at the time of investment. The term "illiquid
securities" for this purpose is determined using the SEC's standard applicable
to open-end investment companies, I.E., securities that cannot be disposed of
within seven days in the ordinary course of business at approximately the value
at which the Fund has valued the securities. Illiquid securities may be subject
to wide fluctuations in market value. The Fund may be subject to significant
delays in disposing of illiquid securities. Accordingly, 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 Manager believes 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. Restricted securities, I.E.,
securities subject to legal or contractual restrictions on resale, may also be
illiquid. However, some restricted securities (such as securities issued
pursuant to Rule 144A under the Securities Act of 1933 and certain commercial
paper) may be treated as liquid for these purposes. To the extent the Manager
determines there is a liquid institutional or other market for these securities,
the Fund considers them to be liquid securities. The Board of Trustees will
review any determination by the Manager to treat a restricted security as a
liquid security on an ongoing basis, including the Manager's assessment of
current trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Manager and the Fund's board of trustees will take into account
the following factors: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to buy or sell the security and the number of
other potential buyers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent the Fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Fund may increase if qualified institutional buyers become
uninterested in buying these securities or the market for these securities
contracts.

     The Fund may invest in securities that are not deemed "illiquid" but that
are currently traded on a limited basis. The value of such securities may
fluctuate more sharply than securities that are traded more widely. Although the
Fund may be able to dispose of such securities in a short period of time, the
Fund may lose money on such sales.

INCOME RISK


     Because the Fund can distribute only what it earns, the Fund's
distributions to shareholders may decline. The income investors receive from the
Fund is based primarily on the interest it earns from its investments, which can
vary widely over the short- and long-term. If prevailing market interest rates
drop, investors' income from the Fund over time could drop as well. The Fund's
income could also be affected already when prevailing short-term interest rates
increase and the Fund is utilizing leverage, although this risk is mitigated by
the Fund's investment in bank loans made to corporate and other business
entities.


ZERO-COUPON SECURITIES RISK

     Zero-coupon securities are especially sensitive to changes in interest
rates, and their prices generally are more volatile than debt securities that
pay interest periodically. Lower quality zero-coupon bonds are generally subject
to the same risks as high yield debt securities. The Fund typically will not
receive any interest payments on these securities until maturity. If the issuer
defaults, the Fund may lose its entire investment, which will affect the Fund's
share price.


SMALLER COMPANY RISK


     Although under current market conditions the Fund does not presently intend
to invest a significant portion of its assets in smaller companies, as market
conditions change over time, the Fund may invest more of its assets

in such companies. The general risks associated with income-producing securities
are particularly pronounced for securities issued by companies with smaller
market capitalizations. These companies may have limited product lines, markets
or financial resources or they may depend on a few key employees. As a result,
they may be subject to greater levels of credit, market and issuer risk.
Securities of smaller companies may trade less frequently and in lesser volume
than more widely held securities and their values may fluctuate more sharply
than other securities. Companies with medium-sized market capitalizations may
have risks similar to those of smaller companies.

REAL ESTATE RISK

     Since the Fund may invest in REITs and mortgage securities secured by real
estate, the Fund may be subject to risks similar to those associated with the
direct ownership of real estate (in addition to securities markets risks). These
risks include declines in the value of real estate, risks related to general and
local economic conditions, dependency on management skill, increases in interest
rates, possible lack of availability of mortgage funds, overbuilding, extended
vacancies of properties, increased competition, increases in property taxes and
operating expenses, changes in zoning laws, losses due to costs resulting from
the clean-up of environmental problems, casualty or condemnation losses,
limitations on rents, and changes in neighborhood values and the appeal of
properties to tenants.

     Rising interest rates may cause investors in REITs to demand a higher
annual yield from future distributions, which may in turn decrease market prices
for equity securities issued by REITs. Rising interest rates also generally
increase the costs of obtaining financing, which could cause the value of the
Fund's investments to decline. During periods of declining interest rates,
certain mortgage REITs may hold mortgages that the mortgagors elect to prepay,
and such prepayment may diminish the yield on securities issued by such mortgage
REITs. In addition, mortgage REITs may be affected by the borrowers' ability to
repay when due the debt extended by the REIT, and equity REITs may be affected
by the tenants' ability to pay rent.

MARKET DISRUPTION AND GEOPOLITICAL RISK

     The war with Iraq, its aftermath and the continuing occupation of Iraq are
likely to have a substantial impact on the U.S. and world economies and
securities markets. The nature, scope and duration of the occupation cannot be
predicted with any certainty. Terrorist attacks on the World Trade Center and
the Pentagon on September 11, 2001 closed some of the U.S. securities markets
for a four-day period and the occurrence of similar events in the future cannot
be ruled out. The war and occupation, terrorism and related geopolitical risks
have led, and may in the future lead to, increased short-term market volatility
and may have adverse long-term effects on U.S. and world economies and markets
generally. Those events could also have an acute effect on individual issuers or
related groups of issuers. These risks could also adversely affect individual
issuers and securities markets, interest rates, auctions, secondary trading,
ratings, credit risk, inflation and other factors relating to the Common Shares.

                            HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

     The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations (two
of which are listed below) are fundamental and may not be changed without the
approval of the holders of a majority of the outstanding Common Shares and, if
issued, Preferred Shares voting together as a single class, and the approval of
the holders of a majority of the Preferred Shares voting as a separate class.
The Fund may not:


     -    Concentrate its investments in a particular "industry," as that term
          is used in the 1940 Act and as interpreted, modified, or otherwise
          permitted by regulatory authority having jurisdiction, from time to
          time (this limitation does not apply to securities issued or
          guaranteed by the U.S. Government or any of its agencies or
          instrumentalities); and


     -    With respect to 75% of the Fund's total assets, purchase the
          securities of any issuer, except securities issued or guaranteed by
          the U.S. Government or any of its agencies or instrumentalities or
          securities of other investment companies, if, as a result, (i) more
          than 5% of the Fund's total assets would be invested in the securities
          of that issuer, or (ii) the Fund would hold more than 10% of the
          outstanding voting securities of that issuer. For the purpose of this
          restriction, each state and each separate political subdivision,
          agency, authority or instrumentality of such state, each multi-state
          agency or authority, and each obligor, if any, is treated as a
          separate issuer of municipal bonds.

     The Fund would be deemed to "concentrate" its investments in a particular
industry if it invested more than 25% of its total assets in that industry. The
Fund's industry concentration policy does not preclude it from focusing
investments in issuers in a group of related industrial sectors (such as
different types of utilities).

     The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above and other restrictions set forth in the
Statement of Additional Information in order to obtain and maintain ratings from
Moody's, S&P and/or Fitch on the Preferred Shares that it intends to issue. The
Fund does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve its
investment objectives. See "Investment Objectives and Policies" and "Investment
Restrictions" in the Statement of Additional Information for information about
these guidelines and a complete list of the fundamental investment policies of
the Fund.

LIMITED ISSUANCE OF PREFERRED SHARES

     Under the 1940 Act, the Fund could issue Preferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the total
assets of the Fund, less liabilities. To the extent that the Fund has
outstanding any senior securities representing indebtedness (such as through the
use of reverse repurchase agreements, swaps and other derivative instruments
that constitute senior securities), the aggregate amount of such senior
securities will be added to the total liquidation value of any outstanding
Preferred Shares for purposes of this asset coverage requirement. If the total
liquidation value of the Preferred Shares plus the aggregate amount of such
other senior securities were ever more than one-half of the value of the Fund's
total net assets, the Fund would not be able to declare dividends on the Common
Shares until such liquidation value and/or aggregate amount of other senior
securities, as a percentage of the Fund's total assets, were reduced.

     The Fund presently intends to issue Preferred Shares representing
approximately 33% (but not more than 38%) of the Fund's Managed Assets
(calculated after their issuance) approximately one to three months after the
completion of the offering of Common Shares. This higher than required margin of
net asset value provides a cushion against later fluctuations in the value of
the Fund's portfolio and will subject Common Shareholders to less income and net
asset value volatility than if the Fund were more highly leveraged through
Preferred Shares. No assurance can be given that this cushion will not be
reduced or eliminated. It also gives the Fund flexibility to utilize other forms
of leverage in addition to Preferred Shares from time to time in accordance with
the 1940 Act asset coverage requirements (such as reverse repurchase agreements,
swaps and other derivatives) that may be more efficient or cost effective
sources of leverage than Preferred Shares under the circumstances.


     The Fund may engage in additional transactions of the type described above
and similar investment management techniques which provide leverage. However,
the Fund will segregate liquid assets against or otherwise cover its future
obligations under such transactions, in order to provide that, immediately after
entering into such a transaction, the Fund's future commitments that it has not
segregated liquid assets against or otherwise covered, together with any
outstanding Preferred Shares, will not exceed 38% of the Fund's Managed Assets.


     The Fund intends to purchase or redeem Preferred Shares, if necessary, to
keep the liquidation value of the Preferred Shares plus the aggregate amount of
other senior securities representing indebtedness below one-half of the value of
the Fund's total net assets.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

     The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity or
duration of its investment portfolio (by investing in short-term, high quality
securities or implementing certain hedging strategies) or may extend the
maturity of outstanding Preferred Shares. The Fund also may attempt to reduce
leverage by redeeming or otherwise purchasing Preferred Shares or by reducing
any holdings in other instruments that create leverage. As explained above under
"Risks -- Leverage Risk," the success of any such attempt to limit leverage risk
depends on the Manager's ability to accurately predict interest rate or other
market changes. Because of the difficulty of making such predictions, the Fund
may not be successful in managing its interest rate exposure in the manner
described above.

     If market conditions suggest that additional leverage would be beneficial,
the Fund may sell previously unissued Preferred Shares or Preferred Shares that
the Fund previously issued but later repurchased, or utilize other forms of
leverage, such as swaps and other derivative instruments. The Fund's investment
in swaps will not be included as illiquid investments for purposes of
determining compliance with the 15% limit on illiquid investments. Accordingly,
the Fund may invest more than 15% of its total assets in swaps. However, the
Fund's use of derivative instruments (other than swaps) will be limited by the
Fund's 15% limit on illiquid investments to the extent such derivatives are
determined to be illiquid. See "Portfolio Contents and Other Information" and
"Risks -- Liquidity Risk."


HEDGING AND RELATED STRATEGIES

     The Fund may use various investment strategies designed to limit the risk
of price fluctuations of its portfolio securities and to preserve capital. For
instance, the Fund may purchase credit default swap contracts for the purpose of
hedging the Fund's exposure to certain issuers and, thereby, decreasing its
exposure to credit risk, and it may invest in structured notes or interest rate
swap or cap transactions for the purpose of reducing the interest rate
sensitivity of the Fund's portfolio and, thereby, decreasing the Fund's exposure
to interest rate risk. See "Investment Objectives and Strategies -- Swaps," and
"Investment Objectives and Strategies -- Structured Notes and Related
Instruments" in this prospectus. Other hedging strategies that the Fund may use
include: financial futures contracts; short sales; other types of swap
agreements or options thereon; options on financial futures; and options based
on either an index or individual debt securities whose prices, the Manager
believes, correlate with the prices of the Fund's investments. Income earned by
the Fund from many hedging activities will be distributed to shareholders in
taxable distributions. If effectively used, hedging strategies will offset in
varying percentages losses incurred on the Fund's investments due to adverse
interest rate changes. There is no assurance that these hedging strategies will
be available at any time or that the Manager will determine to use them for the
Fund or, if used, that the strategies will be successful. In addition, the Fund
may be subject to certain restrictions on its use of hedging strategies imposed
by guidelines of one or more rating agencies that may issue ratings for
Preferred Shares issued by the Fund.


     In order to reduce the interest rate risk inherent in the Fund's underlying
investments and capital structure, the Fund may enter into interest rate swap or
cap transactions. For example, the Fund may enter into interest rate swaps that
are intended to approximate the Fund's variable rate payment obligation on
Preferred Shares, if such Preferred Shares are issued. The Fund also may use an
interest rate cap, which would require the Fund to pay a premium to the
counterparty and would entitle the Fund, to the extent that a specified variable
rate index exceeds a predetermined fixed rate, to receive from the counterparty
payment of the difference based on the notional amount. The Fund may use
interest rate swaps or caps with the intent to reduce or eliminate the risk that
an increase in short-term interest rates could pose for the performance of the
Common Shares as a result of leverage, and also may use these instruments for
other hedging or investment purposes. The Fund may choose or be required to
redeem some or all of the Preferred Shares. This redemption would likely result
in the Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in a termination
payment by or to the Fund. Any termination of a cap could result in a
termination payment to the Fund.

                             MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS


     The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Manager. There are
currently nine Trustees of the Fund, three of whom are currently treated by the
Fund as an "interested person" (as defined in the 1940 Act). The names and
business addresses of the Trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.

INVESTMENT ADVISER

     Franklin Advisers, Inc. (the "Manager") serves as the investment adviser of
the Fund. Subject to the supervision of the Board of Trustees, the Manager is
responsible for managing the investment activities of the Fund and the Fund's
business affairs and other administrative matters. The Manager is located at One
Franklin Parkway, San Mateo, California 94403-1906. Franklin Resources, Inc.
("Franklin") is the parent company of the Manager and the Fund's administrator.
Founded in 1947, Franklin is one of the oldest mutual fund organizations. In
1992, Franklin, a leader in managing fixed-income mutual funds and an innovator
in creating domestic equity funds, joined forces with Templeton, a pioneer in
international investing.

     The Manager and its affiliates (collectively known as "Franklin Templeton
Investments") provide investment management and advisory services to closed-end
and open-end investment company clients, as well as private accounts. As of June
30, 2003, Franklin Templeton Investments had approximately $287 billion in
assets under management for more than five million mutual fund shareholder and
other accounts.

PORTFOLIO MANAGEMENT TEAM

     Christopher Molumphy, CFA, Eric G. Takaha, CFA, Roger Bayston, CFA, and
Richard C. D'Addario will serve as the portfolio management team responsible for
managing the Fund's portfolio investments. They are sometimes referred to herein
as the "portfolio managers." Each of them has experience managing Franklin
mutual funds and private accounts.


     Mr. Molumphy has been a portfolio manager of the Franklin Strategic Income
Fund since 1994, the Franklin AGE High Income Fund since 1991, and the Franklin
Total Return Fund since 1998. He has been an employee of the Manager since 1988.

     Mr. Takaha has been a portfolio manager of the Franklin Strategic Income
Fund since 1997, and an employee of the Manager since 1989.


     Mr. Bayston has been a portfolio manager of the Franklin U.S. Government
Fund and the Franklin Strategic Mortgage Portfolio since 1993, and the Franklin
Total Return Fund since 1998. He has been an employee of the Manager since 1991.

     Mr. D'Addario has been a portfolio manager of the Franklin Floating Rate
Trust and the Franklin Floating Rate Daily Access Fund since 2000, and an
employee of the Manager since 1996.

INVESTMENT MANAGEMENT AGREEMENT

     Pursuant to an investment management agreement between the Manager and the
Fund (the "Investment Management Agreement"), the Fund has agreed to pay the
Manager an annual fee, payable monthly, in an amount equal to 0.50% of the
average daily value of the Fund's Managed Assets for the investment management
services it provides.


     In addition to the fees of the Manager, the Fund pays all other costs and
expenses of its operations, including compensation of its Trustees (other than
those affiliated with the Manager), custodial expenses, shareholder servicing
expenses, transfer agency and dividend disbursing expenses, legal fees, expenses
of independent auditors, expenses of repurchasing shares, expenses of issuing
any Preferred Shares, expenses of preparing, printing and distributing
prospectuses, shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any. The ordinary "Other Expenses" of the
Fund, which are estimated above, may, and are likely to, vary from the Fund's
actual expenses. See "Summary of Fund Expenses."

     Because the fees received by the Manager are based on the Managed Assets of
the Fund (including assets attributable to Preferred Shares and any leverage
created thereby), the Manager has a financial incentive for the Fund to issue
Preferred Shares, which may create a conflict of interest between the Manager
and the holders of the Fund's Common Shares.

                                 NET ASSET VALUE

     The net asset value ("NAV") of the Fund equals the total value of the
Fund's portfolio investments and other assets, less any liabilities. For
purposes of calculating NAV, portfolio securities and other assets for which
market quotes are available are stated at market value. Market value is
generally determined on the basis of the last reported sales price (or the
NASDAQ official closing price for NASDAQ-reported securities, if such price is
provided by the Fund's accountant), or if no sales are reported, based on quotes
obtained from a quotation reporting system, established market makers, or
pricing services. Certain securities or investments for which market quotations
are not readily available may be valued, pursuant to guidelines established by
the Board of Trustees, with reference to other securities or indexes. For
instance, a pricing service may recommend a fair market value based on prices of
comparable securities. Short-term investments having a maturity of 60 days or
less are generally valued at amortized cost. Exchange traded options, futures
and options on futures are valued at the settlement price determined by the
exchange. Other securities for which market quotes are not readily available are
valued at fair value as determined in good faith by the Board of Trustees or
persons acting at their direction.

     The NAV of the Fund will be determined as of the close of regular trading
on the NYSE (normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day
the NYSE is open. Domestic debt securities and foreign securities are normally
priced using data reflecting the earlier closing of the principal markets for
those securities. Information that becomes known to the Fund or its agent after
the Fund's NAV has been calculated on a particular day will not be used to
retroactively adjust the price of a security or the Fund's NAV determined
earlier that day.

     Investments initially valued in currencies other than the U.S. dollar are
converted to U.S. dollars using exchange rates obtained from pricing services.
As a result, the NAV of the Fund's shares may be affected by changes in the
value of currencies in relation to the U.S. dollar. The value of securities
traded in markets outside the United States or denominated in currencies other
than the U.S. dollar may be affected significantly on a day that the NYSE is
closed.

     In unusual circumstances, instead of valuing securities in the usual
manner, the Fund may value securities at fair value as determined in good faith
by the Board of Trustees, generally based upon recommendations provided by the
Manager. Fair valuation also may be required due to material events that occur
after the close of the relevant market but prior to the NYSE Close.

     Shares of closed-end investment companies may frequently trade on an
exchange at prices lower than NAV; accordingly, the Fund may trade on an
exchange at prices lower than its NAV.

                                  DISTRIBUTIONS


     Commencing with the Fund's first dividend, the Fund intends to make regular
monthly cash distributions to Common Shareholders at a rate based upon the
projected performance of the Fund. Distributions can only be made from net
investment income after paying any accrued dividends to Preferred Shareholders.
The dividend rate that the Fund pays on its Common Shares will depend on a
number of factors, including dividends payable on the Preferred Shares, the
income from portfolio securities and the expenses of any other leveraging
transactions. As portfolio and market conditions change, the rate of dividends
on the Common Shares and the Fund's dividend policy could change. The net income
of the Fund consists of all income accrued on portfolio assets less all expenses
of the Fund. Expenses of the Fund are accrued each day. Over time, substantially
all the net investment income of the Fund will be distributed. At least
annually, the Fund also intends to distribute to Common Shareholders their pro
rata share of any available net capital gains. Initial distributions to Common
Shareholders are expected to be declared within approximately 45 days, and paid
within approximately 60 to 75 days, from the completion of this offering,
depending on market conditions. The amount of any distributions will vary, and
there is no guarantee the Fund will pay either income dividends or capital gain
distributions.


     Unless you elect to receive distributions in cash, all of your
distributions will be automatically reinvested in additional Common Shares under
the Fund's Dividend Reinvestment Plan. See "Distributions" and "Dividend
Reinvestment Plan."

     Although it does not now intend to do so, the Board of Trustees may change
the Fund's dividend policy and the amount or timing of the distributions, based
on a number of factors, including the amount of the Fund's undistributed net
investment income and historical and projected investment income and the amount
of the expenses and dividend rates on any outstanding Preferred Shares.

     To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value. Unless you elect to receive
distributions in cash, all of your distributions will be automatically
reinvested in additional Common Shares under the Fund's Dividend Reinvestment
Plan. See "Dividend Reinvestment Plan."

                           DIVIDEND REINVESTMENT PLAN


     Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional Common Shares by PFPC, Inc., as agent for the Common Shareholders
(the "Plan Agent"), unless the Common Shareholder "opts out" of the Plan and
elects to receive cash. An election to receive cash may be revoked or reinstated
at the option of the Common Shareholder. In the case of record Common
Shareholders such as banks, brokers or other nominees that hold Common Shares
for others who are the beneficial owners, the Plan Agent will administer the
Plan on the basis of the number of Common Shares certified from time to time by
the record Common Shareholder as representing the total amount registered in
such Common Shareholder's name and held for the account of beneficial owners
who are to participate in the Plan. Common Shareholders whose shares are held in
the name of a bank, broker or nominee should contact the bank, broker or nominee
for details. Such Common Shareholders may not be able to transfer their shares
to another bank or broker and continue to participate in the Plan. All
distributions to Common Shareholder who elect not to participate in the Plan (or
whose broker or nominee elects not to participate on the Common Shareholder's
behalf), will be paid in cash by check mailed, in the case of direct Common
Shareholders, to the record holder by the Plan Agent, in its capacity as the
Fund's dividend disbursement agent.


     Unless you elect (or your broker or nominee elects) not to participate in
the Plan, the number of Common Shares you will receive will be determined as
follows:

          (1) If Common Shares are trading at or above net asset value on the
     payment date, the Fund will issue new shares at the greater of (i) the net
     asset value per Common Share on the payment date or (ii) 95% of the market
     price per Common Share on the payment date; or


          (2) If Common Shares are trading below net asset value (minus
     estimated brokerage commissions that would be incurred upon the purchase of
     Common Shares on the open market) on the payment date, the Plan Agent will
     receive the dividend or distribution in cash and will purchase Common
     Shares in the open market, on the AMEX or elsewhere, for the participants'
     accounts. It is possible that the market price for the Common Shares may
     increase before the Plan Agent has completed its purchases. Therefore, the
     average purchase price per share paid by the Plan Agent may exceed the
     market price on the payment date, resulting in the purchase of fewer shares
     than if the dividend or distribution had been paid in Common Shares issued
     by the Fund. The Plan Agent will use all dividends and distributions
     received in cash to purchase Common Shares in the open market on or shortly
     after the payment date, but in no event later than the ex-dividend date for
     the next distribution. Interest will not be paid on any uninvested cash
     payments.


     You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.

     The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. The Plan Agent will also furnish each person who
buys Common Shares with written instructions detailing the procedures for
electing not to participate in the Plan and to instead receive distributions in
cash. Common Shares in your account will be held by the Plan Agent in
non-certificated form. Any proxy you receive will include all Common Shares you
have received under the Plan.

     There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.

     Automatically reinvested dividends and distributions are taxed in the same
manner as cash dividends and distributions.


     The Fund and the Plan Agent reserve 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. Additional information about the Plan may be
obtained from PFPC, Inc., P.O. Box 43027, Providence, RI 02940-3027.


                              DESCRIPTION OF SHARES

COMMON SHARES

     The Declaration authorizes the issuance of an unlimited number of Common
Shares. All Common Shares have equal rights to the payment of dividends and the
distribution of assets upon liquidation. Common Shares will, when issued, be
fully paid and, subject to matters discussed in "Anti-Takeover and Other
Provisions in the Declaration of Trust," non-assessable, and will have no
pre-emptive or conversion rights or rights to cumulative voting. Whenever
Preferred Shares are outstanding, Common Shareholders will not be entitled to
receive any distributions from the Fund unless all accrued dividends on
Preferred Shares have been paid, and unless asset coverage (as defined in the
1940 Act) with respect to Preferred Shares would be at least 200% after giving
effect to the distributions. See "-- Preferred Shares" below.

     The Common Shares are expected to be listed on the AMEX. The Fund intends
to hold annual meetings of shareholders so long as the Common Shares are listed
on a national securities exchange and such meetings are required as a condition
to such listing.


     The Fund's net asset value per share generally increases when interest
rates decline, and generally decreases when interest rates rise, and these
changes are likely to be greater because the Fund intends to have a leveraged
capital structure. Net asset value will be reduced immediately following the
offering by the amount of the sales load and organization and offering expenses
paid by the Fund. The Manager has agreed to pay (i) the amount by which the
Fund's offering costs (other than the sales load) exceed $0.03 per share and
(ii) all of the Fund's organizational expenses, except that the Fund has agreed
to reimburse Franklin Advisers, Inc. for such organizational expenses to the
extent that the aggregate of such organizational expenses and offering costs
(other than the sales load) does not exceed $0.03 per share.


     Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange at
prices lower than net asset value. Shares of closed-end investment companies,
like the Fund, that invest predominantly in debt obligations have during some
periods traded at prices higher than net asset value and during other periods
have traded at prices lower than net asset value. The Fund's Declaration limits
the ability of the Fund to convert to open-end status. See "Anti-Takeover and
Other Provisions in the Declaration of Trust."

     Because the market value of the Common Shares may be influenced by such
factors as dividend levels (which are in turn affected by expenses), call
protection, dividend stability, portfolio credit quality, net asset value,
relative demand for and supply of such shares in the market, general market and
economic conditions, and other factors beyond the control of the Fund, the Fund
cannot assure you that the Common Shares will trade at a price equal to or
higher than net asset value in the future. The Common Shares are designed
primarily for long-term investors, and investors in the Common Shares should not
view the Fund as a vehicle for trading purposes. See "Preferred Shares and
Related Leverage" and the Statement of Additional Information under "Repurchase
of Common Shares; Conversion to Open-End Fund."

PREFERRED SHARES

     The Declaration authorizes the issuance of an unlimited number of Preferred
Shares. The Preferred Shares may be issued in one or more classes or series,
with such par value and rights as determined by the Board of Trustees, by action
of the Board of Trustees without the approval of the Common Shareholders.

     The Fund's Board of Trustees has indicated its intention to authorize an
offering of Preferred Shares (representing approximately 33%, but not more than
38%, of the Fund's Managed Assets calculated after the Preferred Shares are
issued) approximately one to three months after completion of the offering of
Common Shares. The terms of the Preferred Shares may provide that they are
redeemable at certain times, in whole or in part, at the original purchase
price per share plus accumulated dividends.

     Any decision by the Board to authorize an offering of Preferred Shares is
subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of Preferred Shares
is likely to achieve the benefits to the Common Shareholders described in this
prospectus. Although the terms of the Preferred Shares will be determined by the
Board of Trustees (subject to applicable law and the Fund's Declaration) if and
when it authorizes a Preferred Shares offering, the Board has determined that
the Preferred Shares, at least initially, would likely pay cumulative dividends
at rates determined over relatively short-term periods (such as seven or 28
days), by providing for the periodic redetermination of the dividend rate
through an auction or remarketing procedure. The Board of Trustees has indicated
that the preference on distribution, liquidation preference, voting rights and
redemption provisions of the Preferred Shares will likely be as stated below.

     As used in this prospectus, unless otherwise noted, the Fund's "net assets"
include assets of the Fund attributable to any outstanding Preferred Shares,
with no deduction for the liquidation preference of the Preferred Shares. Solely
for financial reporting purposes, however, the Fund is required to exclude the
liquidation preference of Preferred Shares from "net assets," so long as the
Preferred Shares have redemption features that are not solely within the control
of the Fund. For all regulatory and tax purposes, the Fund's Preferred Shares
will be treated as stock (rather than indebtedness).

  LIMITED ISSUANCE OF PREFERRED SHARES

     Under the 1940 Act, the Fund could issue Preferred Shares with an aggregate
liquidation value of up to one-half of the value of the Fund's total net assets
(total assets less all liabilities and indebtedness not represented by "senior
securities," as defined in the 1940 Act), measured immediately after issuance of
the Preferred Shares. "Liquidation value" means the original purchase price of
the shares being liquidated plus any accrued and unpaid dividends. In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its Common Shares unless the liquidation value of the Preferred Shares is less
than one-half of the value of the Fund's total net assets (determined after
deducting the amount of such dividend or distribution) calculated immediately
after the distribution. The liquidation value of the Preferred Shares is
expected to be approximately 33% (but not more than 38%) of the value of the
Fund's total net assets. The Fund intends to purchase or redeem Preferred
Shares, if necessary, to keep that fraction below one-half.

  DISTRIBUTION PREFERENCE

     The Preferred Shares have complete priority over the Common Shares as to
distribution of assets.

  LIQUIDATION PREFERENCE

     In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Fund, holders of Preferred Shares will be
entitled to receive a preferential liquidating distribution (expected to equal
the original purchase price per share plus accumulated and unpaid dividends
thereon, whether or not earned or declared) before any distribution of assets is
made to holders of Common Shares.

  VOTING RIGHTS

     Preferred Shares are required to be voting shares. Except as otherwise
provided in the Declaration or the Fund's Bylaws or otherwise required by
applicable law, holders of Preferred Shares will vote together with Common
Shareholders as a single class.

     Holders of Preferred Shares, voting as a separate class, will also be
entitled to elect two of the Fund's Trustees. The remaining Trustees will be
elected by Common Shareholders and holders of Preferred Shares, voting together
as a single class. In the unlikely event that two full years of accrued
dividends are unpaid on the Preferred Shares, the holders of all outstanding
Preferred Shares, voting as a separate class, will be entitled to elect a
majority of the Fund's Trustees until all dividends in arrears have been paid or
declared and set apart for payment.

  REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES

     The terms of the Preferred Shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends. The terms also may state that the Fund may tender
for or purchase Preferred Shares and resell any shares so tendered. Any
redemption or purchase of Preferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of Preferred Shares by the Fund
will increase such leverage. See "Preferred Shares and Related Leverage."

     The discussion above describes the Board of Trustees' present intention
with respect to a possible offering of Preferred Shares. If the Board of
Trustees determines to authorize such an offering, the terms of the Preferred
Shares may be the same as, or different from, the terms described above, subject
to applicable law and the Fund's Declaration and Bylaws.

         ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

     The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. The Fund's Trustees are divided into three classes. At each
annual meeting of shareholders, the term of one class will expire and each
Trustee elected to that class will hold office for a term of three years. The
classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only by action of at least seventy-five percent (75%) of the outstanding
shares of the classes or series of shares entitled to vote for the election of
such Trustee.


     The Declaration requires the approval of the Board of Trustees and the
affirmative vote of the holders of 75% of the Fund's shares (including Common
and Preferred Shares) entitled to vote to approve, adopt or authorize certain
Fund transactions not in the ordinary course of business, including (i) a merger
or consolidation or sale or transfer of the Fund and (ii) conversion of the Fund
from a closed-end to an open-end investment company, unless such action was
previously approved, adopted or authorized by the affirmative vote of 66 2/3% of
the Board of Trustees, in which case such action must be approved by the holders
of a "majority of the outstanding" Common Shares and any Preferred Shares voting
together as a single class, and of the holders of a "majority of the
outstanding" Preferred Shares voting as a separate class. A "majority of the
outstanding" shares (whether voting together as a single class or voting as a
separate class) means (i) 67% or more of such shares present at a meeting, if
the holders of more than 50% of those shares are present or represented by
proxy, or (ii) more than 50% of such shares, whichever is less. See
"Anti-Takeover and Other Provisions in the Declaration of Trust" in the
Statement of Additional Information for a more detailed summary of these
provisions.


     The Trustees may from time to time grant other voting rights to
shareholders with respect to these and other matters in the Fund's Bylaws.

     The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking control
of the Fund to negotiate with its management regarding the price to be paid and
facilitating the continuity of the Fund's investment objective and policies. The
provisions of the Declaration described above could have the effect of depriving
the Common Shareholders of opportunities to sell their Common Shares at a
premium over the then current market price of the Common Shares by discouraging
a third party from seeking to obtain control of the Fund in a tender offer or
similar transaction. The Board of Trustees of the Fund has considered the
foregoing anti-takeover provisions and concluded that they are in the best
interests of the Fund and its Common Shareholders.

     The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's Bylaws,
both of which are on file with the SEC.

     The Declaration contains an express disclaimer of shareholder liability for
debts or obligations of the Fund and requires that notice of such limited
liability be given in each agreement, obligation or instrument entered into or
executed by the Fund or the Trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.

            REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

     The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.
The Fund's Board of Trustees will regularly monitor the relationship between the
market price and net asset value of the Common Shares. If the Common Shares were
to trade at a substantial discount to net asset value for an extended period of
time, the Board may consider the repurchase of its Common Shares on the open
market or in private transactions, the making of a tender offer for such shares,
or the conversion of the Fund to an open-end investment company. The Fund cannot
assure you that its Board of Trustees will decide to take or propose any of
these actions, or that share repurchases or tender offers will actually reduce
market discount.


     The Declaration requires the affirmative vote or consent of a majority of
the Board of Trustees and the affirmative vote or consent of the holders of at
least seventy-five percent (75%) of the Fund's shares (including Common and
Preferred Shares) entitled to vote to approve, unless the conversion has been
authorized by a the affirmative vote or consent of two-thirds (66 2/3%) of the
Board of Trustees, in which case shareholders would have only the minimum voting
rights required by the 1940 Act with respect to the conversion.

     If the Fund were to convert to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares would no
longer be listed on the AMEX. In contrast to a closed-end investment company,
shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less any redemption charge that is
in effect at the time of redemption.


     Before deciding whether to take any action to convert the Fund to an
open-end investment company, the Board would consider all relevant factors,
including the extent and duration of the discount, the liquidity of the Fund's
portfolio, the impact of any action that might be taken on the Fund or its
shareholders, and market considerations. Based on these considerations, even if
the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken. See the Statement of Additional Information under "Repurchase
of Common Shares; Conversion to Open-End Fund" for a further discussion of
possible action to reduce or eliminate such discount to net asset value.

                                   TAX MATTERS

FEDERAL INCOME TAX MATTERS


     The following federal income tax discussion is based on the advice of Paul,
Hastings, Janofsky & Walker, counsel to the Fund, and reflects provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury
regulations promulgated under the Code, rulings published by the Internal
Revenue Service, and other applicable authority, as of the date of this
prospectus. These authorities are subject to change by legislative or
administrative action, possibly with retroactive effect. The following
discussion is only a summary of some of the important tax considerations
generally applicable to investments in the Fund. For more detailed information
regarding tax considerations, see the Statement of Additional Information. There
may be other tax considerations applicable to particular investors. In addition,
income earned through an investment in the Fund may be subject to state, local
and foreign taxes.


     The Fund intends to qualify each year for taxation as a regulated
investment company eligible for treatment under the provisions of Subchapter M
of the Code. If the Fund so qualifies and satisfies certain distribution
requirements, the Fund will not be subject to federal income tax on income
distributed in a timely manner to its shareholders in the form of dividends or
capital gain distributions.


     To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
holders of its Preferred Shares, must qualify for the dividends-paid deduction.
In certain circumstances, the Internal Revenue Service could take the position
that dividends paid on the Preferred Shares constitute preferential dividends
under Section 562(c) of the Code, and thus do not qualify for the dividends-paid
deduction. The Fund believes this position, if asserted, would be unlikely to
prevail.


     If at any time when Preferred Shares are outstanding the Fund does not meet
applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment as
a regulated investment company. The Fund may redeem Preferred Shares in an
effort to comply with the distribution requirement applicable to regulated
investment companies and to avoid income and excise taxes.

     The Fund's investments in certain debt obligations may cause the Fund to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Fund could be required at times to liquidate other investments in
order to satisfy its distribution requirements.


     For federal income tax purposes, distributions of investment income
generally are taxable as ordinary income to the extent of the Fund's earnings
and profits. Taxes on distributions of capital gains are determined by how long
the Fund owned the investments that generated such capital gains, rather than
how long a shareholder has owned his or her shares. Distributions of gains from
the sale of investments that the Fund owned for more than one year and that are
properly designated by the Fund as capital gain distributions will be taxable as
long-term capital gains. Distributions of gains from the sale of investments
that the Fund owned for one year or less will be taxable as ordinary income;
such distributions will not qualify for any reduced tax rates otherwise
available to corporate dividends. A distribution of an amount in excess of the
Fund's current and accumulated earnings and profits is treated as a non-taxable
return of capital that reduces a shareholder's tax basis in his or her shares;
any such distributions in excess of his or her basis are treated as gain from
the sale of such shares. Distributions are taxable to shareholders even if they
are paid from income or gains earned by the Fund before a shareholder's
investment (and thus were included in the price paid by the shareholder).
Distributions are taxable whether shareholders receive them in cash or reinvest
them in additional shares through the Dividend

Reinvestment Plan. Any gain resulting from the sale or exchange of Fund shares
generally will be taxable as a capital gain, either short-term or long-term,
depending on the length of time the shareholder has held the shares.

     For calendar years 2003 through 2008, distributions of investment income
designated by the Fund as derived from "qualified dividend income" will be taxed
in the hands of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met. The Fund does not expect
a significant portion of Fund distributions to be derived from qualified
dividend income.

     Long-term capital gain rates for individuals have been temporarily reduced
to 15% (with lower rates for individuals in the 10% and 15% rate brackets) for
capital gain distributions derived from sales of portfolio securities after May
5, 2003, and for sales of fund shares after that date and on or before December
31, 2008.

     The Internal Revenue Service currently requires that a regulated investment
company that has two or more classes of stock allocate to each such class
proportionate amounts of each type of its income (such as ordinary income and
capital gains) based upon the percentage of total dividends distributed to each
class for the tax year. Accordingly, the Fund intends each year to allocate
capital gain dividends between and among its Common Shares and any series of its
Preferred Shares in proportion to the total dividends paid to each class with
respect to such tax year. Dividends qualifying and not qualifying for (a)
treatment as qualified dividend income and (b) the dividends received deduction,
if any, will similarly be allocated between and among any such classes.


     The Fund's investments in foreign securities may be subject to foreign
withholding taxes. In that case, the Fund's yield on those securities would be
decreased. In addition, the Fund's investments in foreign securities or foreign
currencies may increase or accelerate the Fund's recognition of ordinary income
and may affect the timing or amount of the Fund's distributions.


     Under current law, the backup withholding tax rate is 28% for amounts paid
through 2010 and will be 31% for amounts paid after December 31, 2010. The Fund
may be required to apply backup withholding to taxable distributions payable to
a shareholder. Please see "Tax Matters" in the Statement of Additional
Information for additional information about backup withholding.

     This section relates only to federal income tax consequences of investing
in the Fund; the consequences under other tax laws may differ. You should
consult your tax advisor as to the possible application of foreign, state and
local income tax laws to Fund distributions. Please see "Tax Matters" in the
Statement of Additional Information for additional information regarding the tax
aspects of investing in the Fund.

                                  UNDERWRITING

     Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, UBS Securities LLC, Wachovia Securities, LLC, Advest, Inc., H&R
Block Financial Advisors, Inc., Ferris, Baker Watts, Incorporated, J.J.B.
Hilliard, W.L. Lyons, Inc., Janney Montgomery Scott LLC, Quick & Reilly, Inc. A
FleetBoston Financial Company, RBC Dain Rauscher, Inc., Stifel, Nicolaus &
Company, Incorporated and Wells Fargo Securities, LLC are acting as
representatives of the Underwriters named below. Subject to the terms and
conditions stated in the Fund's underwriting agreement dated    , 2003 (the
"Underwriting Agreement"), each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.

<Table>
<Caption>
                                                                             NUMBER OF
          UNDERWRITER                                                      COMMON SHARES
          -----------                                                      -------------
          <S>                                                                <C>
          Citigroup Global Markets Inc.
          Merrill Lynch, Pierce, Fenner & Smith Incorporated
          UBS Securities LLC
          Wachovia Securities, LLC
          Advest, Inc.
          H&R Block Financial Advisors, Inc.
          Ferris, Baker Watts, Incorporated
          J.J.B. Hilliard, W.L. Lyons, Inc.
          Janney Montgomery Scott LLC
          Quick & Reilly, Inc. A FleetBoston Financial Company
          RBC Dain Rauscher, Inc.
          Stifel, Nicolaus & Company, Incorporated
          Wells Fargo Securities, LLC
                                                                             ---------
          Total
                                                                             =========
</Table>


     The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Common Shares included in this offering are subject
to approval of legal matters by counsel and to other conditions. The
Underwriters are obligated to purchase all the Common Shares (other than those
covered by the over-allotment option described below) if they purchase any of
the Common Shares.


     The Underwriters propose to offer some of the Common Shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the Common Shares to dealers at the public offering price
less a concession not to exceed $     per Common Share. The sales load the Fund
will pay of $0.675 per Common Share is equal to 4.50% of the initial offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not to exceed $    per Common Share on sales to certain other dealers. If all of
the Common Shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
Investors must pay for any Common Shares purchased on or before      ,  2003.
The representatives have advised the Fund that the Underwriters do not intend to
confirm any sales to any accounts over which they exercise discretionary
authority.


     The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to        additional Common
Shares at the public offering price less the sales load. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if any,
in connection with this offering. To the extent such option is exercised, each
Underwriter will be obligated, subject to certain conditions, to purchase a
number of additional Common Shares approximately proportionate to such
Underwriter's initial purchase commitment.


     The Fund and the Manager have agreed that, for a period of 180 days from
the date of this prospectus, they will not, without the prior written consent of
Citigroup Global Markets Inc., on behalf of the Underwriters, dispose of or
hedge any Common Shares or any securities convertible into or exchangeable for
Common Shares. Citigroup Global Markets Inc., in its sole discretion, may
release any of the securities subject to these agreements at any time without
notice.

     Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, the Manager and the
representatives. There can be no assurance, however, that the price at which the
Common Shares will sell in the public market after this offering will not be
lower than the price at which they are sold by the Underwriters or that an
active trading market in the Common Shares will develop and continue after this
offering. The Common Shares are expected to be listed on the AMEX.

     In the Underwriting Agreement, the Fund and the Manager have each agreed to
indemnify the several Underwriters or contribute to losses arising out of
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.

     The Manager has agreed to pay (i) the amount by which the Fund's offering
costs (other than the sales load) exceed $0.03 per share and (ii) all of the
Fund's organizational expenses, except that the Fund has agreed to reimburse
Franklin Advisers, Inc. for such organizational expenses to the extent that the
aggregate of such organizational expenses and offering costs (other than the
sales load) does not exceed $0.03 per share.

     The Manager (and not the Fund) has agreed to pay to certain Underwriters a
fee at an aggregate annual rate equal to 0.15% of the Fund's Managed Assets.
This fee will be divided among such Underwriters based on the number of Common
Shares each sells in this offering and will be payable in arrears at the end of
each calendar quarter during the continuance of the Investment Management
Agreement or other advisory agreement between the Manager and the Fund. The sum
of this fee and the amounts paid by the Fund to reimburse certain Underwriter
expenses will not exceed 4.50% of the total price to the public of the Common
Shares offered hereby; provided, that in determining when the maximum amount has
been paid, the value of each of the quarterly payments shall be discounted at
the annual rate of 10% to the closing date of this offering. The Underwriters
that will receive fees as per above have agreed to provide certain after-market
services to the Manager 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.


     In addition, the Fund has agreed to reimburse the Underwriters for certain
expenses incurred by the Underwriters in the offering.

     In connection with the requirements for listing the Common Shares on the
AMEX, the Underwriters have undertaken to sell lots of 100 or more Common Shares
to a minimum of 400 beneficial owners in the United States. The minimum
investment requirement is 100 Common Shares.

     Certain Underwriters may make a market in the Common Shares after trading
in the Common Shares has commenced on the AMEX. No Underwriter is, however,
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of the
Underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the Common Shares as a result of any market-making activities
undertaken by any Underwriter. This prospectus is to be used by any Underwriter
in connection with the offering and, during the period in which a prospectus
must be delivered, with offers and sales of the Common Shares in market-making
transactions in the over-the-counter market at negotiated prices related to
prevailing market prices at the time of the sale.

     The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Shares at a level
above that which might otherwise prevail in the open market. A "stabilizing bid"
is a bid for or the purchase of the Common Shares on behalf of an Underwriter
for the purpose of fixing or maintaining the price of the Common Shares.
A "covering transaction" is a bid for or purchase of the Common Shares on
behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a contractual
arrangement whereby if, during a specified period after the issuance of the
Common Shares, the Underwriters purchase Common Shares in the open market for
the account of the underwriting syndicate and the Common Shares purchased can be
traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the Common Shares in question at the cost price to the
syndicate or may recover from (or decline to pay to) the Underwriter or selling
group member in question any or all compensation (including, with respect to a
representative, the applicable syndicate management fee) applicable to the
Common Shares in question. As a result, an Underwriter or selling group member
and, in turn, brokers may lose the fees that they otherwise would have earned
from a sale of the Common Shares if their customer resells the Common Shares
while the penalty bid is in effect. The Underwriters are not required to engage
in any of these activities, and any such activities, if commenced, may be
discontinued at any time. These transactions may be effected on the AMEX or
otherwise.


     The Underwriting Agreement provides that it may be terminated in the
absolute discretion of the representatives, without liability on the part of any
Underwriter to the Fund or the Manager, by notice to the Fund or the Manager if,
prior to the delivery of and payment for the Common Shares, (i) trading in the
Common Shares shall have been suspended by the SEC or the AMEX or trading in
securities generally on the NYSE or the AMEX shall have been suspended or
limited or minimum prices shall have been established on either of the
exchanges, (ii) a banking moratorium shall have been declared either by Federal
or New York State authorities, or (iii) there shall have occurred any outbreak
or escalation of hostilities, declaration by the United States of a national
emergency or war, or other calamity or crisis the effect of which on financial
markets is such as to make it, in the sole judgment of the Underwriters,
impractical to proceed with the offering or delivery of the Common Shares as
contemplated by this prospectus (exclusive of any supplement hereto).


     The Fund anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.

     Prior to the public offering of Common Shares, the Manager or Franklin will
purchase Common Shares from the Fund in an amount satisfying the net worth
requirements of Section 14(a) of the 1940 Act.


     The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, NY 10013.

                                    CUSTODIAN

     The Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the Fund's securities and other assets.

                 SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT

     PFPC, Inc., is the Fund's shareholder servicing agent and acts as the
Fund's transfer agent and dividend-paying agent. Please send all correspondence
to PFPC, Inc., which is located at P.O. Box 43027, Providence, RI 02940-3027.

     For its services, PFPC, Inc. receives a fixed fee per account. The Fund
also will reimburse PFPC, Inc. for certain out-of-pocket expenses, which may
include payments by PFPC, Inc. to entities, including affiliated entities, that
provide sub-shareholder services, recordkeeping and/or transfer agency services
to beneficial owners of the Fund. The amount of reimbursements for these
services per benefit plan participant Fund account per year will not exceed the
per account fee payable by the Fund to PFPC, Inc. in connection with maintaining
shareholder accounts.

                                  ADMINISTRATOR

     Franklin Templeton Services, LLC ("FT Services") has an agreement with the
Fund to provide certain administrative services and facilities for the Fund. FT
Services is an affiliate of the Manager, both of which are subsidiaries of
Franklin Resources. FT Services is located at One Franklin Parkway, San Mateo,
CA 94403-1906.

     The administrative services FT Services provides include but are not
limited to preparing and maintaining books, records, and tax and financial
reports, and monitoring compliance with regulatory requirements. The Fund will
pay FT Services a monthly fee equal to an annual rate of 0.20% of the Fund's
average daily Managed Assets.

                                  LEGAL MATTERS

     Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Paul, Hastings, Janofsky & Walker LLP, and for the
Underwriters by Simpson Thacher & Bartlett LLP.

          TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

Use of Proceeds                                                             3
Investment Objectives and Policies                                          3
Investment Restrictions and Additional Investment Information               3
Management of the Fund                                                     34
Investment Adviser                                                         41
Portfolio Transactions                                                     43
Code of Ethics                                                             44
Proxy Voting Policy                                                        45
Distributions                                                              48
Description of Shares                                                      48
Anti-Takeover and Other Provisions in the Declaration of Trust             51
Repurchase of Common Shares; Conversion to Open-End Fund                   52
Tax Matters                                                                55
Performance Related and Comparative Information                            59
Custodian                                                                  60
Shareholder Servicing Agent and Transfer Agent                             60
Independent Auditors                                                       60
Registration Statement                                                     60
Report of Independent Auditors                                             60
Financial Statements                                                       61
Appendix A -- Description of Securities Ratings                           A-1
Appendix B -- Performance Related and Comparative and Other Information   B-1


                                5,000,000 SHARES

                       FRANKLIN TEMPLETON LIMITED DURATION
                                  INCOME TRUST

                                  COMMON SHARES

[FRANKLIN(R) TEMPLETON(R) INVESTMENTS LOGO]
                                   ----------
                                   PROSPECTUS
                                       , 2003
                                   ----------
                                   CITIGROUP
                               MERRILL LYNCH & CO.
                               UBS INVESTMENT BANK
                               WACHOVIA SECURITIES
                                  ADVEST, INC.
                       H&R BLOCK FINANCIAL ADVISORS, INC.
                               FERRIS, BAKER WATTS
                                  INCORPORATED
                        J.J.B. HILLIARD, W.L. LYONS, INC.
                           JANNEY MONTGOMERY SCOTT LLC
                              QUICK & REILLY, INC.
                               RBC CAPITAL MARKETS
                           STIFEL, NICOLAUS & COMPANY
                                  INCORPORATED
                           WELLS FARGO SECURITIES, LLC

SEC File Nos.: 811-21357
               333-105495

     Until         , 2003 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, 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.







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


            SUBJECT TO COMPLETION - DATED JULY 24, 2003
         FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST
                STATEMENT OF ADDITIONAL INFORMATION
                                    , 2003

      Franklin Templeton Limited Duration Income Trust (the
"Fund") is a newly organized, diversified closed-end management
investment company.

      This Statement of Additional Information ("SAI") relating to
common shares of the Fund ("Common Shares") is not a prospectus,
and should be read in conjunction with the Fund's prospectus
relating thereto dated                 , 2003, as it may be
supplemented from time to time (the "Prospectus"). This SAI does
not include all of the information that a prospective investor
should consider before purchasing Common Shares, and investors
should obtain and read the Prospectus prior to purchasing such
shares.  For a free copy of the current prospectus or annual
report, contact your investment representative or call 1-800/DIAL
BEN (1-800/342-5236). You may also obtain a copy of the
Prospectus on the web site (http://www.sec.gov) of the Securities
and Exchange Commission ("SEC"). Capitalized terms used but not
defined in this SAI have the meanings ascribed to them in the
Prospectus.


-------------------------------------------------------------------
INVESTMENT COMPANIES:

o  ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
   CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF
   THE U.S. GOVERNMENT;

o  ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
   ENDORSED BY, ANY BANK; AND

o  ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
   OF PRINCIPAL.
-------------------------------------------------------------------




                         TABLE OF CONTENTS


USE OF PROCEEDS..............................................3
---------------

INVESTMENT OBJECTIVES AND POLICIES...........................3
----------------------------------

INVESTMENT RESTRICTIONS AND ADDITIONAL INVESTMENT INFORMATION3
-------------------------------------------------------------

MANAGEMENT OF THE FUND......................................34
----------------------

INVESTMENT ADVISER..........................................41
------------------

PORTFOLIO TRANSACTIONS......................................43
----------------------

CODE OF ETHICS..............................................44
--------------

PROXY VOTING POLICY.........................................45
-------------------

DISTRIBUTIONS...............................................48
-------------

DESCRIPTION OF SHARES.......................................48
---------------------

ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF
---------------------------------------------------------
      TRUST.................................................51
      -----

REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND....52
--------------------------------------------------------

TAX MATTERS.................................................55
-----------

PERFORMANCE RELATED AND COMPARATIVE INFORMATION.............59
-----------------------------------------------

CUSTODIAN...................................................60
---------

SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT..............60
----------------------------------------------

INDEPENDENT AUDITORS........................................60
--------------------

REGISTRATION STATEMENT......................................60
----------------------

REPORT OF INDEPENDENT AUDITORS..............................61
------------------------------

FINANCIAL STATEMENTS........................................62
--------------------

APPENDIX A - Description of Ratings........................A-1

APPENDIX B - Performance Related and Comparative and Other
      Information..........................................B-1




            THIS STATEMENT OF ADDITIONAL INFORMATION IS
                           DATED , 2003.


                          USE OF PROCEEDS


      The net proceeds of the offering of Common Shares of the
Fund will be approximately $          (or $          if the
Underwriters exercise the over-allotment option in full) after
payment of organization and offering costs.

      On behalf of the Fund, Franklin Advisers, Inc., the Fund's
investment adviser (the "Manager"), has agreed to pay (i) the
amount by which the Fund's offering costs (other than the sales
load) exceed $0.03 per share and (ii) all of the Fund's
organizational expenses, except that the Fund has agreed to
reimburse Franklin Advisers, Inc. for such organizational
expenses to the extent that the aggregate of such organizational
expenses and offering costs (other than the sales load) does not
exceed $0.03 per share.


      Pending investment in U.S. dollar-denominated debt
obligations and other securities that meet the Fund's investment
objectives and policies, it is anticipated that the net proceeds
of the offering will be invested in high quality, short-term
securities.

                INVESTMENT OBJECTIVES AND POLICIES


      The investment objectives and general investment policies of
the Fund are described in the Prospectus. The risks of investing
in the Fund are described in the Prospectus and in this SAI; in
considering such risks, you should read both of these documents
carefully.

      The Fund's primary investment objective is to seek high
current income. Its secondary objective is to seek capital
appreciation to the extent it is possible and is consistent with
the Fund's primary objective. See "Investment Objectives and
Strategies" in the Prospectus.

   INVESTMENT RESTRICTIONS AND ADDITIONAL INVESTMENT INFORMATION

FUNDAMENTAL INVESTMENT RESTRICTIONS

      Generally, the policies and restrictions discussed in this
SAI and in the Prospectus apply when the Fund makes an
investment. In most cases, the Fund is not required to sell a
security because circumstances change and the security no longer
meets one or more of the Fund's policies or restrictions. If a
percentage restriction or limitation is met at the time of
investment, a later increase or decrease in the percentage due to
a change in the value or liquidity of portfolio securities will
not be considered a violation of the restriction or limitation.

      If a bankruptcy or other extraordinary event occurs
concerning a particular security the Fund owns, the Fund may
receive stock, real estate, or other investments that the Fund
would not, or could not, buy. If this happens, the Fund intends
to sell such investments as soon as practicable while trying to
maximize the return to shareholders.

      The Fund has adopted certain investment restrictions as
fundamental and non-fundamental policies.  A fundamental policy
may only be changed if the change is approved by (i) more than
50% of the Fund's outstanding shares or (ii) 67% or more of the
Fund's shares present at a shareholder meeting if more than 50%
of the Fund's outstanding shares are represented at the meeting
in person or by proxy, whichever is less.  A non-fundamental
policy may be changed by the Board of Trustees without the
approval of shareholders.

      Except as described below, the Fund, as a fundamental
policy, may not, without the approval of the holders of a
majority of the outstanding Common Shares and, if issued,
Preferred Shares voting together as a single class, and of the
holders of a majority of the outstanding Preferred Shares voting
as a separate class:

(1)   Concentrate its investments in a particular "industry," as
      that term is used in the 1940 Act and as interpreted,
      modified, or otherwise permitted by regulatory authority
      having jurisdiction, from time to time (this limitation does
      not apply to securities issued or guaranteed by the U.S.
      Government or any of its agencies or instrumentalities).

(2)   With respect to 75% of the Fund's total assets, purchase the
      securities of any issuer, except securities issued or
      guaranteed by the U.S. Government or any of its agencies or
      instrumentalities or securities issued by other investment
      companies, if, as a result, (i) more than 5% of the Fund's
      total assets would be invested in the securities of that
      issuer, or (ii) the Fund would hold more than 10% of the
      outstanding voting securities of that issuer. For the
      purpose of this restriction, each state and each separate
      political subdivision, agency, authority or instrumentality
      of such state, each multi-state agency or authority, and
      each obligor, if any, is treated as a separate issuer of
      municipal bonds.

(3)   Purchase or sell real estate unless acquired as a result of
      ownership of securities or other instruments and provided
      that this restriction does not prevent the Fund from
      investing in issuers which invest, deal, or otherwise engage
      in transactions in real estate or interests therein, or
      investing in securities that are secured by real estate or
      interests therein.

(4)   Purchase or sell commodities as defined in the Commodity
      Exchange Act, as amended, and the rules and regulations
      thereunder, unless acquired as a result of ownership of
      securities or other instruments and provided that this
      restriction does not prevent the Fund from engaging in
      transactions involving futures contracts and options thereon
      or investing in securities that are secured by physical
      commodities.

(5)   Borrow money or issue senior securities, except to the
      extent permitted by the 1940 Act, or any rules, exemptions
      or interpretations thereunder that may be adopted, granted
      or issued by the SEC. See "Preferred Shares and Related
      Leverage" and "Risks--Leverage Risk" in the Prospectus.

(6)   Make loans to other persons except (a) through the lending
      of its portfolio securities, (b) through the purchase of
      debt obligations, loan participations and/or engaging in
      direct corporate loans in accordance with its investment
      objectives and policies, and (c) to the extent the entry
      into a repurchase agreement is deemed to be a loan. The Fund
      may also make loans to other investment companies to the
      extent permitted by the 1940 Act or any exemptions therefrom
      which may be granted by the SEC.

(7)   Act as an underwriter except to the extent that, in
      connection with the disposition of portfolio securities, it
      may be deemed to be an underwriter under applicable
      securities laws.

      For purposes of the foregoing and "Description of
Shares--Preferred Shares--Voting Rights" below, "majority of the
outstanding," when used with respect to particular shares of the
Fund (whether voting together as a single class or voting as
separate classes), means (i) 67% or more of such shares present
at a meeting, if the holders of more than 50% of such shares are
present or represented by proxy, or (ii) more than 50% of such
shares, whichever is less.

NON-FUNDAMENTAL INVESTMENT POLICIES

      The Fund has adopted certain non-fundamental investment
policies, including but not limited to the following:

          (1) The Fund may invest up to 15% of its total assets in
     securities (excluding swaps) which are illiquid at the time of
     investment (as determined by the Manager) See "Illiquid
     Securities."

      Unless otherwise indicated, all limitations applicable to
the Fund's investments (as stated above and elsewhere in this
SAI) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a
security (or, if unrated, deemed by the Manager to be of
comparable quality), or change in the percentage of the Fund's
total assets invested in certain securities or other instruments,
or change in the average maturity or estimated average duration
of the Fund's investment portfolio, resulting from market
fluctuations or other changes in the Fund's total assets, will
not require the Fund to dispose of an investment until the
Manager determines that it is practicable to sell or close out
the investment without undue market or tax consequences to the
Fund. In the event that rating agencies assign different ratings
to the same security, the Manager will determine which rating it
believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings.

      Under the 1940 Act, a "senior security" does not include any
promissory note or evidence of indebtedness where such loan is
for temporary purposes only and in an amount not exceeding 5% of
the value of the total assets of the issuer at the time the loan
is made. A loan is presumed to be for temporary purposes if it is
repaid within sixty days and is not extended or renewed.

      The Fund would be deemed to "concentrate" in a particular
industry if it invested more than 25% of its net assets in that
industry. The Fund's industry concentration policy does not
preclude it from focusing investments in issuers in a group of
related industrial sectors (such as different types of utilities).

      The Fund may not change its duration policy, which is, under
normal market conditions,to maintain an estimated average
portfolio duration of between two and five years (including the
effect of anticipated leverage), unless it provides 60 days'
prior notice to Common Shareholders .

      To the extent the Fund covers its commitment under a reverse
repurchase agreement, swap or other derivative instrument by the
segregation of assets determined by the Manager to be liquid in
accordance with procedures adopted by the Trustees, equal in
value to the amount of the Fund's commitment, such instrument
will not be considered a "senior security" for purposes of the
asset coverage requirements otherwise applicable to borrowings by
the Fund or the Fund's issuance of Preferred Shares.

      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 SEC.

      The Fund intends to apply for ratings for its Preferred
Shares from one of the nationally-recognized statistical rating
organizations ("Rating Agencies") such as Standard & Poor's
Ratings Services ("S&P"), Moody's Investors Service, Inc.
("Moody's"), or Fitch Ratings ("Fitch"). In order to obtain and
maintain the required ratings, the Fund may be required to comply
with investment quality, diversification and other guidelines
established by Moody's, S&P and/or Fitch. Such guidelines will
likely be more restrictive than the restrictions set forth above.
The Fund does not anticipate that such guidelines would have a
material adverse effect on Common Shareholders or its ability to
achieve its investment objectives. The Fund presently anticipates
that any Preferred Shares that it intends to issue would be
initially given a rating of Aa/AA or better by Moody's, S&P
and/or Fitch, but no assurance can be given that such ratings
will be obtained. No minimum rating is required for the issuance
of Preferred Shares by the Fund. Moody's, S&P and Fitch receive
fees in connection with their ratings issuances.


      Additional information concerning the characteristics of
certain of the Fund's investments is set forth below.



DEBT SECURITIES AND OTHER INCOME-PRODUCING INSTRUMENTS


      A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return
the lender's money over a certain time period. A company
typically meets its payment obligations associated with its
outstanding debt securities before it declares and pays any
dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the
issuer's payment schedule, with bonds carrying the longest
repayment schedule and commercial paper the shortest.

      The Fund may invest in senior and subordinated debt
securities. Subordinated debt is more risky because its holder
will be paid only after the holders of senior debt securities are
paid.  The Fund may invest in "zero-coupon securities," which are
debt securities that typically pay interest only at maturity
rather than periodically during the life of the security and are
issued at a significant discount from their principal amount.

      The Fund may buy both rated and unrated debt securities and
other income-producing instruments. The Fund may invest a
significant portion of its assets in investment grade debt
securities. Investment grade debt securities are rated in one of
the top four ratings categories by the Rating Agencies.

      Under normal market conditions, the Fund will invest at
least 25% of its total assets in debt securities and other
income-producing instruments that are rated below investment
grade. Debt securities that are rated below investment grade are
sometimes called "high yield securities" or "junk bonds." A debt
security rated below the top four ratings categories by each of
the Rating Agencies that cover the security, or, if unrated, are
determined to be of comparable quality by the Manager, will be
considered below investment grade. See "High Yield Investments."


      The market value of debt securities and other
income-producing instruments generally varies in response to
changes in interest rates and the financial condition of each
issuer. During periods of declining interest rates, the value of
these investments generally increases. Conversely, during periods
of rising interest rates, the value of such investments generally
declines. These changes in market value will be reflected in the
Fund's net asset value per share. Because market interest rates
are currently near their lowest levels in many years, there is a
great risk that the Fund's portfolio will decline in value.


      The Fund may invest in debt securities or other
income-producing instruments on which the issuer is not currently
making interest payments (defaulted debt securities) or where the
issuer is in bankruptcy. The Fund may buy defaulted debt
securities or other instruments if, in the opinion of the
Manager, it appears likely that the issuer may resume interest
payments or other advantageous developments appear likely in the
near future. These securities may be illiquid. Under normal
conditions, the Fund will not invest more than 5% of its total
assets in debt securities or other obligations whose issuers are
in default at the time of purchase.


      An issuer of a debt security may be unable to make interest
payments and repay principal.  Changes in an issuer's financial
strength or in a security's credit rating may affect a security's
value and, thus, impact Fund performance.



MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES


      Under normal market conditions, the Fund will invest at
least 25% of its assets in mortgage-backed and other asset-backed
securities (unrelated to mortgage loans) that are offered to
investors currently or in the future. Mortgage-related securities
are interests in pools of residential or commercial mortgage
loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others.
Pools of mortgage loans are assembled as securities for sale to
investors by various governmental, government-related and private
organizations. The value of some mortgage-related or asset-backed
securities in which the Fund may invest may be particularly
sensitive to changes in prevailing interest rates, and, like
other debt obligations, the ability of the Fund to successfully
utilize these instruments may depend in part upon the ability of
the Manager to forecast interest rates and other economic factors
correctly. See "--Mortgage Pass-Through Securities" below. The
Fund will not invest in interest-only or principal-only mortgage
securities.


      MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through
securities are securities representing interests in "pools" of
mortgage loans secured by residential or commercial real
property. Interests in pools of mortgage-related securities
differ from other forms of debt obligations, which normally
provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual
borrowers on their residential or commercial mortgage loans, net
of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing
or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the
Government National Mortgage Association (the "GNMA")) are
described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on
the mortgage pool, net of certain fees, at the scheduled payment
dates regardless of whether or not the mortgagor actually makes
the payment.

      The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-related security, and may
have the effect of shortening or extending the effective maturity
of the security beyond what was anticipated at the time of
purchase. Early repayment of principal on some mortgage-related
securities (arising from prepayments of principal due to the sale
of the underlying property, refinancing, or foreclosure, net of
fees and costs which may be incurred) may expose the Fund to a
lower rate of return upon reinvestment of principal. Also, if a
security subject to prepayment has been purchased at a premium,
the value of the premium would be lost in the event of
prepayment. Like other debt obligations, when interest rates
rise, the value of a mortgage-related security generally will
decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not
increase as much as other debt obligations. To the extent that
unanticipated rates of prepayment on underlying mortgages
increase the effective maturity of a mortgage-related security,
the volatility of such security can be expected to increase.

      Payment of principal and interest on some mortgage
pass-through securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and
credit of the U.S. Government (in the case of securities
guaranteed by the GNMA) or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of
securities guaranteed by the Federal National Mortgage
Association (the "FNMA") or the Federal Home Loan Mortgage
Corporation (the "FHLMC"). The principal governmental guarantor
of mortgage-related securities is the GNMA. GNMA is a
wholly-owned U.S. Government corporation within the Department of
Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed
by pools of mortgages insured by the Federal Housing
Administration (the "FHA"), or guaranteed by the Department of
Veterans Affairs (the "VA").


      Government-related guarantors (I.E., guarantors not backed
by the full faith and credit of the U.S. Government) include the
FNMA and the FHLMC. FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (I.E., not insured or guaranteed by
any government agency) residential mortgages from a list of
approved sellers/servicers which include state and federally
chartered savings and loan associations, mutual savings banks,
commercial banks, and credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the U.S. Government.
Instead, they are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations.


      FHLMC was created by Congress in 1970 for the purpose of
increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation formerly owned
by the twelve Federal Home Loan Banks and now owned entirely by
private stockholders. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the U.S. Government.
Instead, they are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations.

      Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other
secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect
government or agency guarantees of payments in such pools.
However, timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers and the mortgage poolers.
There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or
guarantee arrangements. Although the market for such securities
is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. The Fund
will not purchase mortgage-related securities or any other assets
which in the Manager's opinion are illiquid (excluding swaps) if,
as a result, more than 15% of the value of the Fund's total
assets (taken at market value at the time of investment) will be
invested in illiquid securities.

      Mortgage-related securities that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, are not
subject to the Fund's industry concentration restrictions (see
"Investment Restrictions") by virtue of the exclusion from that
test available to all U.S. Government securities. In the case of
privately issued mortgage-related securities, the Fund takes the
position that mortgage-related securities do not represent
interests in any particular "industry" or group of industries.
The assets underlying such securities may be represented by a
portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or
portfolios of mortgage pass-through securities issued or
guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by
the FHA or the VA. In the case of private issue mortgage-related
securities whose underlying assets are neither U.S. Government
securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the
same geographical region, the security may be subject to a
greater risk of default than other comparable securities in the
event of adverse economic, political or business developments
that may affect such region and, ultimately, the ability of
residential homeowners to make payments of principal and interest
on the underlying mortgages.

      COMMERCIAL MORTGAGE-RELATED SECURITIES. The Fund may invest
a significant portion of its assets in commercial
mortgage-related securities issued by corporations. These are
securities that represent an interest in, or are secured by,
mortgage loans secured by commercial property, such as industrial
and warehouse properties, office buildings, retail space and
shopping malls, multifamily properties and cooperative
apartments, hotels and motels, nursing homes, hospitals, and
senior living centers. They may pay fixed or adjustable rates of
interest. Many of the risks of investing in commercial
mortgage-backed securities reflect the risks of investing in the
real estate securing the underlying mortgage loans. These risks
reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan
payments, and the ability of a property to attract and retain
tenants. Commercial mortgage-backed securities may be less liquid
and exhibit greater price volatility than other types of
mortgage- or asset-backed securities.

      Commercial mortgage loans generally lack standardized terms,
which may complicate their structure. Commercial properties
themselves tend to be unique and difficult to value. Commercial
mortgage loans tend to have shorter maturities than residential
mortgage loans, and may not be fully amortizing, meaning that
they may have a significant principal balance, or "balloon"
payment, due on maturity. In addition, commercial properties,
particularly industrial and warehouse properties, are subject to
environmental risks and the burdens and costs of compliance with
environmental laws and regulations.

      OTHER MORTGAGE-RELATED OR ASSET-BACKED SECURITIES. Other
mortgage-related securities in which the Fund may invest include
mortgage pass-through securities, mortgage dollar rolls, and
other securities that directly or indirectly represent a
participation in, or are secured by and payable from, mortgage
loans on real property.

      The Fund may invest in securities issued by trusts and
special purpose corporations with principal and interest payouts
backed by, or supported by, any of various types of assets. These
assets typically include receivables related to the purchase of
manufactured housing, automobiles, credit card loans, and home
equity loans. These securities generally take the form of a
structured type of security, including pass-through, pay-through
and senior subordinated payout structures.

      The Fund may invest in other types of asset-backed
securities that are offered in the marketplace, including
Enhanced Equipment Trust Certificates ("EETCs"). Although any
entity may issue EETCs, to date, U.S. airlines are the primary
issuers. An airline EETC is an obligation secured directly by
aircraft or aircraft engines as collateral. EETCs tend to be less
liquid than bonds. Other asset-backed securities may be
collateralized by the fees earned by service providers. The value
of asset-backed securities may be substantially dependent on the
servicing of the underlying asset pools and are therefore subject
to risks associated with the negligence of, or defalcation by,
their servicers. In certain circumstances, the mishandling of
related documentation may also affect the rights of the security
holders in and to the underlying collateral. The insolvency of
entities that generate receivables or that utilize the assets may
result in added costs and delays in addition to losses associated
with a decline in the value of the underlying assets.

      Consistent with the Fund's investment objectives and
policies, the Manager also may invest in other types of
asset-backed securities. Other asset-backed securities may be
collateralized by the fees earned by service providers. The value
of asset-backed securities may be substantially dependent on the
servicing of the underlying asset pools and are therefore subject
to risks associated with the negligence by, or defalcation of,
their servicers. In certain circumstances, the mishandling of
related documentation may also affect the rights of the security
holders in and to the underlying collateral. The insolvency of
entities that generate receivables or that utilize the assets may
result in added costs and delays in addition to losses associated
with a decline in the value of the underlying assets.

      DOLLAR ROLL TRANSACTIONS. In a mortgage dollar roll
transaction, the Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (name, type, coupon, and
maturity) securities on a specified future date. During the
period between the sale and repurchase (the "roll period"), the
Fund forgoes principal and interest paid on the mortgage-backed
securities. The Fund is compensated by the difference between the
current sales price and the lower forward price for the future
purchase (often referred to as the "drop"), as well as by the
interest earned on the cash proceeds of the initial sale.


      For each mortgage dollar roll transaction, the Fund will
segregate on its books an offsetting cash position or a position
of liquid securities of equivalent value. The Manager will
monitor the value of such securities daily to determine that the
value equals or exceeds the mortgage dollar roll contract price.


      The Fund could suffer a loss if the contracting party fails
to perform the future transaction and the Fund is therefore
unable to buy back the mortgage-backed securities it initially
sold.

      The Fund intends to enter into mortgage dollar rolls only
with high quality government securities dealers and member banks
of the Federal Reserve System as approved by the Fund's board of
trustees. As a matter of non-fundamental policy, the Fund does
not consider the purchase and/or sale of a mortgage dollar roll
to be a borrowing, for purposes of the Fund's investment
restrictions.


BANK LOANS AND LOAN PARTICIPATIONS

      Under normal market conditions, the Fund will invest at
least 25% of its total assets bank loans made to corporate and
other business entities (corporate loans). To implement that
strategy, the Fund may acquire loan participations and other
related direct or indirect bank debt obligations (bank loans or
loan participations), in which the Fund will buy from a lender a
portion of a larger loan that the lender has made to a borrower.

      The rate of interest payable on corporate loans or other
income-producing instruments with floating interest rates is
generally established as the sum of a base lending rate plus a
specified margin. These base lending rates generally are LIBOR,
the Prime Rate of a designated U.S. bank, the CD Rate, or another
base lending rate used by lenders loaning money to companies,
so-called commercial lenders. The interest rate on Prime
Rate-based corporate loans floats daily as the Prime Rate
changes, while the interest rate on LIBOR-based and CD-based
corporate loans is reset periodically, typically at regular
intervals ranging between 30 days and one year.

      A significant portion of the corporate loans held by the
Fund may be issued in highly leveraged transactions. This means
that the borrower is assuming large amounts of debt in order to
have large amounts of financial resources to attempt to achieve
its business objectives. Such business objectives may include:
management's taking over control of a company (leveraged buyout);
reorganizing the assets and liabilities of a company (leveraged
recapitalization); or acquiring another company. Such corporate
loans and similar income-producing instruments present special
risks.

      Corporate 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, which would require
the Fund to make additional investments in the corporate loans as
required under the terms of the credit facility at the borrower's
demand. Such corporate loans also may include receivables
purchase facilities, which are similar to revolving credit
facilities secured by a borrower's receivables.

      The Fund will generally invest in a corporate loan only if
the Manager judges that the borrower can meet the scheduled
payments on the obligation. The Fund may, however, acquire loans
in default. In addition, the Manager will consider other factors
it believes are appropriate to the analysis of the borrower and
the corporate loan. Such factors may include, but are not limited
to, financial ratios of the borrower, such as the interest
coverage ratio and leverage ratio. The Manager also will consider
the nature of the industry in which the borrower is engaged, the
nature of the borrower's assets and the general quality of the
borrower.

      When the Manager selects corporate loans for investment by
the Fund, it primarily considers the creditworthiness of the
borrower. The Manager will not base its selection upon the
quality ratings of other debt obligations of a borrower. These
other debt obligations are often subordinated to the corporate
loans. Instead, the Manager will perform its own independent
credit analysis of the borrower, and of the collateral structure
for the corporate loan. After the Fund invests in a corporate
loan, the Manager will continue to evaluate the corporate loan on
an ongoing basis.

      Indebtedness of companies whose creditworthiness is poor
involves substantially greater risks, and may be highly
speculative. Some companies may never pay off their indebtedness,
or may pay only a small fraction of the amount owed.
Consequently, when investing in indebtedness of companies with
poor credit, the Fund bears a substantial risk of losing the
entire amount invested. If the Fund purchases a loan, it may only
be able to enforce its rights through the lender, and may assume
the credit risk of both the lender and the borrower.

      The Fund will be subject to the risk that collateral
securing a loan will decline in value or have no value. Such a
decline, whether as a result of bankruptcy proceedings or
otherwise, could cause the loan to be undercollateralized or
unsecured. In most credit agreements there is no formal
requirement to pledge additional collateral. In addition, the
Fund may invest in loans guaranteed by, or secured by assets of,
shareholders or owners, even if the loans are not otherwise
collateralized by assets of the borrower; provided, however, that
such guarantees are fully secured. There may be temporary periods
when the principal asset held by a borrower is the stock of a
related company, which may not legally be pledged to secure a
loan. On occasions when such stock cannot be pledged, the loan
will be temporarily unsecured until the stock can be pledged or
is exchanged for or replaced by other assets, which will be
pledged as security for the loan. However, the borrower's ability
to dispose of such securities, other than in connection with such
pledge or replacement, will be strictly limited for the
protection of the holders of loans and, indirectly, loans
themselves.

      If a borrower becomes involved in bankruptcy proceedings, a
court may invalidate the Fund's security interest in the loan
collateral or subordinate the Fund's rights under the loan to the
interests of the borrower's unsecured creditors or cause interest
previously paid to be refunded to the borrower. If a court
required interest to be refunded, it could negatively affect the
Fund's performance. Such action by a court could be based, for
example, on a "fraudulent conveyance" claim to the effect that
the borrower did not receive fair consideration for granting the
security interest in the loan collateral to the Fund. For loans
made in connection with a highly leveraged transaction,
consideration for granting a security interest may be deemed
inadequate if the proceeds of the loan were not received or
retained by the borrower, but were instead paid to other persons
(such as shareholders of the borrower) in an amount which left
the borrower insolvent or without sufficient working capital.
There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official
filings, which could lead to the invalidation of the Fund's
security interest in loan collateral. If the Fund's security
interest in loan collateral is invalidated or the loan is
subordinated to other debt of a borrower in bankruptcy or other
proceedings, the Fund would have substantially lower recovery,
and perhaps no recovery on the full amount of the principal and
interest due on the loan.

      The Manager generally considers loan participations to be
liquid. To the extent loan participations are deemed to be liquid
by the Manager, they will not be subject to the Fund's
restrictions on investments in illiquid securities. Generally,
loan participations are sold without guarantee or recourse to the
lending institution and are subject to the credit risks of both
the borrower and the lending institution. Loan participations,
however, may enable the Fund to acquire an interest in a loan
from a financially strong borrower which it could not do
directly. While loan participations generally trade at par value,
the Fund may be permitted to buy loan participations that sell at
a discount because of the borrower's credit problems or other
issues associated with the credit risk of the loan. To the extent
the credit problems are resolved, loan participations may
appreciate in value.

HIGH YIELD INVESTMENTS

      Under normal market conditions, the Fund will invest at
least 25% of its assets in debt securities and other
income-producing instruments that are rated below investment
grade by Moody's, S&P or Fitch (below Baa by Moody's, below BBB
by S&P or Fitch) or that are unrated but judged by the portfolio
managers to be of comparable quality. These debt securities are
sometimes referred to as "high yield" securities or "junk bonds."
Because the Fund will hold investments that are below investment
grade, an investment in the Fund is subject to a higher degree of
risk than an investment in a fund that invests primarily or
solely in high-rated securities. You should consider the
increased risk of loss to principal that is present with an
investment in higher risk securities and other income-producing
instruments, such as those in which the Fund invests.
Accordingly, an investment in the Fund should not be considered a
complete investment program and should be carefully evaluated for
its appropriateness in light of your overall investment needs and
goals.

      The market value of high yield, lower-quality fixed-income
securities and other income-producing instruments tends to
reflect individual developments affecting the issuer to a greater
degree than the market value of higher-quality securities, which
react primarily to fluctuations in the general level of interest
rates. Lower-rated or unrated investments also tend to be more
sensitive to economic conditions than higher-quality securities.

      Issuers of high yield, fixed-income securities and other
income-producing instruments are often highly leveraged and may
not have more traditional methods of financing available to them.
Therefore, the risk associated with buying the securities or
other instruments of these issuers is generally greater than the
risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising
interest rates, issuers of lower-quality investments may
experience financial stress and may not have sufficient cash flow
to make interest payments. The issuer's ability to make timely
interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the
issuer's inability to meet specific projected business forecasts
or the unavailability of additional financing.

      The risk of loss due to default may also be considerably
greater with lower-quality investments because they are generally
unsecured and are often subordinated to other creditors of the
issuer. If the issuer of an instrument in the Fund's portfolio
defaults, the Fund may have unrealized losses on the security,
which may lower the Fund's net asset value per share. Defaulted
instruments tend to lose much of their value before they default.
Thus, the Fund's net asset value per share may be adversely
affected before an issuer defaults. In addition, the Fund may
incur additional expenses if it must try to recover principal or
interest payments on a defaulted security. Notwithstanding the
foregoing, the Fund may invest in securities and other
instruments where the issuer is in default or bankruptcy.

      High yield securities or other income-producing instruments
frequently have call or buy-back features that allow an issuer to
redeem the obligation from the Fund. Although these securities or
other income-producing instruments are typically not callable for
a period of time, usually for three to five years from the date
of issue, if an issuer calls its obligations during periods of
declining interest rates, the Manager may find it necessary to
replace the investments with lower-yielding securities or other
income-producing instruments, which could result in less net
investment income for the Fund. The premature disposition of a
high yield investment due to a call or buy-back feature, the
deterioration of an issuer's creditworthiness, or a default by an
issuer may make it more difficult for the Fund to manage the
timing of its income.

      High yield securities or other income-producing instruments
may not be as liquid as higher-quality securities. Reduced
liquidity in the secondary market may have an adverse impact on
market price of a security or instrument and on the Fund's
ability to sell a security or instrument in response to a
specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the
Fund's liquidity needs. Reduced liquidity may also make it more
difficult to obtain market quotations based on actual trades for
purposes of valuing the Fund's portfolio.

      The Fund may buy securities that are sold without
registration under the federal securities laws and therefore
carry restrictions on resale. While many securities have been
sold with registration rights, covenants and penalty provisions
for delayed registration, if the Fund is required to sell
restricted securities before the securities have been registered,
it may be deemed an underwriter of the securities under the
Securities Act of 1933, as amended (the "1933 Act"), which
entails special responsibilities and liabilities. The Fund may
also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the
issuer is responsible for registering the securities.

      The Fund may buy high yield securities during an initial
underwriting. These securities involve special risks because they
are new issues. The Manager will carefully review their credit
and other characteristics. The Fund has no arrangement with its
underwriters or any other person concerning the acquisition of
these securities.

      The Fund will rely on the Manager's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. In
this evaluation, the Manager will consider, among other things,
the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.

      The credit risk factors above also apply to lower-quality
zero-coupon, deferred interest and pay-in-kind securities. These
securities have an additional risk, however, because unlike
securities that pay interest throughout the time until maturity,
the Fund will not receive any cash until the cash payment date.
If the issuer defaults, the Fund may not obtain any return on its
investment.

      The Fund may purchase certain high yield securities and
other income-producing instruments at a discount to par value.
These investments, when held to maturity or retired, may include
an element of capital gain. The Fund does not generally intend to
hold these investments solely for the purpose of achieving
capital gain, but will generally hold them as long as expected
returns on the investments remain attractive. The Fund may
realize a capital loss when a security or other instrument is
purchased at a premium (that is, in excess of its stated or par
value) and is held to maturity, or is called or redeemed at a
price lower than its purchase price. The Fund may also realize a
capital gain or loss upon the sale of securities or instruments,
whether purchased at par, a discount, or a premium.

      RATINGS.  Independent rating organizations rate debt
investments based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates
higher risk. Ratings assigned by the rating agencies are based
largely on the issuer's historical financial condition and the
rating agencies' investment analysis at the time of the rating.
Credit quality in the high yield debt market, however, can change
suddenly and unexpectedly, and credit ratings may not reflect the
issuer's current financial condition. For these reasons, the
Manager does not rely principally on the ratings assigned by
rating agencies, but performs its own independent investment
analysis of securities and other income-producing instruments
being considered for the Fund's portfolio.

      In its analysis, the Manager considers a variety of factors,
including:

o     the experience and managerial strength of the issuer;
o     responsiveness to changes in interest rates and business
      conditions;
o     debt maturity schedules and borrowing requirements;
o     the issuer's changing financial condition and market
      recognition of the change; and
o     relative values based on such factors as anticipated cash
      flow, interest or dividend coverage, asset coverage,
      and earnings prospects.


COLLATERALIZED OBLIGATIONS

      The Fund may invest in senior classes of collateralized bond
obligations ("CBOs"), collateralized loan obligations ("CLOs")
and other collateralized debt obligations ("CDOs"), which are
debt instruments backed solely by a pool of other debt
securities. The Fund will not invest in the equity classes of
CBOs, CLOs or other CDOs or in their junior classes that are
subordinate to their senior classes. The risks of an investment
in a CBO, CLO or other CDO depend largely on the type of the
collateral securities (which would have the risks described
elsewhere in this document for that type of security) and the
class of the CBO, CLO or other CDO in which the Fund invests.
Some CBOs, CLOs and other CDOs have credit ratings, but are
typically issued in various classes with various priorities.
Normally, CBOs, CLOs and other CDOs are privately offered and
sold (that is, not registered under the securities laws) and may
be characterized by the Fund as illiquid securities, but an
active dealer market may exist for CBOs, CLOs and other CDOs that
qualify for Rule 144A transactions. In addition to the normal
interest rate, default and other risks of fixed income securities
discussed elsewhere in this document, CBOs, CLOs and other CDOs
carry additional risks, including the possibility that
distributions from collateral securities will not be adequate to
make interest or other payments, the quality of the collateral
may decline in value or default, volatility in values, and the
complex structure of the security may not be fully understood at
the time of investment and produce disputes with the issuer or
unexpected investment results.


ZERO-COUPON SECURITIES

      Zero-coupon or deferred interest securities are debt
obligations that make no periodic interest payments before
maturity or a specified date when the securities begin paying
current interest (the cash payment date), and therefore are
generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining
until maturity or the cash payment date, as well as prevailing
interest rates, liquidity of the security, and the perceived
credit quality of the issuer. The discount, in the absence of
financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches. Lower quality
zero-coupon securities are generally subject to the same risks as
high yield debt securities. The Fund typically will not receive
any interest payments on these securities until maturity. If the
issuer defaults, the Fund may lose its entire investment, which
will affect the Fund's share price.


COMMERCIAL PAPER


      Commercial paper represents short-term unsecured promissory
notes issued in bearer form by corporations such as banks or bank
holding companies and finance companies. The Fund may invest in
commercial paper of any credit quality consistent with the Fund's
investment objectives and policies, including unrated commercial
paper for which the Manager has made a credit quality assessment.
See Appendix A for a description of the ratings assigned by the
Rating Agencies to commercial paper. The rate of return on
commercial paper may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or
currencies.


FOREIGN (NON-U.S.) INVESTMENTS AND CURRENCIES


      The Fund may invest in securities or other income-producing
instruments issued by companies and governments in any foreign
country, developed or developing. Foreign investments held by the
Fund generally will be traded on U.S. markets. The Fund may
invest up to 15% of its total assets in securities or other
income-producing instruments issued by companies and governments
in any foreign country, developed or developing. The Fund also
may invest up to 5% of its total assets in securities or other
income-producing instruments denominated in foreign currencies,
including obligations of non-U.S. governments and their
respective sub-divisions, agencies and government-sponsored
enterprises.


      Investing in securities or other income-producing
instruments issued by companies and governments in foreign
countries typically involves special risks and considerations not
typically associated with investing in U.S. securities. Certain
of these risks also may apply to securities of U.S. companies
with significant foreign operations. These risks can increase the
potential for losses in the Fund and affect its share price. The
political, economic and social structures of some foreign
countries may be less stable and more volatile than those in the
U.S. It is possible that a government may take over the assets or
operations of a company or impose restrictions on the exchange or
export of currency or other assets. Some countries also may have
different legal systems that may make it difficult for the Fund
to pursue legal remedies with respect to its foreign investments.

      You should consider carefully the substantial risks involved
in securities of companies of foreign nations, which are in
addition to the usual risks inherent in domestic investments. The
Fund may invest in securities of issuers in any foreign country,
developed or developing, and may buy foreign securities that are
traded in the U.S. or securities of U.S. issuers that are
denominated in a foreign currency.

      There may be less publicly available information about
foreign companies comparable to the reports and ratings published
about companies in the U.S. Foreign companies are not generally
subject to uniform accounting or financial reporting standards,
and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes
of valuing its portfolio and calculating its net asset value.
Foreign markets have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S.
companies. Commission rates in foreign countries, which are
generally fixed rather than subject to negotiation as in the
U.S., are likely to be higher. In many foreign countries there is
less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the U.S.


      DEVELOPING COUNTRIES AND EMERGING MARKETS.  The Fund may
invest in securities or other income-producing instruments issued
by companies and governments in "emerging market" countries.
Investments in companies domiciled in developing countries or
based in underdeveloped emerging markets may be subject to
potentially higher risks than investments in developed countries
or mature markets. These risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization, and less
social, political, and economic stability; (ii) the small current
size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (iii) certain national
policies which may restrict the Fund's investment opportunities,
including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation;
(v) the absence of developed legal structures governing private
or foreign investment or allowing for judicial redress for injury
to private property; and (vi) the absence or early stage of
development of a capital market structure or market-oriented
economy.


      In addition, many countries in which the Fund may invest
have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing
countries may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product,
rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency, and balance of payments position.

      FOREIGN CURRENCY.  The Fund's management endeavors to buy
and sell foreign currencies on as favorable a basis as
practicable. Some price spread on currency exchange (to cover
service charges) may be incurred, particularly when the Fund
changes investments from one country to another or when proceeds
of the sale of shares in U.S. dollars are used for the purchase
of securities in foreign countries. Also, some countries may
adopt policies that would prevent the Fund from transferring cash
out of the country or withhold portions of interest and dividends
at the source. There is the possibility of cessation of trading
on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on
income or other amounts, foreign exchange controls (which may
include suspension of the ability to transfer currency from a
given country), default in foreign government securities,
political or social instability, or diplomatic developments that
could affect investments in securities of issuers in foreign
nations.

      The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the
currencies of different nations, by exchange control regulations,
and by indigenous economic and political developments. Some
countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally
traded.

      Certain of these currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the
currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Through
the Fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable
developments in particular nations where, from time to time, it
places the Fund's investments.

      The exercise of this flexible policy may include decisions
to purchase securities with substantial risk characteristics and
other decisions such as changing the emphasis on investments from
one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed
losses.

      FORWARD CURRENCY EXCHANGE CONTRACTS.  The Fund may enter
into forward currency exchange contracts (forward contracts) to
attempt to minimize the risk to the Fund from adverse changes in
the relationship between currencies or to enhance income. A
forward contract is an obligation to buy or sell a specific
currency for an agreed price at a future date which is
individually negotiated and is privately traded by currency
traders and their customers. The Fund will either cover its
position in such a transaction or maintain, in a segregated
account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of any
such commitment until payment is made.

SOVEREIGN DEBT

      The Fund may invest in sovereign debt, which can involve a
high degree of risk. The governmental entity that controls the
repayment of sovereign debt may not be able or willing to repay
the principal and/or interest when due in accordance with the
terms of the debt. A governmental entity's willingness or ability
to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the
extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size
of the debt service burden to the economy as a whole, the
governmental entity's policy toward the International Monetary
Fund, and the political constraints to which a governmental
entity may be subject. Governmental entities may also depend on
expected disbursements from foreign governments, multilateral
agencies and others to reduce principal and interest arrearages
on their debt. The commitment on the part of these governments,
agencies and others to make such disbursements may be conditioned
on a governmental entity's implementation of economic reforms
and/or economic performance and the timely service of such
debtor's obligations. Failure to implement such reforms, achieve
such levels of economic performance or repay principal or
interest when due may result in the cancellation of such third
parties' commitments to lend funds to the governmental entity,
which may further impair such debtor's ability or willingness to
service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of
sovereign debt (including the Fund) may be requested to
participate in the rescheduling of such debt and to extend
further loans to governmental entities. There is no bankruptcy
proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part. To the
extent the Fund invests in foreign currency-denominated debt
obligations and hedging activities, such investments may produce
a difference between its book income and its taxable income. This
difference may cause a portion of the Fund's income distributions
to constitute returns of capital for tax purposes or require the
Fund to make distributions exceeding book income to qualify as a
regulated investment company for federal income tax purposes.

EQUITY SECURITIES

      The Fund may invest in equity securities. The purchaser of
an equity security typically receives an ownership interest in
the company as well as certain voting rights. The owner of an
equity security may participate in a company's success through
the receipt of dividends which are distributions of earnings by
the company to its owners; however, the Fund may hold equity
securities that do not issue dividends. Equity security owners
may also participate in a company's success or lack of success
through increases or decreases in the value of the company's
shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater
dividends but may receive less appreciation than common
stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or
rights. Warrants or rights give the holder the right to purchase
a common stock at a given time for a specified price.

      The Fund's equity investments generally will be limited to
convertible securities and dividend-paying common or preferred
stocks. The Fund may also acquire equity securities in connection
with the Fund's other investment activities, including through:
the restructuring of loans or other debt securities; the
resolution of a bankruptcy or a default; the entry of an issuer
into receivership, a corporate or securities transaction by the
issuer that affects securities held by the Fund; or the exercise
by the Fund of conversion or purchase rights associated with a
convertible or other fixed-income security purchased by the Fund.
These equity securities may have risk and other characteristics
of stocks or of both stocks and bonds. By holding and investing
in equity securities, the Fund may expose an investor to certain
risks that could cause the investor to lose money, particularly
if there is a sudden decline in a holding's share price or an
overall decline in the stock market. The value of an investment
in a Fund could decline because of equity securities held by the
Fund based on the day-to-day fluctuation or the decline in their
value related to movements in the stock market, as well as in
response to the activities of individual companies. In addition,
some of the equity securities that the Fund would obtain as a
result of the special circumstances described above could be
subject to restrictions on transfer or sale that may reduce their
market value compared to freely tradable securities.

      PREFERRED STOCKS. Preferred stock represents an equity
interest in a company that generally entitles the holder to
receive, in preference to the holders of other stocks such as
common stocks, dividends and a fixed share of the proceeds
resulting from liquidation of the company. Some preferred stocks
also entitle their holders to receive additional liquidation
proceeds on the same basis as holders of a company's common
stock, and thus also represent an ownership interest in the
company. Some preferred stocks offer a fixed rate of return with
no maturity date. Because they never mature, these preferred
stocks act like long-term bonds and can be more volatile than
other types of preferred stocks and may have heightened
sensitivity to changes in interest rates. In addition, a
company's preferred stock generally pays dividends only after the
company makes required payments to holders of its bonds and other
debt. For this reason, the value of the preferred stock will
usually react more strongly than bonds and other debt to actual
or perceived changes in the company's financial condition or
prospects. Other preferred stocks 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 stocks. Because preferred
stocks represent an equity ownership interest in a company, their
value usually will react more strongly than bonds and other debt
instruments to actual or perceived changes in a company's
financial condition or prospects, or to fluctuations in the
equity markets. Preferred stocks of smaller companies may be more
vulnerable to adverse developments than those of larger companies.

      CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES.
The Fund may invest in convertible securities, which are
generally a debt obligation or preferred stock that may be
converted within a specified period of time into a certain amount
of common stock of the same or a different issuer. A convertible
security provides a fixed-income stream and the opportunity,
through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its
underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market
value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a
convertible security also tends to increase as the market value
of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because both
interest rate and market movements can influence its value, a
convertible security is not as sensitive to interest rates as a
similar fixed-income security, nor is it as sensitive to changes
in share price as its underlying stock.

      A convertible security may be subject to redemption at the
option of the issuer at a predetermined price. If a convertible
security held by the Fund is called for redemption, the Fund
would be required to permit the issuer to redeem the security and
convert it to underlying common stock, or would sell the
convertible security to a third party, which may have an adverse
effect on the Fund's ability to achieve its investment objectives.

      The Fund may invest in so-called "synthetic convertible
securities," which are composed of two or more different
securities whose investment characteristics, taken together,
resemble those of convertible securities. For example, the Fund
may purchase a non-convertible debt security and a warrant or
option. The synthetic convertible security differs from the true
convertible security in several respects. Unlike a true
convertible security, which is a single security having a unitary
market value, a synthetic convertible security comprises two or
more separate securities, each with its own market value.
Therefore, the "market value" of a synthetic convertible security
is the sum of the values of its debt component and its
convertible component. For this reason, the values of a synthetic
convertible security and a true convertible security may respond
differently to market fluctuations.

BANK OBLIGATIONS

      Bank obligations in which the Fund may invest include
certificates of deposit, bankers' acceptances, and fixed time
deposits. Certificates of deposit are negotiable certificates
that are issued against funds deposited in a commercial bank for
a definite period of time and that earn a specified return.
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect,
that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations
payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the
investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity
of the obligation. There are generally no contractual
restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market
for such deposits. The Fund may also hold funds on deposit with
its custodian bank in an interest-bearing account for temporary
purposes.


      Subject to the Fund's limitation on concentration of no more
than 25% of its total assets in the securities of issuers in a
particular industry, the Fund may invest without limit in U.S.
dollar-denominated obligations of foreign banks and up to 5% of
its total assets in foreign bank obligations denominated in
foreign currencies. Obligations of foreign banks involve certain
risks associated with investing in foreign securities described
under "--Foreign (Non-U.S.) Investments and Currencies" above,
including the possibilities that their liquidity could be
impaired because of future political and economic developments,
that their obligations may be less marketable than comparable
obligations of U.S. banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those
obligations, that foreign deposits may be seized or nationalized,
that foreign governmental restrictions such as exchange controls
may be adopted which might adversely affect the payment of
principal and interest on those obligations and that the
selection of those obligations may be more difficult because
there may be less publicly available information concerning
foreign banks or the accounting, auditing and financial reporting
standards, practices and requirements applicable to foreign banks
may differ from those applicable to U.S. banks. Foreign banks are
not generally subject to examination by any U.S. Government
agency or instrumentality.


CORPORATE BONDS

      The Fund may invest in a wide variety of bonds and related
debt obligations of varying maturities issued by U.S. and foreign
corporations (including banks) and other business entities. Bonds
are fixed or variable rate debt obligations, including bills,
notes, debentures, money market instruments and similar
instruments and securities. Bonds generally are used by
corporations and other issuers to borrow money from investors.
The issuer pays the investor a fixed or variable 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 will invest in U.S. dollar-denominated
corporate bonds and may also invest up to 5% of its total assets
in bonds denominated in foreign currencies in accordance with the
Fund's investment objectives and policies as described in the
Prospectus.


      The Fund's investments in corporate bonds are subject to a
number of risks described in the Prospectus and elaborated upon
elsewhere in this section of the SAI, including interest rate
risk, credit risk, high yield risk, issuer risk, foreign
(non-U.S.) investment risk, inflation risk, liquidity risk, and
management risk.


DERIVATIVE INSTRUMENTS

      In pursuing its investment objectives, the Fund may purchase
and sell (write) both put options and call options on securities,
swap agreements, and securities indexes, and enter into interest
rate and index futures contracts and purchase and sell options on
such futures contracts ("futures options") to add leverage to the
portfolio, for hedging purposes or as part of its overall
investment strategy. The Fund also may enter into swap agreements
with respect to interest rates, currencies, securities indexes
and other assets and measures of risk or return. If other types
of financial instruments, including other types of options,
futures contracts or futures options are traded in the future,
the Fund may also use those instruments, provided that the
Trustees determine that their use is consistent with the Fund's
investment objectives. The Fund's use of derivative instruments
(other than swaps) will be limited by the Fund's 15% limit on
illiquid investments to the extent they are determined to be
illiquid.

      The value of some derivative instruments in which the Fund
may invest may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Fund, the
ability of the Fund to successfully utilize these instruments may
depend in part upon the ability of the Manager to forecast
interest rates and other economic factors correctly. If the
Manager incorrectly forecasts such factors and has taken
positions in derivative instruments contrary to prevailing market
trends, the Fund could be exposed to the risk of loss.


      The Fund might not employ any of the strategies described
below, and no assurance can be given that any strategy used will
succeed. If the Manager incorrectly forecasts interest rates,
market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a
better position if it had not entered into the transaction at
all. Also, suitable derivative transactions may not be available
in all circumstances. The use of these strategies involves
certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of
derivative instruments and price movements of related
investments. While some strategies involving derivative
instruments can reduce the risk of loss, they can also reduce the
opportunity for gain or even result in losses by offsetting
favorable price movements in related investments or otherwise,
due to the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable or
the possible need to sell a portfolio security at a
disadvantageous time because the Fund is required to maintain
asset coverage or offsetting positions in connection with
transactions in derivative instruments, and the possible
inability of the Fund to close out or to liquidate its
derivatives positions. Income earned by the Fund from many
derivative strategies will be distributed to shareholders in
taxable distributions.


      OPTIONS ON SECURITIES, SWAP AGREEMENTS AND INDEXES. The Fund
may purchase and sell both put and call options on securities,
swap agreements or indexes in standardized contracts traded on
domestic or other securities exchanges, boards of trade, or
similar entities, or quoted on NASDAQ or on an over-the-counter
market, and agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of debt obligations from a
dealer.

      An option on a security (or an index) is a contract that
gives the holder of the option, in return for a premium, the
right to buy from (in the case of a call) or sell to (in the case
of a put) the writer of the option the security underlying the
option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the
option to deliver the underlying security upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security. Upon exercise, the writer of an option on an
index is obligated to pay the difference between the cash value
of the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect
features of a particular securities market, a specific group of
financial instruments or securities, or certain economic
indicators.)

      The Fund will write call options and put options only if
they are "covered." In the case of a call option on a debt
obligation or other security, the option is "covered" if the Fund
owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required,
cash or other assets determined to be liquid by the Manager in
accordance with procedures established by the Board of Trustees,
in such amount are segregated by its custodian) upon conversion
or exchange of other securities held by the Fund. For a call
option on an index, the option is covered if the Fund maintains
with its custodian assets determined to be liquid by the Manager
in accordance with procedures established by the Board of
Trustees, in an amount equal to the contract value of the index.
A call option is also covered if the Fund holds a call on the
same security or index as the call written where the exercise
price of the call held is (i) equal to or less than the exercise
price of the call written, or (ii) greater than the exercise
price of the call written, provided the difference is maintained
by the Fund in segregated assets determined to be liquid by the
Manager in accordance with procedures established by the Board of
Trustees. A put option on a security or an index is "covered" if
the Fund segregates assets determined to be liquid by the Manager
in accordance with procedures established by the Board of
Trustees equal to the exercise price. A put option is also
covered if the Fund holds a put on the same security or index as
the put written where the exercise price of the put held is (i)
equal to or greater than the exercise price of the put written,
or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in segregated assets
determined to be liquid by the Manager in accordance with
procedures established by the Board of Trustees.

      If an option written by the Fund expires unexercised, the
Fund realizes a capital gain equal to the premium received at the
time the option was written. If an option purchased by the Fund
expires unexercised, the Fund realizes a capital loss equal to
the premium paid. Prior to the earlier of exercise or expiration,
an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or
sale transaction can be effected when the Fund desires.

      The Fund may sell put or call options it has previously
purchased, which could result in a net gain or loss depending on
whether the amount realized on the sale is more or less than the
premium and other transaction costs paid on the put or call
option which is sold. Prior to exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series. The Fund will realize a capital gain from a
closing purchase transaction if the cost of the closing option is
less than the premium received from writing the option, or, if it
is more, the Fund will realize a capital loss. If the premium
received from a closing sale transaction is more than the premium
paid to purchase the option, the Fund will realize a capital gain
or, if it is less, the Fund will realize a capital loss. The
principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to
the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the
expiration date.

      The premium paid for a put or call option purchased by the
Fund is an asset of the Fund. The premium received for an option
written by the Fund is recorded as a deferred credit. The value
of an option purchased or written is marked to market daily and
is valued at the closing price on the exchange on which it is
traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.

      The Fund may write covered straddles consisting of a
combination of a call and a put written on the same underlying
security. A straddle will be covered when sufficient assets are
deposited to meet the Fund's immediate obligations. The Fund may
use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the
exercise price of the call is higher than that of the put. In
such cases, the Fund will also segregate liquid assets equivalent
to the amount, if any, by which the put is "in the money."

      RISKS ASSOCIATED WITH OPTIONS ON SECURITIES AND INDEXES.
There are several risks associated with transactions in options
on securities and on indexes. For example, there are significant
differences between the securities and options markets that could
result in an imperfect correlation between these markets, causing
a given transaction not to achieve its objectives. A decision as
to whether, when and how to use options involves the exercise of
skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or
unexpected events.

      During the option period, the covered call writer has, in
return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying security above the
exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no
control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has
received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option
and must deliver the underlying security at the exercise price.
If a put or call option purchased by the Fund is not sold when it
has remaining value, and if the market price of the underlying
security remains equal to or greater than the exercise price (in
the case of a put), or remains less than or equal to the exercise
price (in the case of a call), the Fund will lose its entire
investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements
in a related security, the price of the put or call option may
move more or less than the price of the related security.

      There can be no assurance that a liquid market will exist
when the Fund seeks to close out an option position. If the Fund
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to
realize any profit or the option may expire worthless. If the
Fund were unable to close out a covered call option that it had
written on a security, it would not be able to sell the
underlying security unless the option expired without exercise.
As the writer of a covered call option, the Fund forgoes, during
the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above
the sum of the premium and the exercise price of the call.

      If trading were suspended in an option purchased by the
Fund, the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased. Except to the extent that
a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the
index may result in a loss to the Fund; however, such losses may
be mitigated by changes in the value of the Fund's securities
during the period the option was outstanding.

      FOREIGN CURRENCY OPTIONS. The Fund may buy or sell put and
call options on foreign currencies for investment purposes or as
a hedge against changes in the value of the U.S. dollar (or
another currency) in relation to a foreign currency in which the
Fund's securities may be denominated. The Fund may buy or sell
put and call options on foreign currencies either on exchanges or
in the over-the-counter market. A put option on a foreign
currency gives the purchaser of the option the right to sell a
foreign currency at the exercise price until the option expires.
A call option on a foreign currency gives the purchaser of the
option the right to purchase the currency at the exercise price
until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit
the ability of the Fund to reduce foreign currency risk using
such options.

      FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund
may invest in interest rate futures contracts and options thereon
("futures options"). The Fund may also purchase and sell futures
contracts on debt obligations (to the extent they are available)
and U.S. Government and agency securities, as well as purchase
put and call options on such futures contracts.

      A futures contract provides for the future sale by one party
and purchase by another party of a specified quantity of the
security or other financial instrument at a specified price and
time. A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at
the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the
value of an index might be a function of the value of certain
specified securities, physical delivery of these securities is
not always made. A public market exists in futures contracts
covering a number of indexes as well as financial instruments,
including, without limitation: U.S. Treasury bonds; U.S. Treasury
notes; GNMA Certificates; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; Eurodollar
certificates of deposit; the Australian dollar; the Canadian
dollar; the British pound; the German mark; the Japanese yen; the
French franc; the Swiss franc; the Mexican peso; and certain
multinational currencies, such as the euro. It is expected that
other futures contracts will be developed and traded in the
future.

      The Fund may purchase and write call and put futures
options. Futures options possess many of the same characteristics
as options on securities and indexes (discussed above). A futures
option gives the holder the right, in return for the premium
paid, to assume a long position (call) or short position (put) in
a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option,
the holder acquires a long position in the futures contract and
the writer is assigned the opposite short position. In the case
of a put option, the opposite is true.

      To comply with applicable rules of the Commodity Futures
Trading Commission ("CFTC") under which the Fund avoids being
deemed a "commodity pool" or a "commodity pool operator," the
Fund intends generally to limit its use of futures contracts and
futures options to "bona fide hedging" transactions, as such term
is defined in applicable regulations, interpretations and
practice. For example, the Fund might use futures contracts to
hedge against anticipated changes in interest rates that might
adversely affect either the value of the Fund's debt obligations
or the price of the debt obligations that the Fund intends to
purchase. The Fund's hedging activities may include sales of
futures contracts as an offset against the effect of expected
increases in interest rates, and purchases of futures contracts
as an offset against the effect of expected declines in interest
rates. Although other techniques could be used to reduce the
Fund's exposure to interest rate fluctuations, the Fund may be
able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.

      The Fund may enter into futures contracts and futures
options that are standardized and traded on a U.S. or other
exchange, board of trade, or similar entity, or quoted on an
automated quotation system, and the Fund may also enter into OTC
options on futures contracts.

      When a purchase or sale of a futures contract is made by the
Fund, the Fund is required to deposit with its custodian (or
broker, if legally permitted) a specified amount of assets
determined to be liquid by the Manager in accordance with
procedures established by the Board of Trustees ("initial
margin"). The margin required for a futures contract is set by the
exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures
contract that is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn taxable interest income on
its initial margin deposits. A futures contract held by the Fund
is valued daily at the official settlement price of the exchange
on which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan
by the Fund but is instead a settlement between the Fund and the
broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, the Fund
will mark to market its open futures positions.

      The Fund is also required to deposit and maintain margin
with respect to put and call options on futures contracts written
by it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.

      Although some futures contracts call for making or taking
delivery of the underlying securities, generally these
obligations are closed out prior to delivery by offsetting
purchases or sales of matching futures contracts (involving the
same exchange, underlying security or index, and delivery month).
If an offsetting purchase price is less than the original sale
price, the Fund realizes a capital gain, or if it is more, the
Fund realizes a capital loss. Conversely, if an offsetting sale
price is more than the original purchase price, the Fund realizes
a capital gain, or if it is less, the Fund realizes a capital
loss. The transaction costs must also be included in these
calculations.

      The Fund may write covered straddles consisting of a call
and a put written on the same underlying futures contract. A
straddle will be covered when sufficient assets are deposited to
meet the Fund's immediate obligations. The Fund may use the same
liquid assets to cover both the call and put options where the
exercise price of the call and put are the same, or the exercise
price of the call is higher than that of the put. In such cases,
the Fund will also segregate liquid assets equivalent to the
amount, if any, by which the put is "in the money."


      LIMITATIONS ON USE OF FUTURES AND FUTURES OPTIONS. As noted
above, the Fund generally intends to enter into positions in
futures contracts and related options only for "bona fide
hedging" purposes. With respect to positions in futures and
related options that do not constitute bona fide hedging
positions, the Fund will comply with applicable CFTC
requirements, as amended. Under current CFTC requirements, with
respect to positions in futures and related options that do not
constitute bona fide hedging positions, the Fund will not enter
into a futures contract or futures option contract unless either
(1) immediately thereafter, the aggregate initial margin deposits
relating to such positions plus premiums paid by it for open
futures option positions, less the amount by which any such
options are "in the money," do not exceed 5% of the Fund's
liquidation value, after taking into account unrealized profits
and unrealized losses on any such contracts into which the Fund
has entered or (2) the aggregate notional value of all non-hedge
futures contracts including such contract (taken at market value
at the time of entering that contract) does not exceed the
liquidation value of that Fund's portfolio. Pending CFTC rule
amendments may eliminate the limitations set forth above, in
which case the Fund may no longer be subject to such limitations.
A call option is "in the money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in the money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.


      When purchasing a futures contract, the Fund will maintain
with its custodian (and mark to market on a daily basis) assets
determined to be liquid by the Manager in accordance with
procedures established by the Board of Trustees, that, when added
to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract.
Alternatively, the Fund may "cover" its position by purchasing a
put option on the same futures contract with a strike price as
high as or higher than the price of the contract held by the Fund.

      When selling a futures contract, the Fund will maintain with
its custodian (and mark to market on a daily basis) assets
determined to be liquid by the Manager in accordance with
procedures established by the Board of Trustees, that are equal
to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the
instruments underlying the contract (or, in the case of an index
futures contract, a portfolio with a volatility substantially
similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to
purchase the same futures contract at a price no higher than the
price of the contract written by the Fund (or at a higher price
if the difference is maintained in liquid assets with the Fund's
custodian).

      When selling a call option on a futures contract, the Fund
will maintain with its custodian (and mark to market on a daily
basis) assets determined to be liquid by the Manager in
accordance with procedures established by the Board of Trustees,
that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of
the futures contract underlying the call option. Alternatively,
the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike
price of the call option, by owning the instruments underlying
the futures contract, or by holding a separate call option
permitting the Fund to purchase the same futures contract at a
price not higher than the strike price of the call option sold by
the Fund.

      When selling a put option on a futures contract, the Fund
will maintain with its custodian (and mark to market on a daily
basis) assets determined to be liquid by the Manager in
accordance with procedures established by the Board of Trustees,
that equal the purchase price of the futures contract, less any
margin on deposit. Alternatively, the Fund may cover the position
either by entering into a short position in the same futures
contract, or by owning a separate put option permitting it to
sell the same futures contract so long as the strike price of the
purchased put option is the same as or higher than the strike
price of the put option sold by the Fund.

      To the extent that securities with maturities greater than
one year are used to segregate assets to cover the Fund's
obligations under futures contracts and related options, such use
will not eliminate the leverage risk arising from such use, which
may tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio,
and may require liquidation of portfolio positions when it is not
advantageous to do so.

      The requirements for qualification as a regulated investment
company also may limit the extent to which the Fund may enter
into futures, futures options or forward contracts. See "Tax
Matters."

      RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS. There are
several risks associated with the use of futures contracts and
futures options as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount
invested in the futures contract. There can be no guarantee that
there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In
addition, there are significant differences between the
securities and futures markets that could result in an imperfect
correlation between the markets, causing a given hedge not to
achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market
demand for futures and futures options on securities, including
technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and
the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and
how to hedge involves the exercise of skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.

      Futures contracts on U.S. Government securities historically
have reacted to an increase or decrease in interest rates in a
manner similar to that in which the underlying U.S. Government
securities reacted. To the extent, however, that the Fund enters
into such futures contracts, the value of such futures will not
vary in direct proportion to the value of the Fund's holdings of
debt obligations. Thus, the anticipated spread between the price
of the futures contract and the hedged security may be distorted
due to differences in the nature of the markets. The spread also
may be distorted by differences in initial and variation margin
requirements, the liquidity of such markets and the participation
of speculators in such markets.

      Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs
only price movements during a particular trading day and
therefore does not limit potential losses because the limit may
work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial
losses.

      There can be no assurance that a liquid market will exist at
a time when the Fund seeks to close out a futures contract or a
futures option position, and the Fund would remain obligated to
meet margin requirements until the position is closed. In
addition, many of the contracts discussed above are relatively
new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market
will develop or continue to exist.

      ADDITIONAL RISKS OF OPTIONS ON SECURITIES, FUTURES
CONTRACTS, OPTIONS ON FUTURES CONTRACTS AND FORWARD CURRENCY
EXCHANGE CONTRACTS AND OPTIONS THEREON. Options on securities,
futures contracts, options on futures contracts, and options on
currencies may be traded on foreign exchanges. Such transactions
may not be regulated as effectively as similar transactions in
the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign
securities. Some foreign exchanges may be principal markets so
that no common clearing facility exists and a trader may look
only to the broker for performance of the contract. The value of
such positions also could be adversely affected by (i) other
complex foreign political, legal and economic factors, (ii)
lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in the Fund's ability to act
upon economic events occurring in foreign markets during
non-business hours in the United States, (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the United States and (v) lesser trading
volume. In addition, unless the Fund hedges against fluctuations
in the exchange rate between the U.S. dollar and the currencies
in which trading is done on foreign exchanges, any profits that
the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a
result of those changes. The Fund's use of such instruments may
cause the Fund to realize higher amounts of short-term capital
gains (generally taxed to shareholders at ordinary income tax
rates) than if the Fund had not used such instruments.

SWAP AGREEMENTS

      The Fund may enter into swap contracts for hedging purposes
or to add leverage to the portfolio; such swaps may include but
are not limited to interest rate swaps, credit default swaps or
currency swaps. When used for hedging purposes, the Fund would be
the buyer of a swap contract. When the Fund is the seller of a
swap contract, the Fund will segregate assets in the form of cash
and cash equivalents in an amount equal to the aggregate market
value of such swaps, marked to market on a daily basis.

      Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a
few weeks to more than one year. In a standard "swap"
transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be
exchanged or "swapped" between the parties are generally
calculated with respect to a "notional amount," I.E., the return
on or increase in value of a particular dollar amount invested at
a particular interest rate or in a "basket" of securities
representing a particular index.

      The Fund's investment in swaps will not be included as
illiquid investments for purposes of determining compliance with
the 15% limit on illiquid investments. Accordingly, the Fund may
invest more than 15% of its total assets in swaps. However, the
Fund's use of derivative instruments (other than swaps) will be
limited by the Fund's 15% limit on illiquid investments to the
extent such derivatives are determined to be illiquid.

      Most swap agreements entered into by the Fund would
calculate the obligations of the parties to the agreement on a
"net basis." Consequently, the Fund's current obligations (or
rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the
agreement (the "net amount"). The Fund's current obligations
under a swap agreement will be accrued daily (offset against any
amounts owed to the Fund).

      Whether the Fund's use of swaps will be successful in
furthering its investment objectives will depend on the Manager's
ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. The
Fund bears the risk of loss of the amount expected to be received
under a swap agreement in the event of the default or bankruptcy
of a swap agreement counterparty. The Fund will enter into swap
agreements only with counterparties that meet certain standards
of creditworthiness. The swaps market is a relatively new market
and is largely unregulated. It is possible that developments in
the swaps market, including potential government regulation,
could adversely affect the Fund's ability to terminate existing
swap agreements or to realize amounts to be received under such
agreements. Certain swap agreements are exempt from most
provisions of the Commodity Exchange Act ("CEA") and, therefore,
are not regulated as futures or commodity option transactions
under the CEA.

      INTEREST RATE SWAPS. An interest rate swap is the transfer
between two counterparties of interest rate obligations. One
obligation has an interest rate fixed to maturity while the other
has an interest rate that changes with changes in a designated
benchmark, such as the London Interbank Offered Rate (LIBOR),
prime, commercial paper, or other benchmarks. The obligations to
make repayment of principal on the underlying securities are not
transferred. These transactions generally require the
participation of an intermediary, frequently a bank. The entity
holding the fixed rate obligation will transfer the obligation to
the intermediary, and the entity will then be obligated to pay to
the intermediary a floating rate of interest, generally including
a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity that
has a floating-rate obligation that substantially mirrors the
obligation desired by the first entity. In return for assuming a
fixed obligation, the second entity will pay the intermediary all
sums that the intermediary pays on behalf of the first entity,
plus an arrangement fee and other agreed upon fees. To the extent
the Fund does not own the underlying obligation, the Fund will
maintain, in a segregated account with its custodian bank, cash
or liquid debt securities with an aggregate value equal to the
amount of the Fund's outstanding swap obligation.

      Interest rate swaps permit the party seeking a floating rate
obligation the opportunity to acquire the obligation at a lower
rate than is directly available in the credit market, while
permitting the party desiring a fixed rate obligation the
opportunity to acquire a fixed rate obligation, also frequently
at a price lower than is available in the capital markets. The
success of the transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon
rate to cover the cost involved.

      CREDIT DEFAULT SWAPS. The Fund may purchase credit default
swaps. In that case, the Fund would be entitled to receive the
par (or other agreed-upon) value of a referenced debt obligation
from the counterparty to the contract in the event of a default
by a third party, such as a U.S. or foreign issuer, on the debt
obligation. In return, the Fund would pay to the counterparty a
periodic stream of payments over the term of the contract
provided that no event of default has occurred. If no default
occurs, the Fund would have spent the stream of payments and
received no benefit from the contract. When the Fund is the
seller of a swap contract, it receives the stream of payments but
is obligated to pay upon default of the referenced debt
obligation. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total
assets, the Fund would be subject to investment exposure on the
notional amount of the swap.

STRUCTURED NOTES AND OTHER RELATED INSTRUMENTS

      The Fund may invest in "structured" notes and other related
instruments, which are privately negotiated debt obligations
where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate (an
"embedded index"), such as selected securities, an index of
securities or specified interest rates, or the differential
performance of two assets or markets, such as indexes reflecting
bonds. Structured instruments may be issued by corporations,
including banks, as well as by governmental agencies. Structured
instruments frequently are assembled in the form of medium-term
notes, but a variety of forms are available and may be used in
particular circumstances. The terms of such structured
instruments normally provide that their principal and/or interest
payments are to be adjusted upwards or downwards (but ordinarily
not below zero) to reflect changes in the embedded index while
the structured instruments are outstanding. As a result, the
interest and/or principal payments that may be made on a
structured product may vary widely, depending on a variety of
factors, including the volatility of the embedded index and the
effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or
differential performance of the referenced index(es) or other
asset(s). Application of a multiplier involves leverage that will
serve to magnify the potential for gain and the risk of loss.

      The Manager may utilize structured instruments for
investment purposes and also for risk management purposes, such
as to reduce the duration and interest rate sensitivity of the
Fund's portfolio. While structured instruments may offer the
potential for a favorable rate of return from time to time, they
also entail certain risks. Structured instruments may be less
liquid than other debt securities, and the price of structured
instruments may be more volatile. In some cases, depending on the
terms of the embedded index, a structured instrument may provide
that the principal and/or interest payments may be adjusted below
zero. Structured instruments also may involve significant credit
risk and risk of default by the counterparty. Certain issuers of
structured instruments may be deemed to be "investment companies"
as defined in the 1940 Act. As a result, the Fund's investment in
these structured instruments may be limited by the restrictions
contained in the 1940 Act. Although structured notes, bank loans
and loan participations are not necessarily illiquid, to the
extent such investments are deemed to be illiquid by the Manager,
they will be subject to the Fund's restrictions on investments in
illiquid securities. Like other sophisticated strategies, the
Fund's use of structured instruments may not work as intended. If
the value of the embedded index changes in a manner other than
that expected by the Manager, principal and/or interest payments
received on the structured instrument may be substantially less
than expected. Also, if the Manager uses structured instruments
to reduce the duration of the Fund's portfolio, this may limit
the Fund's return when having a longer duration would be
beneficial (for instance, when interest rates decline).

U.S. GOVERNMENT SECURITIES


      U.S. Government securities are obligations of, or guaranteed
by, the U.S. Government, its agencies or instrumentalities. The
U.S. Government does not guarantee the net asset value of the
Fund's shares. Some U.S. Government securities, such as Treasury
bills, notes and bonds, and securities guaranteed by the GNMA,
are supported by the full faith and credit of the United States;
others, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the
agency's obligations; and still others, such as those of the
Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. Government securities include
securities that have no coupons, or have been stripped of their
unmatured interest coupons, individual interest coupons from such
securities that trade separately, and evidences of receipt of
such securities. Such securities may pay no cash income, and are
purchased at a deep discount from their value at maturity. See
"--Zero-Coupon Securities" and "--Pay-In-Kind Securities."
Custodial receipts issued in connection with so-called trademark
zero-coupon securities, such as CATs and TIGRs, are not issued by
the U.S. Treasury, and are therefore not U.S. Government
securities, although the underlying bond represented by such
receipt is a debt obligation of the U.S. Treasury. Other
zero-coupon Treasury securities (E.G., STRIPs and CUBEs) are
direct obligations of the U.S. Government.


MUNICIPAL BONDS

      The Fund may invest in municipal bonds which pay interest
that, in the opinion of bond counsel to the issuer (or on the
basis of other authority believed by the Fund's portfolio
managers to be reliable), is exempt from federal income taxes
("municipal bonds"), although dividends that the Fund pays that
are attributable to such interest will not be tax-exempt to
shareholders of the Fund.

      Municipal bonds share the attributes of debt obligations in
general, but are generally issued by states, municipalities and
other political subdivisions, agencies, authorities and
instrumentalities of states and multi-state agencies or
authorities. The municipal bonds that the Fund may purchase
include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued
pursuant to former federal tax law. General obligation bonds are
obligations involving the credit of an issuer possessing taxing
power and are payable from such issuer's general revenues and not
from any particular source. Limited obligation bonds are payable
only from the revenues derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source. Tax-exempt
private activity bonds and industrial development bonds generally
are also revenue bonds and thus are not payable from the issuer's
general revenues. The credit and quality of private activity
bonds and industrial development bonds are usually related to the
credit of the user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the
user (and/or any guarantor).

      Municipal bonds are subject to credit and market risk.
Generally, prices of higher quality issues tend to fluctuate less
with changes in market interest rates than prices of lower
quality issues and prices of longer maturity issues tend to
fluctuate more than prices of shorter maturity issues. Prices and
yields on municipal bonds are dependent on a variety of factors,
including general money-market conditions, the financial
condition of the issuer, general conditions of the municipal bond
market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. A number of these
factors, including the ratings of particular issues, are subject
to change from time to time. Information about the financial
condition of an issuer of municipal bonds may not be as extensive
as that which is made available by corporations whose securities
are publicly traded. Obligations of issuers of municipal bonds
are subject to the provisions of bankruptcy, insolvency and other
laws, such as the Federal Bankruptcy Reform Act of 1978,
affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal
or interest, or both, or to impose other constraints upon
enforcement of such obligations. There is also the possibility
that as a result of litigation or other conditions, the power or
ability of issuers to meet their obligations for the payment of
interest and principal on their municipal bonds may be materially
affected or their obligations may be found to be invalid or
unenforceable.

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS

      The Fund may buy debt securities on a "when-issued" or
"delayed delivery" basis. These transactions are arrangements
under which the Fund buys securities with payment and delivery
scheduled for a future time. Purchases of debt securities on a
when-issued or delayed delivery basis are subject to market
fluctuation and to the risk that the value or yields at delivery
may be more or less than the purchase price or the yields
available when the transaction was entered into. Although the
Fund will generally buy debt securities on a when-issued basis
with the intention of acquiring such securities, it may sell them
before the settlement date if it deems the sale to be advisable.
The Fund will not enter into these transactions for investment
leverage. When the Fund is the buyer in such a transaction, it
will maintain, in a segregated account with its custodian bank,
cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until
payment is made.

      In when-issued and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other
party's failure may cause the Fund to miss a price or yield
considered advantageous. Securities purchased on a when-issued or
delayed delivery basis do not generally earn interest until their
scheduled delivery date. The Fund is not subject to any
percentage limit on the amount of its assets which may be
invested in when-issued debt securities.

REPURCHASE AGREEMENTS

      The Fund generally will have a portion of its assets in cash
or cash equivalents for a variety of reasons, such as waiting for
a suitable investment opportunity or taking a defensive position.
To earn income on this portion of its assets, the Fund may enter
into repurchase agreements. Under a repurchase agreement, the
Fund agrees to buy securities guaranteed as to payment of
principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the
securities back to the bank or broker-dealer after a short period
of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the Fund's custodian
securities with an initial market value of at least 102% of the
dollar amount invested by the Fund in each repurchase agreement.
The Manager will monitor the value of such securities daily to
determine that the value equals or exceeds the repurchase price.

      Repurchase agreements may involve risks in the event of
default or insolvency of the bank or broker-dealer, including
possible delays or restrictions upon the Fund's ability to sell
the underlying securities. The Fund will enter into repurchase
agreements only with parties who meet certain creditworthiness
standards, I.E., banks or broker-dealers that the Manager has
determined present no serious risk of becoming involved in
bankruptcy proceedings within the time frame contemplated by the
repurchase transaction.

BORROWING


      The Fund may borrow money to the extent permitted under the
1940 Act as interpreted, modified or otherwise permitted by
regulatory authority having jurisdiction, from time to time. The
Fund may from time to time borrow money to add leverage to the
portfolio. The Fund is permitted to use leverage representing up
to 38% of the Fund's Managed Assets. "Managed Assets" means the
total assets of the Fund (including any assets attributable to
leverage) minus the sum of accrued liabilities (other than debt
representing financial leverage).  The Fund may also borrow money
for temporary administrative purposes.


      Under the 1940 Act, the Fund generally is not permitted to
engage in borrowings unless immediately after a borrowing the
value of the Fund's total assets less liabilities (other than the
borrowing) is at least 300% of the principal amount of such
borrowing (I.E., such principal amount may not exceed 33 1/3% of
the Fund's total assets). In addition, the Fund is not permitted
to declare any cash dividend or other distribution on Common
Shares unless, at the time of such declaration, the value of the
Fund's total assets, less liabilities other than borrowing, is at
least 300% of such principal amount. If the Fund borrows it
intends, to the extent possible, to prepay all or a portion of
the principal amount of the borrowing to the extent necessary in
order to maintain the required asset coverage. Failure to
maintain certain asset coverage requirements could result in an
event of default and entitle the holders of Preferred Shares
("Preferred Shareholders") to elect a majority of the Trustees of
the Fund.


      As described elsewhere in this SAI, the Fund also may enter
into certain transactions, including swap contracts and other
derivative instruments, reverse repurchase agreements, and
when-issued, delayed delivery or forward commitment transactions,
although the Fund's exposure to certain derivative instruments
(other than swaps) will be limited by the Fund's 15% limit on
illiquid investments to the extent they are determined to be
illiquid. The Fund may enter into these transactions in order to
add leverage to the portfolio. See "Investment Objectives and
Strategies," "Risks - Liquidity Risk" and "Preferred Shares and
Related Leverage" in the Prospectus. The Fund may (but is not
required to) cover its commitment under these instruments by the
segregation of assets determined to be liquid by the Manager in
accordance with procedures adopted by the Trustees, equal in
value to the amount of the Fund's commitment, or by entering into
offsetting transactions or owning positions covering its
obligations. In that case, the instruments will not be considered
"senior securities" under the 1940 Act for purposes of the asset
coverage requirements otherwise applicable to borrowings by the
Fund or the Fund's issuance of Preferred Shares. Borrowing will
tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of the Fund's portfolio. Money
borrowed will be subject to interest costs which may or may not
be recovered by appreciation of the securities purchased. The
Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other
fee to maintain a line of credit; either of these requirements
would increase the cost of borrowing over the stated interest
rate.


REVERSE REPURCHASE AGREEMENTS


      The Fund may enter into reverse repurchase agreements and
economically similar transactions in order to add leverage to the
portfolio or for hedging or cash management purposes. A reverse
repurchase agreement involves the sale of a portfolio-eligible
security by the Fund, coupled with its agreement to repurchase
the instrument at a specified time and price. Under a reverse
repurchase agreement, the Fund continues to receive any principal
and interest payments on the underlying security during the term
of the agreement. Reverse repurchase agreements involve leverage
risk and the risk that the market value of securities retained by
the Fund may decline below the repurchase price of the securities
sold by the Fund which it is obligated to repurchase. The Fund
may (but is not required to) segregate assets determined to be
liquid by the Manager in accordance with procedures established
by the Board of Trustees, equal (on a daily mark-to-market basis)
to its obligations under reverse repurchase agreements. To the
extent that positions in reverse repurchase agreements are not so
covered, such transactions would be subject to the Fund's
limitations on borrowings, which would, among other things,
restrict the aggregate of such transactions (plus any other
borrowings) to one-third of the Fund's Managed Assets.

      The Fund also may effect simultaneous purchase and sale
transactions that are known as "sale-buybacks." A sale-buyback is
similar to a reverse repurchase agreement, except that in a
sale-buyback, the counterparty who purchases the security is
entitled to receive any principal or interest payments made on
the underlying security pending settlement of the Fund's
repurchase of the underlying security.


SHORT SALES

      The Fund may use short sales for investment and risk
management purposes. 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 on a security, it must
borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral
for 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 accrued
interest and dividends on such borrowed securities.

      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 capital gain. Any gain
will be decreased, and any loss increased, by the transaction
costs described above. The successful use of short selling may be
adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being
hedged.

      To the extent that the Fund engages in short sales, it will
provide collateral to the broker-dealer. A short sale is "against
the box" to the extent that the Fund contemporaneously owns, or
has the right to obtain at no added cost, securities identical to
those sold short. The Fund may also engage in so-called "naked"
short sales (I.E., short sales that are not "against the box"),
in which case the Fund's losses could theoretically be unlimited,
in cases where the Fund is unable for whatever reason to close
out its short position. The Fund has the flexibility to engage in
short selling to the extent permitted by the 1940 Act and rules
and interpretations thereunder.

ILLIQUID SECURITIES

      The Fund may invest up to 15% of its total assets in
securities (excluding swaps) which are illiquid at the time of
investment. Generally, an illiquid security is any security that
cannot be sold within seven days in the ordinary course of
business at approximately the amount at which the Fund has valued
it. The Fund's investment in swaps will not be included as
illiquid investments for purposes of determining compliance with
the 15% limit on illiquid investments. However, the Fund's use of
derivative instruments (other than swaps) will be limited by the
Fund's 15% limit on illiquid investments to the extent such
derivatives are determined to be illiquid.

      The Fund's Board of Trustees has authorized the Fund to
invest in legally restricted securities (such as those issued
pursuant to an exemption from the registration requirements of
the federal securities laws). To the extent the Manager
determines there is a liquid institutional or other market for
these securities, the Fund considers them to be liquid
securities. An example of these securities are restricted
securities that may be freely transferred among qualified
institutional buyers under Rule 144A of the 1933 Act, and for
which a liquid institutional market has developed. The Fund's
Board of Trustees will review any determination by the Manager to
treat a restricted security as a liquid security on an ongoing
basis, including the Manager's assessment of current trading
activity and the availability of reliable price information. In
determining whether a restricted security is properly considered
a liquid security, the Manager and the Fund's Board of Trustees
will take into account the following factors: (i) the frequency
of trades and quotes for the security; (ii) the number of dealers
willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and the nature
of the marketplace trades (E.G., the time needed to dispose of
the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the Fund invests in restricted
securities that are deemed liquid, the general level of
illiquidity in the Fund may increase if qualified institutional
buyers become uninterested in buying these securities or the
market for these securities contracts.

REAL ESTATE INVESTMENT TRUSTS

      The Fund may invest in the equity or debt securities of
publicly traded and private real estate investment trusts
("REITs"). A REIT is an entity that concentrates its assets in
investments related to equity real estate and/or interests in
mortgages on real estate. The shares of publicly traded REITs are
traded on a national securities exchange or in the OTC market.
Shares of private REITs are not publicly traded, and will be
treated as illiquid securities. The Fund will limit its
investments in illiquid securities, including private REITs, to
15% of its net assets.

OTHER INVESTMENT COMPANIES

      The Fund may invest in the securities of other investment
companies to the extent that such investments are consistent with
the Fund's investment objective and policies and permissible
under the 1940 Act. Under the 1940 Act, the Fund may not acquire
the securities of other domestic or non-U.S. investment companies
if, as a result, (i) more than 10% of the Fund's total assets
would be invested in securities of other investment companies,
(ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being
held by the Fund, or (iii) more than 5% of the Fund's total
assets would be invested in any one investment company. These
limitations do not apply to the purchase of shares of any
investment company in connection with a merger, consolidation,
reorganization or acquisition of substantially all the assets of
another investment company. Notwithstanding the foregoing, to the
extent permitted by exemptive orders received from the Securities
and Exchange Commission, the Fund may invest cash balances in
shares of other money market funds advised by the Manager or its
affiliates in amounts up to 25% of the Fund's total assets. The
Fund, as a holder of the securities of other investment
companies, will bear its pro rata portion of the other investment
companies' expenses, including advisory fees. These expenses are
in addition to the direct expenses of the Fund's own operations.

PORTFOLIO TRADING AND TURNOVER RATE

      Portfolio trading may be undertaken to accomplish the
investment objectives of the Fund in relation to actual and
anticipated movements in interest rates. In addition, an
investment may be sold and another of comparable quality
purchased at approximately the same time to take advantage of
what the Manager believes to be a temporary price disparity
between the two investments. Temporary price disparities between
two comparable investments may result from supply and demand
imbalances where, for example, a temporary oversupply of certain
bonds may cause a temporarily low price for such bonds, as
compared with other bonds of like quality and characteristics.
The Fund may also engage in short-term trading consistent with
its investment objectives. Investments may be sold in
anticipation of a market decline (a rise in interest rates) or
purchased in anticipation of a market rise (a decline in interest
rates) and later sold, or to recognize a gain.

      A change in the investments held by the Fund is known as
"portfolio turnover." The Manager manages the Fund without regard
generally to restrictions on portfolio turnover. The use of
certain derivative instruments with relatively short maturities
may tend to exaggerate the portfolio turnover rate for the Fund.
Trading in debt obligations does not generally involve the
payment of brokerage commissions, but does involve indirect
transaction costs. The use of futures contracts may involve the
payment of commissions to futures commission merchants. High
portfolio turnover (E.G., greater than 100%) involves
correspondingly greater expenses to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the
sale of securities and reinvestments in other securities. The
higher the rate of portfolio turnover of the Fund, the higher
these transaction costs borne by the Fund generally will be.
Transactions in the Fund's portfolio securities may result in
realization of taxable capital gains (including short-term
capital gains which are generally taxed to shareholders at
ordinary income tax rates). The trading costs and tax effects
associated with portfolio turnover may adversely affect the
Fund's performance.

      The portfolio turnover rate of the Fund is calculated by
dividing (a) the lesser of purchases or sales of portfolio
investments for the particular fiscal year by (b) the monthly
average of the value of the portfolio investments owned by the
Fund during the particular fiscal year. In calculating the rate
of portfolio turnover, there is excluded from both (a) and (b)
all investments, including options, whose maturities or
expiration dates at the time of acquisition were one year or less.

WARRANTS

      The Fund may invest in warrants to purchase securities. Debt
obligations with warrants attached to purchase equity securities
have many characteristics of convertible bonds and their prices
may, to some degree, reflect the performance of the underlying
stock. Debt obligations also may be issued with warrants attached
to purchase additional debt obligations at the same coupon rate.
A decline in interest rates would permit the Fund to buy
additional bonds at the favorable rate or to sell the warrants at
a profit. If interest rates rise, the warrants would generally
expire with no value.

LOANS OF PORTFOLIO SECURITIES

      To generate additional income, the Fund may lend certain of
its portfolio securities to qualified banks and broker-dealers.
For each loan, the borrower must maintain with the Fund's
custodian collateral (consisting of any combination of cash,
securities issued by the U.S. government and its agencies and
instrumentalities, or irrevocable letters of credit) with a value
at least equal to 100% of the current market value of the loaned
securities. The Fund retains all or a portion of the interest
received on investment of the cash collateral or receives a fee
from the borrower. The Fund also continues to receive any
distributions paid on the loaned securities. The Fund may
terminate a loan at any time and obtain the return of the
securities loaned within the normal settlement period for the
security involved.

      Where voting rights with respect to the loaned securities
pass with the lending of the securities, the Manager intends to
call the loaned securities to vote proxies, or to use other
practicable and legally enforceable means to obtain voting
rights, when the Manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the
Manager otherwise believes it necessary to vote. As with other
extensions of credit, there are risks of delay in recovery or
even loss of rights in collateral in the event of default or
insolvency of the borrower. The Fund will loan its securities
only to parties who meet creditworthiness standards approved by
the Fund's Board of Trustees, I.E., banks or broker-dealers that
the Manager has determined present no serious risk of becoming
involved in bankruptcy proceedings within the time frame
contemplated by the loan.

PARTICIPATION ON CREDITORS COMMITTEES

      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 Manager
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.

SHORT-TERM INVESTMENTS / TEMPORARY DEFENSIVE STRATEGIES

      When the Manager believes market or economic conditions are
unfavorable for investors, the Manager may invest up to 100% of
the Fund's assets in a temporary defensive manner by holding all
or a substantial portion of its assets in cash, cash equivalents
or other high quality short-term investments.  Temporary
defensive investments generally may include U.S. government
securities, commercial paper, repurchase agreements and other
money market securities.  The Manager also may invest in these
types of securities or hold cash while looking for suitable
investment opportunities or to maintain liquidity.  In these
circumstances, the Fund may be unable to achieve its investment
goals.



                      MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

      The business of the Fund is managed under the direction of
the Fund's Board of Trustees. Subject to the provisions of the
Fund's Agreement and Declaration of Trust (the "Declaration"),
its Bylaws and Delaware law, the Trustees have all powers
necessary and convenient to carry out this responsibility,
including the election and removal of the Fund's officers.

      The Trustees and officers of the Fund, their ages, the
position they hold with the Fund, their term of office and length
of time served, a description of their principal occupations
during the past five years, the number of portfolios in the fund
complex that the Trustee oversees and any other directorships
held by the Trustee are listed in the two tables immediately
following. Except as shown, each Trustee's and officer's
principal occupation and business experience for the last five
years have been with the employer(s) indicated, although in some
cases the Trustee may have held different positions with such
employer(s).  Unless otherwise indicated, the business address of
the persons listed below is c/o Franklin Advisers, Inc., One
Franklin Parkway, San Mateo, California 94403-1906.

 INDEPENDENT TRUSTEES

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


                              TERM OF   NUMBER  OF
                            OFFICE (1)/ PORTFOLIOS
                               LENGTH    IN FUND
NAME, AGE AND                  OF TIME  COMPLEX
ADDRESS              POSITION  SERVED   OVERSEEN    OTHER
                       HELD     WITH       BY    DIRECTORSHIPS
                     WITH FUND   THE     TRUSTEE     HELD
                               FUND (2)   (3)
------------------------------------------------------------------
FRANK H. ABBOTT, III  Trustee   1 year   105      Abbott
(82)                            / Since           Corporation
One Franklin Parkway            inception
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President and Director, Abbott Corporation (an investment
company); and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
------------------------------------------------------------------

------------------------------------------------------------------
ROBERT F. CARLSON     Trustee   2 years  46       None
(75)                            / Since
One Franklin Parkway            inception
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President and past President, Board of Administration,
California Public Employees Retirement Systems (CALPERS); and
FORMERLY, member and Chairman of the Board, Sutter Community
Hospitals; member, Corporate Board, Blue Shield of California;
and Chief Counsel, California Department of Transportation.
------------------------------------------------------------------

------------------------------------------------------------------
HARRIS J. ASHTON (71) Trustee   1 years  132      RBC Holdings,
One Franklin Parkway            / Since           Inc. and Bar-S
San Mateo, CA                   inception         Foods
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director, RBC Holdings, Inc. (bank holding company) and Bar-S
Foods (meat packing company); and FORMERLY, President, Chief
Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
------------------------------------------------------------------

------------------------------------------------------------------
S. JOSEPH FORTUNATO   Trustee   2 years  133      None
(71)                            / Since
One Franklin Parkway            inception
San Mateo, CA
94403-1906

------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Member of the law firm of Pitney, Hardin, Kipp & Szuch.
------------------------------------------------------------------

------------------------------------------------------------------
FRANK W.T.  LAHAYE    Trustee   3 years  105      Director, The
(74)                            / Since           California
One Franklin Parkway            inception         Center for
San Mateo, CA                                     Land Recycling
94403-1906                                        (redevelopment).
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
General Partner, Las Olas L.P. (asset management); and FORMERLY,
Chairman, Peregrine Venture Management Company (venture capital).
------------------------------------------------------------------

------------------------------------------------------------------
GORDON S. MACKLIN     Trustee   3 years  132      Director,
(75)                            / Since           White
One Franklin Parkway            inception         Mountains
San Mateo, CA                                     Insurance
94403-1906                                        Group, Ltd.
                                                  (holding
                                                  company);
                                                  Martek
                                                  Biosciences
                                                  Corporation;
                                                  MedImmune,
                                                  Inc.
                                                  (biotechnology);
                                                  Overstock.com
                                                  (Internet
                                                  services);
                                                  Spacelab, Inc.
                                                  (aerospace
                                                  services); and
                                                  FORMERLY,
                                                  Director, MCI
                                                  Communication
                                                  Corporation
                                                  (subsequently
                                                  known as MCI
                                                  WorldCom, Inc.
                                                  and WorldCom,
                                                  Inc.)
                                                  (communications
                                                  services)
                                                  (1988-2002).
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding
company); and FORMERLY, Chairman, White River Corporation
(financial services) (until 1998).
------------------------------------------------------------------


INTERESTED TRUSTEES AND OFFICERS

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

                             TERM OF   NUMBER  OF
                            OFFICE (1)/ PORTFOLIOS
                               LENGTH    IN FUND
NAME, AGE AND                  OF TIME  COMPLEX
ADDRESS              POSITION  SERVED   OVERSEEN    OTHER
                       HELD     WITH       BY    DIRECTORSHIPS
                     WITH FUND   THE     TRUSTEE     HELD
                               FUND (2)   (3)
------------------------------------------------------------------
*CHARLES B. JOHNSON     Trustee   3 years /     132       None
(70)                    and       Since
One Franklin Parkway    Chairman  inception
San Mateo, CA           of the
94403-1906              Board
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Chief Executive Officer, Member - Office
of the Chairman and Director, Franklin Resources, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; and officer
and/or director or trustee, as the case may be, of most of the
other subsidiaries of Franklin Resources, Inc.
------------------------------------------------------------------

------------------------------------------------------------------
*RUPERT H. JOHNSON,     Trustee   2 years /     115       None
JR. (62)                and       Since
One Franklin Parkway    Senior    inception
San Mateo, CA           Vice
94403-1906              President
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director,
Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice
President, Franklin Advisory Services, LLC; officer and/or
director or trustee, as the case may be, of some of the other
subsidiaries of Franklin Resources, Inc.
------------------------------------------------------------------

------------------------------------------------------------------
*MARTIN L. FLANAGAN     Trustee   1 year /       4        None
(43)                    and Vice  Since
One Franklin Parkway    President inception
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Member - Office of the President, Chief Financial
Officer and Chief Operating Officer, Franklin Resources, Inc.;
Senior Vice President and Chief Financial Officer, Franklin
Mutual Advisers, LLC; Executive Vice President, Chief Financial
Officer and Director, Templeton Worldwide, Inc.; Executive Vice
President and Chief Operating Officer, Templeton Investment
Counsel, LLC; Executive Vice President and Director, Franklin
Advisers, Inc.; Executive Vice President, Franklin Investment
Advisory Services, Inc. and Franklin Templeton Investor
Services, LLC; Chief Financial Officer, Franklin Advisory
Services, LLC; Chairman, Franklin Templeton Services, LLC; and
officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.
------------------------------------------------------------------

------------------------------------------------------------------
CHRISTOPHER MOLUMPHY,   President Since      Not          None
CFA (41)                & Chief   inception  Applicable
One Franklin Parkway    Executive
San Mateo, CA           Officer
94403-1906              -
                        Investment
                        Management
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and Chief Investment Officer - Fixed
Income, Franklin Advisers, Inc.; portfolio manager of several of
the investment companies in Franklin Templeton Investments,
including Franklin's AGE High Income Fund and the Franklin
Strategic Income Fund.
------------------------------------------------------------------

------------------------------------------------------------------
JIMMY D. GAMBILL (55)   Senior    Since      Not        SWIFT
One Franklin Parkway    Vice      inception  Applicable Securities
San Mateo, CA           President                       Committee
94403-1906              & Chief
                        Executive
                        Officer
                        -
                        Finance
                        and
                        Administration
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Member - Executive
Committee, Technology Operations Committee, Risk Management
Committee, Franklin Resources, Inc.
------------------------------------------------------------------

------------------------------------------------------------------
MURRAY L. SIMPSON (65)  Vice      Since      Not          None
One Franklin Parkway    President inception  Applicable
San Mateo, CA           and
94403-1906              Secretary
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Executive Vice President and General Counsel, Franklin
Resources, Inc.; officer and/or director of some of the
subsidiaries of Franklin Resources, Inc.; officer of 52 of the
investment companies in Franklin Templeton Investments; and
FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until
2000); and Director, Templeton Asset Management Ltd. (until
1999).
------------------------------------------------------------------

------------------------------------------------------------------
HARMON E. BURNS (58)    Vice      Since      Not          None
One Franklin Parkway    President inception  Applicable
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Member - Office of the Chairman and Director,
Franklin Resources, Inc.; Vice President and Director, Franklin
Templeton Distributors, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin Investment Advisory Services,
Inc.; officer and/or director or trustee, as the case may be, of
some of the other subsidiaries of Franklin Resources, Inc.; and
officer of 50 of the investment companies in Franklin Templeton
Investments.
------------------------------------------------------------------

DAVID P. GOSS (56)      Vice      Since      Not          None
One Franklin Parkway    President inception  Applicable
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel, Franklin Resources, Inc.; President,
Chief Executive Officer and Director, Property Resources, Inc.
and Franklin Properties, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; officer
of 52 of the investment companies in Franklin Templeton
Investments; and FORMERLY, President, Chief Executive Officer
and Director, Property Resources Equity Trust (until 1999) and
Franklin Select Realty Trust (until 2000).
------------------------------------------------------------------

------------------------------------------------------------------
BARBARA J. GREEN (55)   Vice      Since      Not          None
One Franklin Parkway    President inception  Applicable
San Mateo, CA
94403-1906
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President and Deputy General Counsel, Franklin Resources,
Inc.; and Senior Vice President, Templeton Worldwide, Inc.;
officer of 52 of the investment companies in Franklin Templeton
Investments.
------------------------------------------------------------------

GREGORY E. JOHNSON (42) Vice      Since      Not        Fiduciary
One Franklin Parkway    President inception  Applicable Trust
San Mateo, CA                                           Company
94403-1906                                              International;
                                                        Command
                                                        Audio
                                                        Corporation
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President, Franklin Resources, Inc.; Chairman, Franklin
Templeton Distributors, Inc.; President, Franklin Templeton
Investment Services; Vice President, Franklin Advisers, Inc.;
and FORMERLY, President of Franklin Templeton Distributors,
Inc.; President of FT Trust Company; and co-manager of Franklin
Income Fund and Franklin Utilities Fund.
------------------------------------------------------------------

------------------------------------------------------------------
KIMBERLEY MONASTERIO    Treasurer Treasurer  Not          None
(39)                    and       and Chief  Applicable
One Franklin Parkway    Chief     Financial
San Mateo, CA           Financial Officer
94403-1906              Officer   since
                                  inception
------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and
officer of 34 of the investment companies in Franklin Templeton
Investments.
------------------------------------------------------------------

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

(1) The Fund's Trustees normally are elected to a three-year term
of office. However, the Fund has a staggered Board and its
Trustees are divided into three classes (Class I, Class II and
Class III), which have initial terms of one, two and three years,
respectively (see "Anti-Takeover and Other Provisions in the
Declaration of Trust"). Trustees may be reelected.

(2) All of the Independent Trustees have served on the Boards of
Trustees of other Funds in the Franklin Templeton Investments
fund complex. Their respective length of time served as Trustees
in the fund complex are as follows: Frank H. Abbott, III (since
1965); Robert F. Carlson (since 1982); S. Joseph Fortunato (since
1981); Frank W.T. Lahaye (since 1968); Harris J. Ashton (since
1976) and Gordon S. Macklin (since 1982).


(3) We base the number of portfolios on each separate series of
the registered investment companies comprising the Franklin
Templeton Investments fund complex. These portfolios have a
common investment adviser or affiliated investment advisers.


* Charles B. Johnson and Rupert H. Johnson, Jr. are both
considered to be interested persons of the Fund under the federal
securities laws because each of them is an officer and director
and major shareholder of Franklin Resources, Inc. Martin L.
Flanagan is considered to be an interested person of the Fund
under the federal securities laws due to his position as an
officer and director of Franklin Resources, Inc.

      For the Trustees who are considered to be an "interested
person" of the Fund, as defined in the 1940 Act (the "Interested
Trustees"), and the Fund's officers, positions held with
affiliated persons or principal underwriters of the Fund are
listed in the table above.


COMPENSATION


      The Fund has no employees. Its officers are compensated by
the Manager. The Fund pays an annual retainer of $7,500 and $810
per meeting attended to each of the Trustees who are not
"interested persons" of the Fund as defined in the 1940 Act (the
"Independent Trustees"). Independent Trustees who serve on the
audit committee of the Trust and other funds in Franklin
Templeton Investments receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the Fund.
Independent Trustees also may serve as directors or trustees of
other funds in Franklin Templeton Investments and may receive
fees from these funds for their services. The fees payable to the
Independent Trustees by the Fund are subject to reductions
resulting from fee caps limiting the amount of fees payable to
Trustees who serve on other boards within Franklin Templeton
Investments. The following table provides the total fees paid to
the Independent Trustees by the Fund and by Franklin Templeton
Investments.

                                                       NUMBER OF BOARDS
                                       TOTAL FEES        IN FRANKLIN
                      ESTIMATED      RECEIVED FROM       TEMPLETON
                       FEES TO BE       FRANKLIN       INVESTMENTS ON
                       RECEIVED        TEMPLETON        WHICH EACH
  NAME               FROM THE FUND(1) INVESTMENTS(2)      SERVES(3)
-----------------------------------------------------------------------
Frank H. Abbott,        $7,500         $164,214             28
III
Robert F. Carlson       $7,500          $95,070             14
Harris J. Ashton        $7,500         $372,100             45
S. Joseph Fortunato     $7,500         $372,941             46
Frank W.T. LaHaye       $7,500         $164,214             28
Gordon S. Macklin       $7,500         $363,512             45

(1) Since the Fund has not completed its first full fiscal year,
Trustee compensation is estimated based upon future payments to
be made by the Fund during the current fiscal year ending March
31, 2004.


(2) For the calendar year ended December 31, 2002.

(3) We base the number of boards on the number of registered
investment companies in Franklin Templeton Investments. This
number does not include the total number of series or portfolios
within each investment company for which the board members are
responsible.

Independent board members are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each
fund in Franklin Templeton Investments for which they serve as
director or trustee. No officer or Trustee received any other
compensation, including pension or retirement benefits, directly
or indirectly from the Fund or other funds in Franklin Templeton
Investments. Certain officers or Trustees who are shareholders of
Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries.

TRUSTEE ELECTION

      In accordance with the Fund's staggered board (see
"Anti-Takeover and Other Provisions in the Declaration of Trust"),
the Common Shareholders of the Fund will elect Trustees to fill
the vacancies of Trustees whose terms expire at each annual
meeting of Common Shareholders, unless any Preferred Shares are
outstanding, in which event Preferred Shareholders, voting as a
separate class, will elect two Trustees and the remaining Trustee
shall be elected by Common Shareholders and Preferred
Shareholders, voting together as a single class. Preferred
Shareholders will be entitled to elect a majority of the Fund's
Trustees under certain circumstances.

COMMITTEES OF THE BOARD OF TRUSTEES


      The Board maintains two standing committees: the Audit
Committee and the Nominating Committee. The Audit Committee is
generally responsible for recommending the selection of the
Trust's independent auditors, including evaluating their
independence and meeting with such accountants to consider and
review matters relating to the Trust's financial reports and
internal accounting. The Audit Committee is comprised of the
following Independent Trustees of the Trust: Frank H. Abbott, III
and Robert F. Carlson and Frank W. T. LaHaye, Chairman. The
Nominating Committee is comprised of the following Independent
Trustees of the Trust: Frank H. Abbott, III, Harris J. Ashton,
Robert F. Carlson, S. Joseph Fortunato, Frank W. T. LaHaye, and
Gordon S. Macklin, Chairman

      The Trust's Nominating Committee sets Trustees' fees and is
responsible for the nomination of Trustees to the Board.  When
vacancies arise or elections are held, the Committee considers
qualified nominees, including those recommended by shareholders
who provide a written request to the Board, care of the Trust's
address at: Franklin Templeton Limited Duration Income Trust,
P.O. Box 997151, Sacramento, CA  95899-9983.

      Since the Fund is not yet operational, the Audit Committee
and the Nominating Committee have not convened any meetings prior
to the date of this SAI.


SECURITIES OWNERSHIP

      Franklin trustees historically have followed a policy of
having substantial investments in one or more of the funds in
Franklin Templeton Investments, as is consistent with their
individual financial goals. In February 1998, this policy was
formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a
director or trustee of a Templeton fund in shares of one or more
Templeton funds and one-third of fees received for serving as a
director or trustee of a Franklin fund in shares of one or more
Franklin funds until the value of such investments equals or
exceeds five times the annual fees paid such board member.
Investments in the name of family members or entities controlled
by a board member constitute fund holdings of such board member
for purposes of this policy, and a three-year phase-in period
applies to such investment requirements for newly elected
Trustees. In implementing such policy, a board member's fund
holdings existing on February 27, 1998, are valued as of such
date with subsequent investments valued at cost.

      The following tables provide the dollar range of equity
securities beneficially owned by the Trustees of the Trust on
December 31, 2002.


INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------
                                          AGGREGATE DOLLAR RANGE
                                           OF EQUITY SECURITIES
                      DOLLAR RANGE       OWNED IN ALL FUNDS
                        OF EQUITY         OVERSEEN BY THE TRUSTEE
                     SECURITIES IN THE       IN THE FRANKLIN
 NAME OF TRUSTEE          FUND*          TEMPLETON FUND COMPLEX
------------------------------------------------------------------
Frank H. Abbott,           None               Over $100,000
III
------------------------------------------------------------------
Robert F. Carlson          None               Over $100,000
------------------------------------------------------------------
Harris J. Ashton           None               Over $100,000
------------------------------------------------------------------
S. Joseph                  None               Over $100,000
Fortunato
------------------------------------------------------------------
Frank W.T. LaHaye          None               Over $100,000
------------------------------------------------------------------
Gordon S. Macklin          None               Over $100,000
------------------------------------------------------------------

*Since the Fund was not operational as of December 31, 2002, the
Trustees did not own any securities in the Fund as of that date.


INTERESTED TRUSTEES
------------------------------------------------------------------
                                          AGGREGATE DOLLAR RANGE
                                           OF EQUITY SECURITIES
                      DOLLAR RANGE       OWNED IN ALL FUNDS
                        OF EQUITY         OVERSEEN BY THE TRUSTEE
                     SECURITIES IN THE       IN THE FRANKLIN
 NAME OF TRUSTEE          FUND*          TEMPLETON FUND COMPLEX
------------------------------------------------------------------
Charles B. Johnson         None               Over $100,000
------------------------------------------------------------------
Rupert H.                  None               Over $100,000
Johnson, Jr.
------------------------------------------------------------------
Martin L. Flanagan         None               Over $100,000
------------------------------------------------------------------

*Since the Fund was not operational as of December 31, 2002, the
Trustees did not own any securities in the Fund as of that date.


None of the Independent Trustees or their immediate family
members had beneficial ownership of any class of securities in an
investment adviser or principal underwriter of the Fund, or a
person (other than a registered investment company) directly or
indirectly controlling, controlled by, or under common control
with an investment adviser or principal underwriter of the Fund
as of December 31, 2002.

      As of July 21, 2003, the Fund's officers and Trustees as a
group owned less than 1% of the outstanding Common Shares.

      As of July 21, 2003, the following persons owned of record
the number of Common Shares noted below, representing the
indicated percentage of the Fund's outstanding shares as of such
date.
                                             PERCENTAGE OF THE
      NAME OF        NUMBER OF COMMON     FUND'S OUTSTANDING SHARES
    PERSON/ENTITY          SHARES          AS OF JULY 21, 2003
    -------------    -----------------    -------------------------
        None          Not Applicable         Not Applicable




                        INVESTMENT ADVISER

INVESTMENT ADVISER


      The Fund's investment adviser is Franklin Advisers, Inc.
(the "Manager"), a direct wholly-owned subsidiary of Franklin
Resources, Inc., a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders
of Franklin Resources, Inc. As of June 30, 2003, the Manager and
its affiliates had approximately $287 billion in assets under
management.


      The Manager serves as investment adviser to the Fund
pursuant to an investment management agreement (the "Investment
Management Agreement") between it and the Fund. The Manager
provides investment research and portfolio management services,
and selects the securities for the Fund to buy, hold or sell. The
Manager also selects the brokers who execute the Fund's portfolio
transactions. The Manager provides periodic reports to the Board,
which reviews and supervises the Manager's investment activities.
To protect the Fund, the Manager and its officers, directors and
employees are covered by fidelity insurance.

CERTAIN TERMS OF THE INVESTMENT MANAGEMENT AGREEMENT

      Under the terms of the Investment Management Agreement,
subject to such policies as the Trustees of the Fund may
determine, the Manager, at its expense, will furnish continuously
an investment program for the Fund and will make investment
decisions on behalf of the Fund and place all orders for the
purchase and sale of portfolio securities subject always to the
Fund's investment objectives, policies and restrictions.

      Subject to the control of the Trustees, the Manager also
manages, supervises and conducts the other affairs and business
of the Fund, furnishes office space and equipment, provides
bookkeeping and certain clerical services (excluding
determination of the net asset value of the Fund, shareholder
accounting services and the accounting services for the Fund) and
pays all salaries, fees and expenses of officers and Trustees of
the Fund who are affiliated with the Manager.


      Pursuant to the Investment Management Agreement, the Fund
has agreed to pay the Manager an annual fee, payable monthly, in
an amount equal to 0.50% of the average daily value of the Fund's
Managed Assets (including net assets attributable to Preferred
Shares), for the services and facilities it provides. All fees
and expenses are accrued daily and deducted before payment of
dividends to investors.

      Except as otherwise described in the Prospectus, the Fund
pays, in addition to the investment management fee described
above, all expenses not assumed by the Manager, including,
without limitation, fees and expenses of the Independent Trustees
, interest charges, taxes, brokerage commissions, expenses of
issue of shares, fees and expenses of registering and qualifying
the Fund and its classes of shares for distribution under federal
and state laws and regulations, charges of custodians, auditing
and legal expenses, expenses of determining net asset value of
the Fund, reports to shareholders, expenses of meetings of
shareholders, expenses of printing and mailing prospectuses,
proxy statements and proxies to existing shareholders, and its
proportionate share of insurance premiums and professional
association dues or assessments. The Fund is also responsible for
such nonrecurring expenses as may arise, including litigation in
which the Fund may be a party, and other expenses as determined
by the Trustees. The Fund may have an obligation to indemnify its
officers and Trustees with respect to such litigation.


      The Investment Management Agreement will continue in force
with respect to the Fund for two years from its initial effective
date, and from year to year thereafter, but only so long as its
continuance is approved at least annually by (i) vote, cast in
person at a meeting called for that purpose, of a majority of
those Trustees who are not "interested persons" of the Manager or
the Fund, and (ii) the majority vote of either the full Board of
Trustees or the vote of a majority of the outstanding shares of
all classes of the Fund.  The Investment Management Agreement
automatically terminates on assignment. The Investment Management
Agreement may be terminated on not less than 60 days' notice by
the Manager to the Fund or by the Fund to the Manager.

      The Investment Management Agreement provides that the
Manager shall not be subject to any liability in connection with
the performance of its services thereunder in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations and duties.

BASIS FOR APPROVAL OF THE INVESTMENT MANAGEMENT AGREEMENT


      At a meeting on July 17, 2003, the Board, including a
majority of the Independent Trustees, approved the Fund's
Investment Management Agreement.  In reaching this decision, the
Board took into account information specifically furnished for
the Board meeting and information furnished at a prior meeting.
Information furnished included reports on the Manager's
investment performance using similar investment strategies,
expected expenses of the Fund, expected portfolio composition,,
information about the scope and quality of services provided by
the Manager and its affiliates, as well as periodic reporting
procedures relating to compliance with the Fund's investment
policies and restrictions.  In considering such material, the
Independent Trustees received assistance and advice from and met
separately with independent counsel.

      The Trustees met with the relevant investment advisory
personnel from the Manager and considered information relating to
the education, experience and number of investment professionals
and other personnel who would provide services under the
Investment Management Agreement. See "Management of the Fund" in
the Prospectus and this SAI. The Trustees also took into account
the time and attention to be devoted by senior management to the
Fund and the other funds in the complex. The Trustees evaluated
the level of skill required to manage the Fund and concluded that
the human resources to be available at the Manager were
appropriate to fulfill effectively the duties of the Manager on
behalf of the Fund under the Investment Management Agreement. The
Trustees also considered the business reputation of the Manager,
its financial resources and professional liability insurance
coverage and concluded that the Manager would be able to meet any
reasonably foreseeable obligations under the Investment
Management Agreement.


      The Trustees received information concerning the investment
philosophy and investment process to be applied by the Manager in
managing the Fund. In this regard, the Trustees considered the
Manager's in-house research capabilities as well as other
resources available to the Manager's personnel, including
research services available to the Manager as a result of
securities transactions effected for the Fund and other
investment advisory clients. The Trustees concluded that the
Manager's investment process, research capabilities and
philosophy were well suited to the Fund, given the Fund's
investment objectives and policies.

      The Trustees noted that the Manager's standard of care was
comparable to that found in most investment company advisory
agreements. See "--Certain Terms of the Investment Management
Agreement" above. The Trustees concluded that the scope of the
Manager's services to be provided to the Fund was consistent with
the Fund's operational requirements, including, in addition to
its investment objectives, compliance with the Fund's investment
restrictions, tax and reporting requirements and related
shareholder services.


      The Trustees considered the quality of the services to be
provided by the Manager to the Fund. The Trustees also evaluated
the procedures of the Manager designed to fulfill its fiduciary
duty to the Fund with respect to possible conflicts of interest,
including its codes of ethics (regulating the personal trading of
its officers and employees) (see "Code of Ethics" below), the
procedures by which the Manager allocates trades among its
various investment advisory clients, the integrity of the systems
in place to ensure compliance with the foregoing and the record
of the Manager in these matters. The Trustees also received
information concerning standards of the Manager with respect to
the execution of portfolio transactions. See "Portfolio
Transactions" below.

      The Trustees also gave substantial consideration to the fees
payable under the Investment Management Agreement. The Trustees
reviewed information concerning fees paid to investment advisers
of similar funds. The Trustees evaluated the Manager's
profitability with respect to the Fund, concluding that such
profitability was not inconsistent with levels of profitability
that had been determined by courts not to be "excessive." In
evaluating the Fund's advisory fees, the Trustees also took into
account the complexity of investment management for the Fund
relative to other types of funds.

      Based upon its review of such material and information
together with such other information as it deemed relevant, the
Board, including a majority of Independent Trustees, concluded
that the initial approval of the Investment Management Agreement
was appropriate and in the best interests of the Fund.


                      PORTFOLIO TRANSACTIONS

      The Manager selects brokers and dealers to execute the
Fund's portfolio transactions in accordance with criteria set
forth in the management agreement and any directions that the
Board may give.

      When placing a portfolio transaction, the Manager seeks to
obtain prompt execution of orders at the most favorable net
price. For portfolio transactions on a securities exchange, the
amount of commission paid is negotiated between the Manager and
the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions
paid are based to a large degree on the professional opinions of
the persons responsible for placement and review of the
transactions. These opinions are based on the experience of these
individuals in the securities industry and information available
to them about the level of commissions being paid by other
institutional investors of comparable size. The Manager will
ordinarily place orders to buy and sell over-the-counter
securities on a principal rather than agency basis with a
principal market maker unless the Manager believes that trading
on a principal basis will not provide best execution. Purchases
of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter,
and purchases from dealers will include a spread between the bid
and ask price.

      The Manager may pay certain brokers commissions that are
higher than those another broker may charge, if the Manager
determines in good faith that the amount paid is reasonable in
relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular
transaction or the Manager's overall responsibilities to client
accounts over which it exercises investment discretion. The
services that brokers may provide to the Manager include, among
others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities
pricing information, and other information that provides lawful
and appropriate assistance to the Manager in carrying out its
investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value
to the Manager in carrying out its overall responsibilities to
its clients.

      It is not possible to place a dollar value on the special
executions or on the research services the Manager receives from
dealers effecting transactions in portfolio securities. The
allocation of transactions to obtain additional research services
allows the Manager to supplement its own research and analysis
activities and to receive the views and information of
individuals and research staffs of other securities firms. As
long as it is lawful and appropriate to do so, the Manager and
its affiliates may use this research and data in their investment
advisory capacities with other clients. If the Fund's officers
are satisfied that the best execution is obtained, the sale of
Fund shares, as well as shares of other funds in Franklin
Templeton Investments, also may be considered a factor in the
selection of broker-dealers to execute the Fund's portfolio
transactions.


      Because Franklin Templeton Distributors, Inc.
("Distributors") is a member of the National Association of
Securities Dealers, Inc., it may sometimes receive certain fees
when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit
of the Fund, any portfolio securities tendered by the Fund may be
tendered through Distributors if it is legally permissible to do
so. In turn, the next management fee payable to the Manager will
be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the
tender.


      If purchases or sales of securities of the Fund and one or
more other investment companies or clients supervised by the
Manager are considered at or about the same time, transactions in
these securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds
and the amount of securities to be purchased or sold. In some
cases this procedure could have a detrimental effect on the price
or volume of the security so far as the Fund is concerned. In
other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction
costs to the Fund.


      Since the Fund was not operational prior to the date of this
SAI, the Fund did not pay any brokerage commissions prior to that
date. As of the date of this SAI, the Fund did not own securities
of its regular broker-dealers.


                          CODE OF ETHICS

      The Fund and the Manager have each adopted a code of ethics,
as required by federal securities laws.  Under the code of
ethics, employees who are designated as access persons may engage
in personal securities transactions, including transactions
involving securities that are being considered for the Fund or
that are currently held by the Fund, subject to certain general
restrictions and procedures. The personal securities transactions
of access persons of the Fund and its Manager will be governed by
the code of ethics.

      The Manager and its affiliates manage numerous other
investment companies and accounts. The Manager may give advice
and take action with respect to any of the other funds it
manages, or for its own account, that may differ from action
taken by the Manager on behalf of the Fund. Similarly, with
respect to the Fund, the Manager is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling
any security that the Manager and access persons, as defined by
applicable federal securities laws, may buy or sell for its or
their own account or for the accounts of any other fund. The
Manager is not obligated to refrain from investing in securities
held by the Fund or other funds it manages.  The Fund and the
Manager have text-only versions of the codes of ethics that can
be viewed online or downloaded from the EDGAR Database on the
SEC's internet web site at www.sec.gov. You may also review and
copy those documents by visiting the SEC's Public Reference Room
in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at
202-942-8090. In addition, copies of the codes of ethics may be
obtained, after mailing the appropriate duplicating fee, by
writing to the SEC's Public Reference Section, 450 5th Street,
N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.


                        PROXY VOTING POLICY

      The Board of Trustees of the Fund has delegated the
authority to develop policies and procedures relating to proxy
voting to the Manager. The Manager has adopted Proxy Voting
Policies and Procedures, in which its administrative duties with
respect to voting proxies has been assigned to the Proxy Group
within Franklin Templeton Companies, LLC (the "Proxy Group"), an
affiliate and wholly owned subsidiary of Franklin Resources, Inc.

      All proxies received by the Proxy Group will be voted based
upon the Manager's instructions and/or policies.  To assist it in
analyzing proxies, the Manager subscribes to Institutional
Shareholder Services ("ISS"), an unaffiliated third party
corporate governance research service that provides in-depth
analyses of shareholder meeting agendas, vote recommendations,
recordkeeping and vote disclosure services.  Although ISS'
analyses are thoroughly reviewed and considered in making a final
voting decision, the Manager does not consider recommendations
from ISS or any other third party to be determinative of the
Manager's ultimate decision.  The Manager votes proxies solely in
the interests of the Fund and its shareholders.  As a matter of
policy, the officers, directors and employees of the Fund, the
Manager and the Proxy Group will not be influenced by outside
sources whose interests conflict with the interests of the Fund
and its shareholders.  In situations where the Manager perceives
a material conflict of interest, the Manager may: disclose the
conflict to the Fund's Board of Trustees; defer to the voting
recommendation of the Fund's Board of Trustees, ISS or those of
another independent third party provider of proxy services; or
take such other action in good faith (in consultation with
counsel) which would protect the interests of the Fund and its
shareholders.

      As a matter of practice, the votes with respect to most
issues are cast in accordance with the position of the company's
management.  Each issue, however, is considered on its own
merits, and the Manager will not support the position of the
company's management in any situation where it deems that the
ratification of company management's position would adversely
affect the investment merits of owning that company's shares.

      The Proxy Group is part of the Franklin Templeton Companies,
LLC Corporate Legal Department and is overseen by legal counsel.
For each shareholder meeting, a member of the Proxy Group will
consult with the research analyst that follows the security and
will provide the analyst with the meeting notice, agenda, ISS
analyses, recommendations, and any other available information.
The Manager's research analyst and relevant portfolio manager(s)
are responsible for making the final voting decision based on
their review of the agenda, ISS analysis, their knowledge of the
company and any other information readily available.  The Proxy
Group must obtain voting instructions from the Manager's research
analyst, relevant portfolio manager(s) and/or legal counsel prior
to submitting the vote.

      The Manager has adopted general proxy voting guidelines that
are reviewed periodically by various members of the Manager's
organization, including portfolio management, legal counsel and
the Manager's officers, and are subject to change.  These
guidelines cannot provide an exhaustive list of all the issues
that may arise nor can the Manager anticipate all future
situations.

MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES

      The following is a summary of the proxy voting positions
that the Manager has developed based on years of experience with
proxy voting and corporate governance issues and reflects what
the Manager believes to be good corporate governance and
responsible behavior:

      BOARD OF DIRECTORS.  Directors are expected to be competent,
accountable and responsive to shareholders.  The Manager supports
an independent board of directors, and prefers that key
committees such as audit, nominating, and compensation committees
be comprised of independent directors.  The Manager will
generally vote against company management efforts to classify a
board and will generally support proposals to declassify the
board of directors. The Manager may withhold votes from directors
who have attended less than 75% of meetings without a valid
reason.  While generally in favor of separating Chairman and CEO
positions, the Manager will review this issue as well as
proposals to restore or provide for cumulative voting on a
case-by-case basis taking into consideration other factors
including the company's corporate governance guidelines and
performance.

      RATIFICATION OF AUDITORS.  In light of several high profile
accounting scandals, the Manager will closely scrutinize the role
and performance of auditors.  On a case-by-case basis, the
Manager will examine proposals relating to non-audit
relationships and non-audit fees.  The Manager will also
consider, on a case-by-case basis, proposals to rotate auditors,
and will vote against the ratification of auditors when there is
clear and compelling evidence of accounting irregularities or
negligence.

      MANAGEMENT AND DIRECTOR COMPENSATION.  A company's
equity-based compensation plan should be in alignment with its
shareholders' long-term interests.  The Manager evaluates plans
on a case-by-case basis by considering several factors to
determine whether the plan is fair and reasonable.  Among other
things, the Manager considers the ISS quantitative model utilized
to assess such plans.  The Manager will generally oppose plans
that have the potential to be excessively dilutive, and will
almost always oppose plans that are structured to allow the
repricing of underwater options, or plans that have an automatic
share replenishment "evergreen" feature.  The Manager will
generally support employee stock option plans in which the
purchase price is at least 85% of fair market value, and when
potential dilution is 10% or less.

      Severance compensation arrangements will be reviewed on a
case-by-case basis, although the Manager will generally oppose
excessive "golden parachutes."  The Manager will normally support
proposals that require a percentage of directors' compensation to
be in the form of common stock, as it aligns their interests with
those of shareholders.  The Manager will review on a case-by-case
basis any shareholder proposals to adopt policies on expensing
stock option plans, and will continue to closely monitor future
developments in this area.

      ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES.  The Manager
generally opposes anti-takeover measures since they tend to
reduce shareholder rights.  However, as with all proxy issues, a
research analyst will conduct an independent review of each
anti-takeover proposal.  On occasion, the Manager may vote with
management when the research analyst has concluded that the
proposal is not onerous and would not harm the Fund or its
shareholders' interests.  The Manager generally supports
proposals that require shareholder rights' plans (poison pills)
to be subject to a shareholder vote.  The Manager will closely
evaluate shareholder rights plans on a case-by-case basis to
determine whether or not they warrant support. The Manager will
generally vote against any proposal to issue stock that has
unequal or subordinate voting rights.  In addition, the Manager
generally opposes any supermajority voting requirements as well
as the payment of "greenmail."  The Manager generally supports
"fair price" provisions and confidential voting.

      CHANGES TO CAPITAL STRUCTURE.  The Manager realizes that a
company's financing decisions have a significant impact on its
shareholders, particularly when they involve the issuance of
additional shares in the form of common or preferred stock or the
assumption of additional debt.  The Manager will carefully
review, on a case-by-case basis, proposals by companies to
increase authorized shares and the purpose for the increase.  The
Manager will generally not vote in favor of dual-class capital
structures to increase the number of authorized shares where that
class of stock would have superior voting rights.  The Manager
will generally vote in favor of the issuance of preferred stock
in cases where the company specifies the voting, dividend,
conversion and other rights of such stock and the terms of the
preferred stock issuance are deemed reasonable. The Manager will
review proposals seeking preemptive rights on a case-by-case
basis.

      MERGERS AND CORPORATE RESTRUCTURING.  Mergers and
acquisitions will be subject to careful review by the research
analyst to determine whether each will be beneficial to
shareholders.  The Manager will analyze various economic and
strategic factors in making the final decision on a merger or
acquisition.  Corporate restructuring and reincorporation
proposals are also subject to a thorough examination on a
case-by-case basis.

      SOCIAL AND CORPORATE POLICY ISSUES.  As a fiduciary, the
Manager is primarily concerned about the financial interests of
the Fund and its shareholders.  The Manager will generally give
management discretion with regard to social, environmental and
ethical issues, although the Manager may vote in favor of those
that are believed to have significant economic benefits or
implications for the Fund and its shareholders.

      GLOBAL CORPORATE GOVERNANCE.  The Manager is a global
manager of investments in countries worldwide.  Many of the
tenets discussed above are applied to proxy voting decisions for
international companies.  However, the Manager must be more
flexible in these instances and must be mindful of the varied
market practices of each region.  As experienced global money
managers, the Manager's analysts are skilled in understanding the
complexities of the regions in which they specialize and are
trained to analyze proxy issues germane to their regions.

      The Proxy Group is fully cognizant of its responsibility to
process proxies and maintain proxy records pursuant to SEC rules
and regulations. In addition, the Manager understands its
fiduciary duty to vote Fund proxies and that proxy voting
decisions may affect the value of shareholdings.  Therefore, the
Manager will attempt to process every vote it receives for all
domestic and foreign proxies.  However, there may be situations
in which the Manager cannot process proxies, for example, where a
meeting notice was received too late, or sell orders preclude the
ability to vote. In addition, the Manager may abstain from voting
under certain circumstances or vote against items such as "Other
Business" when the Manager is not given adequate information from
the company.

      The Proxy Group is responsible for maintaining the
documentation that supports the Manager's voting position.  The
Proxy Group is also responsible for maintaining appropriate proxy
voting supporting documentation and records.  Such records may
include, but are not limited to, a copy of all materials returned
to the issuer and/or its agent, the documentation described
above, listings of proxies voted by issuer and by client, and any
other relevant information.  The Proxy Group may use an outside
service such as ISS to support this function. All files will be
retained for at least five years, the first two of which will be
on-site. Shareholders may view the Manager's complete proxy
voting policies and procedures on-line at
www.franklintempleton.com. Alternatively, shareholders may
request copies of the Fund's complete proxy voting policies and
procedures free of charge by calling the Proxy Group collect at
1-954/847-2268 or by sending a written request to:  Franklin
Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500,
Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the
Fund's proxy voting records will also be made available on-line
at www.franklintempleton.com and posted on the SEC website at
http://www.sec.gov no later than August 31, 2004 and will reflect
the prior 12 months' voting record. In addition, the Proxy Group
is responsible for ensuring that the proxy voting policies,
procedures and records of the Manager are made available as
required by law and is responsible for overseeing the filing of
such policies, procedures and Fund voting records with the SEC.


                           DISTRIBUTIONS


      As described in the Prospectus, initial distributions to
Common Shareholders are expected to be declared within
approximately 45 days, and paid within approximately 60 to 75
days, from the completion of the offering of the Common Shares,
depending on market conditions. To permit the Fund to maintain a
more stable monthly distribution, the Fund will initially, and
may from time to time thereafter, distribute less than the entire
amount of net investment income earned in a particular period.
Such undistributed net investment income would be available to
supplement future distributions, including distributions that
might otherwise have been reduced by a decrease in the Fund's
monthly net income due to fluctuations in investment income or
expenses, or due to an increase in the dividend rate on the
Fund's outstanding Preferred Shares. As a result, the
distributions paid by the Fund for any particular period may be
more or less than the amount of net investment income actually
earned by the Fund during such period. Undistributed net
investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net
investment income will be deducted from the Fund's net asset
value.

      For tax purposes, the Fund is currently required to allocate
net capital gain and other taxable income, if any, between and
among Common Shares and any series of Preferred Shares in
proportion to total dividends paid to each class for the year in
which such net capital gain or other taxable income is realized.
For information relating to the impact of the issuance of
Preferred Shares on the distributions made by the Fund to Common
Shareholders, see the Prospectus under "Preferred Shares and
Related Leverage."


      While any Preferred Shares are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common
Shares unless at the time of such declaration (1) all accumulated
dividends on the Preferred Shares 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 any outstanding Preferred
Shares. This latter limitation on the Fund's ability to make
distributions on its Common Shares could cause the Fund to incur
income and excise tax and, under certain circumstances, impair
the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Tax Matters."

                       DESCRIPTION OF SHARES

COMMON SHARES


      The Fund's Declaration authorizes the issuance of an
unlimited number of Common Shares. All Common Shares of the Fund
have equal rights as to the payment of dividends and the
distribution of assets upon liquidation of the Fund. Common
Shares will, when issued, be fully paid and, subject to matters
discussed in "Anti-Takeover and Other Provisions in the
Declaration of Trust--Shareholder Liability" below,
non-assessable, and will have no pre-emptive or conversion rights
or rights to cumulative voting. At any time when the Fund's
Preferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all
accrued dividends on Preferred Shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to
Preferred Shares would be at least 200% after giving effect to
such distributions. See "--Preferred Shares" below.

      The Common Shares are expected to be listed on the American
Stock Exchange. The Fund intends to hold annual meetings of
shareholders so long as the Common Shares are listed on a
national securities exchange and such meetings are required as a
condition to such listing.


      Shares of closed-end investment companies may frequently
trade at prices lower than net asset value. Shares of closed-end
investment companies like the Fund that may invest a significant
portion of their assets in below investment-grade debt
obligations have during some periods traded at prices higher than
net asset value and during other periods traded at prices lower
than net asset value. There can be no assurance that Common
Shares or shares of other similar funds will trade at a price
higher than net asset value in the future. Net asset value will
be reduced immediately following the offering of Common Shares
after payment of the sales load and organization and offering
expenses and immediately following any offering of Preferred
Shares by the costs of that offering paid by the Fund. Net asset
value generally increases when interest rates decline, and
decreases when interest rates rise, and these changes are likely
to be greater in the case of a fund, such as the Fund, having a
leveraged capital structure. Whether investors will realize gains
or losses upon the sale of Common Shares will not depend upon the
Fund's net asset value but will depend entirely upon whether the
market price of the Common Shares at the time of sale is above or
below the original purchase price for the shares. Since the
market price of the Fund's Common Shares will be determined by
factors beyond the control of the Fund, the Fund cannot predict
whether the Common Shares will trade at, below, or above net
asset value or at, below or above the initial public offering
price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should
not view the Fund as a vehicle for trading purposes. See
"Repurchase of Common Shares; Conversion to Open-End Fund" and the
Prospectus under "Preferred Shares and Related Leverage" and
"Description of Shares--Common Shares."

PREFERRED SHARES

      The Declaration authorizes the issuance of an unlimited
number of Preferred Shares. The Preferred Shares may be issued in
one or more classes or series, with such par value and rights as
determined by the Board of Trustees of the Fund, by action of the
Board of Trustees without the approval of the Common Shareholders.


      The Fund's Board of Trustees has indicated its intention to
authorize an offering of Preferred Shares (representing
approximately 33%, but not more than 38%, of the Fund's Managed
Assets immediately after the time the Preferred Shares are
issued) within approximately one to three months after completion
of the offering of Common Shares, subject to market conditions
and to the Board's continuing belief that leveraging the Fund's
capital structure through the issuance of Preferred Shares is
likely to achieve the benefits to the Common Shareholders
described in the Prospectus and this SAI. Although the terms of
the Preferred Shares, including their dividend rate, voting
rights, liquidation preference and redemption provisions, will be
determined by the Board of Trustees (subject to applicable law
and the Declaration) if and when it authorizes a Preferred Shares
offering, the Board has stated that the initial series of
Preferred Shares would likely pay cumulative dividends at
relatively short-term periods (such as seven days), by providing
for the periodic redetermination of the dividend rate through an
auction or remarketing procedure. The liquidation preference,
preference on distribution, voting rights and redemption
provisions of the Preferred Shares are expected to be as stated
below.

      As used in this SAI, unless otherwise noted, the Fund's "net
assets" include assets of the Fund attributable to any
outstanding Preferred Shares, with no deduction for the
liquidation preference of the Preferred Shares. Solely for
financial reporting purposes, however, the Fund is required to
exclude the liquidation preference of Preferred Shares from "net
assets," so long as the Preferred Shares have redemption features
that are not solely within the control of the Fund. For all
regulatory and tax purposes, the Fund's Preferred Shares will be
treated as stock (rather than indebtedness).


      LIMITED ISSUANCE OF PREFERRED SHARES. Under the 1940 Act,
the Fund could issue Preferred Shares having a total liquidation
value (original purchase price of the shares being liquidated
plus any accrued and unpaid dividends) of up to one-half of the
value of the total assets of the Fund, less liabilities.
"Liquidation value" means the original purchase price of the
shares being liquidated plus any accrued and unpaid dividends. To
the extent that the Fund has outstanding any senior securities
representing indebtedness (such as through the use of reverse
repurchase agreements, swaps and other derivative instruments
that constitute senior securities), the aggregate amount of such
senior securities will be added to the total liquidation value of
any outstanding Preferred Shares for purposes of this asset
coverage requirement. If the total liquidation value of the
Preferred Shares plus the aggregate amount of such other senior
securities were ever more than one-half of the value of the
Fund's total net assets, the Fund would not be able to declare
dividends on the Common Shares until such liquidation value
and/or aggregate amount of other senior securities, as a
percentage of the Fund's total assets, were reduced.


      The Fund presently intends to issue Preferred Shares
representing approximately 33% (but not more than 38%) of the
Fund's Managed Assets (calculated after their issuance)
approximately one to three months after the completion of the
offering of Common Shares. This higher than required margin of
net asset value provides a cushion against later fluctuations in
the value of the Fund's portfolio and will subject Common
Shareholders to less income and net asset value volatility than
if the Fund were more highly leveraged through Preferred Shares.
No assurance can be given that this cushion will not be reduced
or eliminated. It also gives the Fund flexibility to utilize
other forms of leverage in addition to Preferred Shares from time
to time in accordance with the 1940 Act asset coverage
requirements (such as reverse repurchase agreements, swaps and
other derivatives) that may be more efficient or cost effective
sources of leverage than Preferred Shares under the
circumstances. The Fund will segregate liquid assets against or
otherwise cover its future obligations under such other forms of
leverage, to the extent that, immediately after entering into
such a transaction, the Fund's future commitments that it has not
segregated liquid assets against or otherwise covered, together
with any outstanding Preferred Shares, would exceed 38% of the
Fund's Managed Assets. The Fund intends to purchase or redeem
Preferred Shares, if necessary, to keep the liquidation value of
the Preferred Shares plus the aggregate amount of other senior
securities representing indebtedness below one-half of the value
of the Fund's total net assets.


      DISTRIBUTION PREFERENCE. The Preferred Shares will have
complete priority over the Common Shares as to distribution of
assets.

      LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs
of the Fund, Preferred Shareholders will be entitled to receive a
preferential liquidating distribution (expected to equal the
original purchase price per share plus accumulated and unpaid
dividends thereon, whether or not earned or declared) before any
distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to
which they are entitled, Preferred Shareholders will not be
entitled to any further participation in any distribution of
assets by the Fund. A consolidation or merger of the Fund with or
into any Delaware statutory trust or corporation or a sale of all
or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.

      VOTING RIGHTS. In connection with any issuance of Preferred
Shares, the Fund must comply with Section 18(i) of the 1940 Act
which requires, among other things, that Preferred Shares be
voting shares. Except as otherwise provided in the Declaration or
the Fund's Bylaws or otherwise required by applicable law,
Preferred Shareholders will vote together with Common
Shareholders as a single class.

      In connection with the election of the Fund's Trustees,
Preferred Shareholders, voting as a separate class, will also be
entitled to elect two of the Fund's Trustees, and the remaining
Trustees shall be elected by Common Shareholders and Preferred
Shareholders, voting together as a single class. In addition, if
at any time dividends on the Fund's outstanding Preferred Shares
shall be unpaid in an amount equal to two full years' dividends
thereon, the holders of all outstanding Preferred Shares, voting
as a separate class, will be entitled to elect a majority of the
Fund's Trustees until all dividends in arrears have been paid or
declared and set apart for payment.

      The affirmative vote of the holders of a majority of the
outstanding Preferred Shares, voting as a separate class, shall
be required to approve any action requiring a vote of security
holders under Section 13(a) of the 1940 Act including, among
other things, changes in the Fund's investment objectives, the
conversion of the Fund from a closed-end to an open-end company,
or changes in the investment restrictions described as
fundamental policies under "Investment Restrictions." The class
or series vote of Preferred Shareholders described above shall in
each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares necessary to
authorize the action in question.

      The foregoing voting provisions will not apply with respect
to the Fund's Preferred Shares if, at or prior to the time when a
vote is required, such shares shall have been (1) redeemed or (2)
called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.

      REDEMPTION, PURCHASE AND SALE OF PREFERRED SHARES BY THE
FUND. The terms of the Preferred Shares may provide that they are
redeemable at certain times, in whole or in part, at the original
purchase price per share plus accumulated dividends, that the
Fund may tender for or purchase Preferred Shares and that the
Fund may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the
Fund will reduce the leverage applicable to Common Shares, while
any resale of shares by the Fund will increase such leverage.

      The discussion above describes the present intention of the
Board of Trustees of the Fund with respect to a possible offering
of Preferred Shares. If the Board of Trustees determines to
authorize such an offering, the terms of the Preferred Shares may
be the same as, or different from, the terms described above,
subject to applicable law and the Declaration.

  ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

SHAREHOLDER LIABILITY

      The Declaration contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and
requires that notice of such disclaimer be given in each
agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration also provides for
indemnification out of the Fund's property for all loss and
expense of any shareholder held personally liable on account of
being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which such disclaimer is
inoperative or the Fund is unable to meet its obligations, and
thus should be considered remote.

ANTI-TAKEOVER PROVISIONS

      As described below, the Declaration 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 Trustees, and could have the effect
of depriving shareholders of opportunities to sell their shares
at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.


      The Fund's Trustees are divided into three classes (Class I,
Class II and Class III), having initial terms of one, two and
three years, respectively. At each annual meeting of
shareholders, the term of one class will expire and each Trustee
elected to that class will hold office for a term of three years.
The classification of the Board of Trustees in this manner could
delay for an additional year the replacement of a majority of the
Board of Trustees. In addition, the Declaration provides that a
Trustee may be removed only for cause upon the vote of at least
seventy-five percent (75%) of the outstanding shares of the
classes or series of shares entitled to vote for the election of
such Trustee.

      The Declaration requires the approval of the Board of
Trustees and the affirmative vote of the holders of 75% of the
Fund's shares (including Common and Preferred Shares) entitled to
vote to approve, adopt or authorize certain Fund transactions not
in the ordinary course of business, including (i) a merger or
consolidation or sale or transfer of the fund expenses, (ii)
conversion of the Fund from a closed-end to an open-end
investment company, and (iii) termination of the Fund, unless
such action was previously approved, adopted or authorized by the
affirmative vote of 66 2/3% of the Board of Trustees, in which
case such action must be approved by the holders of a "majority
of the outstanding" Common Shares and any Preferred Shares voting
together as a single class, and of the holders of a "majority of
the outstanding" Preferred Shares voting as a separate class. A
"majority of the outstanding" shares (whether voting together as a
single class or voting as a separate class) means (i) 67% or more
of such shares present at a meeting, if the holders of more than
50% of those shares are present or represented by proxy, or (ii)
more than 50% of such shares, whichever is less. See
"Anti-Takeover and Other Provisions in the Declaration of Trust"
in the SAI for a more detailed summary of these provisions.

      As described above, in certain circumstances, the
Declaration also imposes shareholder voting requirements that are
more demanding than those required under the 1940 Act in order to
authorize a conversion of the Fund from a closed-end to an
open-end investment company. See "Repurchase of Common Shares;
Conversion to Open-End Fund" below.


      As noted, the voting provisions described above could have
the effect of depriving Common Shareholders of an opportunity to
sell their Common Shares at a premium over prevailing market
prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In
the view of the Fund's Board of Trustees, however, these
provisions offer several possible advantages, including: (1)
requiring persons seeking control of the Fund to negotiate with
its management regarding the price to be paid for the amount of
Common Shares required to obtain control; (2) promoting
continuity and stability; and (3) enhancing the Fund's ability to
pursue long-term strategies that are consistent with its
investment objectives and management policies. The Board of
Trustees has determined that the voting requirements described
above, which are generally greater than the minimum requirements
under the 1940 Act, are in the best interests of the Fund's
Common Shareholders generally.



      The foregoing is intended only as a summary and is qualified
in its entirety by reference to the full text of the Declaration
and the Fund's Bylaws, both of which have been filed as exhibits
to the Fund's registration statement on file with the SEC.

LIABILITY OF TRUSTEES

      The Declaration provides that the obligations of the Fund
are not binding upon the Trustees of the Fund individually, but
only upon the assets and property of the Fund, and that the
Trustees shall not be liable for errors of judgment or mistakes
of fact or law. Nothing in the Declaration, however, protects a
Trustee against any liability to which he 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 office.

     REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

      The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem
their shares. Instead, the Fund's Common Shares will trade in the
open market at a price that will be a function of several
factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors.
Shares of a closed-end investment company may frequently trade at
prices lower than net asset value. The Fund's Board of Trustees
regularly monitors the relationship between the market price and
net asset value of the Common Shares. If the Common Shares were
to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of
its Common Shares on the open market or in private transactions,
or the making of a tender offer for such shares. There can be no
assurance, however, that the Board of Trustees will decide to
take or propose any of these actions, or that share repurchases
or tender offers, if undertaken, will reduce market discount. The
Fund has no present intention to repurchase its Common Shares and
would do so only in the circumstances described in this section.

      Notwithstanding the foregoing, at any time when the Fund's
Preferred Shares are outstanding, the Fund may not purchase,
redeem or otherwise acquire any of its Common Shares unless (1)
all accrued dividends on Preferred Shares have been paid and (2)
at the time of such purchase, redemption or acquisition, the net
asset value of the Fund's portfolio (determined after deducting
the acquisition price of the Common Shares) is at least 200% of
the liquidation value of the outstanding Preferred Shares
(expected to equal the original purchase price per share plus any
accrued and unpaid dividends thereon).

      Subject to its investment limitations, the Fund may borrow
to finance the repurchase of shares or to make a tender offer.
Interest on any borrowings to finance share repurchase
transactions or the accumulation of cash by the Fund in
anticipation of share repurchases or tenders will reduce the
Fund's net income. Any share repurchase, tender offer or borrowing
that might be approved by the Board of Trustees would have to
comply with the Securities Exchange Act of 1934, as amended, and
the 1940 Act and the rules and regulations thereunder.

      The Fund's Board of Trustees may also from time to time
consider submitting to the holders of the shares of beneficial
interest of the Fund a proposal to convert the Fund to an
open-end investment company. In determining whether to exercise
its sole discretion to submit this issue to shareholders, the
Board of Trustees would consider all factors then relevant,
including the relationship of the market price of the Common
Shares to net asset value, the extent to which the Fund's capital
structure is leveraged and the possibility of re-leveraging, the
spread, if any, between the yields on securities in the Fund's
portfolio and interest and dividend charges on Preferred Shares
issued by the Fund and general market and economic conditions.


      The Declaration requires the affirmative vote or consent of
a majority of the Board of Trustees and the affirmative vote or
consent of the holders of at least seventy-five percent (75%) of
the Fund's shares (including Common and Preferred Shares)
entitled to vote to approve, unless the conversion has been
authorized by a the affirmative vote or consent of two-thirds (66
2/3%) of the Board of Trustees, in which case shareholders would
have only the minimum voting rights required by the 1940 Act with
respect to the conversion.

      This seventy-five percent (75%) shareholder approval
requirement is higher than is required under the 1940 Act. In the
event that a conversion is approved by two-thirds (66 2/3%) of
the Trustees as described above, the minimum shareholder vote
required under the 1940 Act would be necessary to authorize the
conversion. Currently, the 1940 Act would require approval of the
holders of a "majority of the outstanding" Common Shares and, if
issued, Preferred Shares voting together as a single class, and
the holders of a "majority of the outstanding" Preferred Shares
voting as a separate class, in order to authorize a conversion.

      If the Fund converted to an open-end company, it would be
required to redeem all Preferred Shares then outstanding
(requiring in turn that it liquidate a portion of its investment
portfolio), and the Fund's Common Shares likely would no longer
be listed on the American Stock Exchange. Shareholders of an
open-end investment company may require the company to redeem
their shares on any business day (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 redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous
offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate
portfolio management.


      The repurchase by the Fund of its shares at prices below net
asset value will result in an increase in the net asset value of
those shares that remain outstanding. However, there can be no
assurance that share repurchases or tenders at or below net asset
value will result in the Fund's shares trading at a price equal
to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net
asset value from time to time, or that the Fund may be converted
to an open-end company, may reduce any spread between market
price and net asset value that might otherwise exist.

      In addition, a purchase by the Fund of its Common Shares
will decrease the Fund's total assets. This would likely have the
effect of increasing the Fund's expense ratio. Any purchase by
the Fund of its Common Shares at a time when Preferred Shares are
outstanding will increase the leverage applicable to the
outstanding Common Shares then remaining. See the Prospectus
under "Risks--Leverage Risk."

      Before deciding whether to take any action if the Fund's
Common Shares trade below net asset value, the Board of Trustees
would consider all relevant factors, including the extent and
duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its
shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a
discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be
taken.


                            TAX MATTERS

      TAXATION OF THE FUND. The Fund intends to qualify each year
as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code").  In order
to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among
other things:

(a)   derive at least 90% of its gross income from dividends,
      interest, payments with respect to certain securities loans,
      and gains from the sale of stock, securities or foreign
      currencies, or other income (including but not limited to
      gains from options, futures, or forward contracts) derived
      with respect to its business of investing in such stock,
      securities, or currencies;


(b)   distribute with respect to each taxable year at least 90% of
      the sum of its investment company taxable income (as that
      term is defined in the Code without regard to the deduction
      for dividends paid - generally taxable ordinary income and
      the excess, if any, of net short-term capital gains over net
      long-term capital losses) and net tax-exempt interest income
      for such year; and

(c)   diversify its holdings so that, at the end of each quarter
      of the Fund's taxable year, (i) at least 50% of the market
      value of the Fund's total assets is represented by cash and
      cash items, U.S. Government securities, securities of other
      regulated investment companies, and other securities limited
      in respect of any one issuer to a value not greater than 5%
      of the value of the Fund's total assets and not more than
      10% of the outstanding voting securities of such issuer, and
      (ii) not more than 25% of the value of the Fund's total
      assets is invested in the securities (other than those of
      the U.S. Government or other regulated investment companies)
      of any one issuer or of two or more issuers which the Fund
      controls and which are engaged in the same, similar, or
      related trades or businesses. If the Fund qualifies as a
      regulated investment company that is accorded special tax
      treatment, the Fund will not be subject to federal income
      tax on income distributed in a timely manner to its
      shareholders in the form of dividends (including Capital
      Gain Dividends, as defined below).

      If the Fund failed to qualify as a regulated investment
company accorded special tax treatment in any taxable year, the
Fund would be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including
any distributions of net tax-exempt income and net long-term
capital gains, generally would be taxable to shareholders as
corporate dividends.  Such distributions generally would be
eligible (i) to be treated as qualified dividend income in the
case of individual shareholders and (ii) for the dividends
received deduction in the case of corporate shareholders. In
addition, the Fund could be required to recognize unrealized
gains, pay substantial taxes and interest and make substantial
distributions before requalifying as a regulated investment
company that is accorded special tax treatment.


      The Fund intends to distribute at least annually to its
shareholders all or substantially all of its investment company
taxable income and any net tax-exempt interest, and may
distribute its net capital gain. The Fund may also retain for
investment its net capital gain. If the Fund does retain any net
capital gain or any investment company taxable income, it will be
subject to tax at regular corporate rates on the amount retained.
If the Fund retains any net capital gain, it may designate the
retained amount as undistributed capital gains in a notice to its
shareholders who, if subject to federal income tax on long-term
capital gains, (i) will be required to include in income for
federal income tax purposes, as long-term capital gain, their
shares of such undistributed amount, and (ii) will be entitled to
credit their proportionate shares of the tax paid by the Fund on
such undistributed amount against their federal income tax
liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For federal income tax purposes,
the tax basis of shares owned by a shareholder of the Fund will
be increased by an amount equal under current law to the
difference between the amount of undistributed capital gains
included in the shareholder's gross income and the tax deemed
paid by the shareholder under clause (ii) of the preceding
sentence.


      Certain investment strategies of the Fund, such as hedging,
the acquisition of securities with original issue discount, the
acquisition of higher risk securities and certain other
acquisitions may generate more taxable income than book income
and may affect the timing and amount of income that must be
distributed to the Fund's shareholders.  In order to generate
sufficient cash to make the requisite distributions, the Fund may
be required to sell securities in its portfolio that it otherwise
would have continued to hold.


      If the Fund fails to distribute in a calendar year at least
an amount equal to the sum of 98% of its ordinary income for such
year and 98% of its capital gain net income for the one-year
period ending October 31 of such year, plus any retained amount
from the prior year, the Fund will be subject to a 4% excise tax
on the undistributed amounts. For these purposes, the Fund will
be treated as having distributed any amount for which it is
subject to income tax. A dividend paid to shareholders in January
of a year generally is deemed to have been paid by the Fund on
December 31 of the preceding year, if the dividend was declared
and payable to shareholders of record on a date in October,
November or December of that preceding year. The Fund intends
generally to make distributions sufficient to avoid imposition of
the 4% excise tax.


      FUND DISTRIBUTIONS. Distributions from the Fund other than
distributions of net capital gains and qualified dividend income
generally will be taxable to shareholders as ordinary income to
the extent of the Fund's earnings and profits. Distributions of
net capital gains (I.E., the excess of net gains from the sale of
capital assets held more than one year over net losses from the
sale of capital assets held for not more than one year) properly
designated as capital gain dividends ("Capital Gain Dividends")
will be taxable to shareholders as long-term capital gain,
regardless of how long a shareholder has held the shares in the
Fund.  Long-term capital gain rates for individuals have been
temporarily reduced to 15% (with lower rates for individuals in
the 10% and 15% rate brackets) for taxable years beginning on or
before December 31, 2008.

      Dividends (including Capital Gain Dividends and
distributions of qualified dividend income) will be taxable as
described above whether received in cash or in shares. A
shareholder whose distributions are reinvested in shares will be
treated as having received a dividend equal to either (i) the
fair market value of the new shares issued to the shareholder, or
(ii) if the shares are trading below net asset value, the amount
of cash allocated to the shareholder for the purchase of shares
on its behalf in the open market.

      For taxable years beginning on or before December 31, 2008,
distributions of investment income designated by the Fund as
derived from qualified dividend income will be taxed in the hands
of individuals at the rates applicable to long-term capital gain,
provided holding period and other requirements are met.  Such
distributions, however, even though taxed to individuals at the
same rate as long-term capital gains, are not the equivalent of
long-term capital gains, which can potentially be fully offset by
the capital losses of a taxpayer, whereas qualified dividend
income may be offset by a maximum of $3000 in capital losses in
any taxable year.  The Fund does not expect a significant portion
of Fund distributions to be derived from qualified dividend
income.

      Dividends of net investment income received by corporate
shareholders of the Fund will qualify for the 70% dividends
received deduction generally available to corporations to the
extent of the amount of qualifying dividends received by the Fund
from domestic corporations for the taxable year. It is not
expected that any significant percentage of the Fund's
distributions will so qualify.

      The Internal Revenue Service currently requires that a
regulated investment company that has two or more classes of
stock allocate to each such class proportionate amounts of each
type of its income (such as ordinary income and capital gains)
based upon the percentage of total dividends distributed to each
class for the tax year. Accordingly, the Fund intends each year
to allocate Capital Gain Dividends between and among its Common
Shares and any series of its Preferred Shares in proportion to
the total dividends paid to each class with respect to such tax
year. Dividends qualifying and not qualifying for (a) treatment
as qualified dividend income and (b) the dividends received
deduction will similarly be allocated between and among such
classes.

      RETURN OF CAPITAL DISTRIBUTIONS. If the Fund makes a
distribution to a shareholder in excess of the Fund's current and
accumulated earnings and profits in any taxable year, the excess
distribution will be treated as a return of capital to the extent
of such shareholder's tax basis in his or her shares, and
thereafter as capital gain. A return of capital is not taxable,
but it reduces a shareholder's tax basis in his or her shares,
thus reducing any loss or increasing any gain on a subsequent
taxable disposition by the shareholder of his or her shares.
Where one or more such distributions occur in any taxable year of
the Fund, the available earnings and profits will be allocated,
first, to the distributions made to the holders of Preferred
Shares, and only thereafter to distributions made to holders of
Common Shares. As a result, the holders of Preferred Shares will
receive a disproportionate share of the distributions treated as
dividends, and the holders of the Common Shares will receive a
disproportionate share of the distributions treated as a return
of capital.

      Dividends and distributions on the Fund's shares are
generally subject to federal income tax as described herein to
the extent they do not exceed the Fund's realized income and
gains, even though such dividends and distributions may
economically represent a return of a particular shareholder's
investment. Such distributions are likely to occur in respect of
shares purchased at a time when the Fund's net asset value
reflects gains that are either unrealized, or realized but not
distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects
unrealized losses. Distributions are taxable to a shareholder
even if they are paid from income or gains earned by the Fund
prior to the shareholder's investment (and thus included in the
price paid by the shareholders). Each January, you will receive a
statement that shows the tax status of distributions you received
for the previous year.

      SALE OF SHARES. The sale of Fund shares by a shareholder may
give rise to a gain or loss. For tax purposes, an exchange of
your Fund shares for shares of a different Franklin Templeton
fund is the same as a sale. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term
capital gain or loss if the shares have been held for more than
12 months. Otherwise, the gain or loss on the taxable disposition
of Fund shares will be treated as short-term capital gain or
loss. However, any loss realized upon a taxable disposition of
shares held for six months or less will be treated as long-term,
rather than short-term, to the extent of any long-term capital
gain distributions received (or deemed received) by the
shareholder with respect to the shares. All or a portion of any
loss realized upon a taxable disposition of Fund shares will be
disallowed if other substantially identical shares of the Fund
are purchased within 30 days before or after the disposition. In
such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.


      From time to time the Fund may make a tender offer for its
Common Shares. It is expected that the terms of any such offer
will require a tendering shareholder to tender all Common Shares
and dispose of all Preferred Shares held, or considered under
certain attribution rules of the Code to be held, by such
shareholder. Shareholders who tender all Common Shares and
dispose of all Preferred Shares held, or considered to be held,
by them will be treated as having sold their shares and generally
will realize a capital gain or loss. If a shareholder tenders
fewer than all of its Common Shares, or retains a substantial
portion of its Preferred Shares, such shareholder may be treated
as having received a taxable dividend upon the tender of its
Common Shares. In such a case, there is a remote risk that
non-tendering shareholders will be treated as having received
taxable distributions from the Fund. Likewise, if the Fund
redeems some but not all of the Preferred Shares held by a
Preferred Shareholder and such shareholder is treated as having
received a taxable dividend upon such redemption, there is a
remote risk that Common Shareholders and non-redeeming Preferred
Shareholders will be treated as having received taxable
distributions from the Fund. To the extent that the Fund
recognizes net gains on the liquidation of portfolio securities
to meet such tenders of Common Shares, the Fund will be required
to make additional distributions to its Common Shareholders.


      OPTIONS, FUTURES, FORWARD CONTRACTS AND SWAP AGREEMENTS. The
Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, swap agreements, straddles and
foreign currencies will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale
and short sale rules), the effect of which may be to accelerate
income to the Fund, defer losses to the Fund, cause adjustments
in the holding periods of the Fund's securities, convert
long-term capital gains into short-term capital gains and convert
short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of
distributions to shareholders. The Fund will monitor its
transactions, will make appropriate tax elections and will make
appropriate entries in its books and records in order to mitigate
the effect of these rules.

      FOREIGN TAXATION. Income received by the Fund from sources
within foreign countries may be subject to withholding and other
taxes imposed by such countries. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes.
Although the Fund may be able to claim a credit or deduction with
respect to such taxes, shareholders generally will not be
entitled to claim a credit or deduction with respect to foreign
taxes.

      SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS. Special tax
rules apply to investments through defined contribution plans and
other tax-qualified plans. Shareholders should consult their tax
advisers to determine the suitability of shares of the Fund as an
investment through such plans and the precise effect of an
investment on their particular tax situation.


      BACKUP WITHHOLDING. The Fund must withhold a portion of your
taxable distributions and sales proceeds unless you:

o  provide your correct social security or taxpayer
   identification number,

o  certify that this number is correct,

o  certify that you are not subject to backup withholding, and

o  certify that you are a U.S. person (including a U.S.
   resident alien).


      The Fund also must withhold if the Internal Revenue Service
instructs it to do so. The backup withholding tax rate is
currently 28% for amounts paid through 2010.

      In order for a foreign investor to qualify for exemption
from the backup withholding tax rates under income tax treaties,
the foreign investor must comply with special certification and
filing requirements. Foreign investors in the Fund should consult
their tax advisers in this regard.

      Backup withholding is not an additional tax. Any amounts
withheld may be refunded or credited against the shareholder's
U.S. federal income tax liability, provided the appropriate
information is furnished to the Internal Revenue Service.

      NON-U.S. SHAREHOLDERS. Under U.S. federal tax law, dividends
other than Capital Gain Dividends paid on shares beneficially
held by a person who is not a "U.S. person" within the meaning of
the Code (or a "foreign person"), are, in general, subject to
withholding of U.S. federal income tax at a rate of 30% of the
gross dividend, which rate may, in some cases, be reduced by an
applicable tax treaty. Dividends are subject to withholding even
if they are funded by income or gains (such as portfolio
interest, short-term capital gains, or foreign-source dividend
and interest income) that, if paid to a foreign person directly,
would not be subject to withholding. However, Capital Gain
Dividends will not be subject to withholding of U.S. federal
income tax. If a beneficial holder who is a foreign person has a
trade or business in the United States, and the dividends are
effectively connected with the conduct by the beneficial holder
of a trade or business in the United States, the dividend will be
subject to U.S. federal net income taxation at regular income tax
rates.

      Under U.S. federal tax law, a beneficial holder of shares
who is a foreign person is not, in general, subject to U.S.
federal income tax on gains (and is not allowed a deduction for
losses) realized on the sale of shares of the Fund or Capital
Gain Dividends unless (i) such gain or Capital Gain Dividend is
effectively connected with the conduct of a trade or business
carried on by such holder within the United States or (ii) in the
case of an individual holder, the holder is present in the United
States for a period or periods aggregating 183 days or more
during the year of the sale or Capital Gain Dividend and certain
other conditions are met.


      If you are eligible for the benefits of a tax treaty, any
effectively connected income or gain will generally be subject to
U.S. federal income tax on a net basis only if it is also
attributable to a permanent establishment maintained by you in
the United States.  A beneficial holder of shares who is a
foreign person may be subject to state and local tax and to the
U.S. federal estate tax in addition to the federal tax on income
referred to above.


      RECENT TAX SHELTER REPORTING REGULATIONS.  Under recently
promulgated Treasury regulations, if a shareholder recognizes a
loss with respect to the Fund's share of $2 million or more for
an individual shareholder or $10 million or more for a corporate
shareholder in any single taxable year (or a greater loss over a
combination of years), the shareholder must file with the
Internal Revenue Service a disclosure statement on Form 8886. The
fact that a loss is reportable under these regulations does not
affect the legal determination of whether the taxpayer's
treatment of the loss is proper. Shareholders should consult
their tax adviser to determine the applicability of these
regulations in light of their individual circumstances.


      GENERAL. The federal income tax discussion set forth above
is for general information only. Prospective investors should
consult their tax advisers regarding the specific federal tax
consequences of purchasing, holding, and disposing of shares of
the Fund, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.

          PERFORMANCE RELATED AND COMPARATIVE INFORMATION

      The Fund may quote certain performance-related information
and may compare certain aspects of its portfolio and structure to
other substantially similar closed-end funds as categorized by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent
services. Comparison of the Fund to an alternative investment
should be made with consideration of differences in features and
expected performance. The Fund may obtain data from sources or
reporting services, such as Bloomberg Financial ("Bloomberg") and
Lipper, that the Fund believes to be generally accurate.

      The Fund, in its advertisements, may refer to pending
legislation from time to time and the possible impact of such
legislation on investors, investment strategy and related
matters. At any time in the future, yields and total return may
be higher or lower than past yields and there can be no assurance
that any historical results will continue.

      Past performance is not indicative of future results. At the
time Common Shareholders sell their shares, they may be worth
more or less than their original investment.

      See Appendix A for additional performance related and
comparative and other information.


                             CUSTODIAN


      The Bank of New York, Mutual Funds Division, 90 Washington
Street, New York, NY 10286, acts as custodian of the Fund's
securities and other assets.


          SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT


      PFPC, Inc. ("Servicing Agent") is the Fund's shareholder
servicing agent and acts as the Fund's transfer agent and
dividend-paying agent. The Servicing Agent is located at P.O. Box
43027, Providence, RI 02940-3027. Please send all correspondence
to PFPC, Inc. at P.O. Box 43027, Providence, RI 02940-3027.


      For its services, Servicing Agent receives a fixed fee per
account. The Fund also will reimburse Servicing Agent for certain
out-of-pocket expenses, which may include payments by Servicing
Agent to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency
services to beneficial owners of the Fund. The amount of
reimbursements for these services per benefit plan participant
Fund account per year will not exceed the per account fee payable
by the Fund to Servicing Agent in connection with maintaining
shareholder accounts.


                       INDEPENDENT AUDITORS

      PricewaterhouseCoopers LLP, 333 Market Street, San
Francisco, California 94105, serves as independent auditors for
the Fund. PricewaterhouseCoopers LLP provides audit services, tax
return preparation and assistance and consultation in connection
with review of SEC filings to the Fund.


                      REGISTRATION STATEMENT


      A Registration Statement on Form N-2, including any
amendments thereto (a "Registration Statement"), relating to the
shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Prospectus and this SAI do not
contain all of the information set forth in the Registration
Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares
offered or to be offered hereby, reference is made to the Fund's
Registration Statement. Statements contained in the Prospectus
and this SAI 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.
Copies of the Registration Statement may be inspected without
charge at the SEC's principal office in Washington, D.C., and
copies of all or any part thereof may be obtained from the SEC
upon the payment of certain fees prescribed by the SEC.


                  REPORT OF INDEPENDENT AUDITORS


                         [TO BE PROVIDED]


                       FINANCIAL STATEMENTS




         FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST




                STATEMENT OF ASSETS AND LIABILITIES



                                       , 2003



                         [TO BE PROVIDED]


                      STATEMENT OF OPERATIONS

                       ONE DAY ENDED , 2003

                         [TO BE PROVIDED]



                            APPENDIX A


                      DESCRIPTION OF RATINGS

The Fund's investments may range in quality from securities rated
in the lowest category to securities rated in the highest
category (as rated by Moody's, S&P, or Fitch, or, if unrated,
determined by the Manager to be of comparable quality). The
percentage of a Fund's assets invested in securities in a
particular rating category will vary. The following terms are
generally used to describe the credit quality of debt securities:

High Quality Debt Securities are those rated in one of the two
highest rating categories (the highest category for commercial
paper) or, if unrated, deemed comparable by the Manager.

Investment Grade Debt Securities are those rated in one of the
four highest rating categories or, if unrated, deemed comparable
by the Manager.

Below Investment Grade, High Yield Securities ("Junk Bonds") are
those rated lower than Baa by Moody's, BBB by S&P or Fitch, and
comparable securities. They are deemed predominantly speculative
with respect to the issuer's ability to repay principal and
interest.

Following is a description of Moody's, S&P's, and Fitch's rating
categories applicable to debt securities.

MOODY'S INVESTORS SERVICE, INC.

   CORPORATE AND MUNICIPAL BOND RATINGS

Aaa:  Bonds 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 edge." 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 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 that
make the long-term risks appear somewhat larger than with Aaa
securities.

A:  Bonds 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 that suggest
a susceptibility to impairment sometime in the future.

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

Caa:  Bonds 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 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 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.

Moody's bond ratings, where specified, are applicable to
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 letter-of-credit and bonds of
indemnity are excluded unless explicitly rated. Obligations of a
branch of a bank are considered to be domiciled in the country in
which the branch is located.

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

Moody's makes no representation that rated bank obligations or
insurance company obligations are exempt from registration under
the U.S. Securities Act of 1933 or issued in conformity with any
other applicable law or regulation. Nor does Moody's represent
any specific bank or insurance company obligation is legally
enforceable or a valid senior obligation of a rated issuer.

Moody's applies numerical modifiers, 1, 2, and 3, in each generic
rating classified from Aa through Caa in its corporate bond
rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.

Corporate Short-Term Debt Ratings

Moody's short-term debt ratings are opinions of the ability of
issuers to repay punctually senior debt obligations. These
obligations have an original maturity not exceeding one year,
unless explicitly noted.

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

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; and well-established access to a range of
financial markets and assured sources of alternate liquidity.

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

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

NOT PRIME:  Issuers rated Not Prime do not fall within any of the
Prime rating categories.

STANDARD & POOR'S

   ISSUE CREDIT RATING DEFINITIONS

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

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

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

Issue credit ratings are based, in varying degrees, on the
following considerations:  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; nature
of and provisions of the obligation; 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.

CORPORATE AND MUNICIPAL BOND RATINGS

   INVESTMENT GRADE

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

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

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

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

   SPECULATIVE GRADE

Obligations rated BB, B, CCC, CC, and C are regarded as having
predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. BB indicates the
least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to
adverse conditions.

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

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

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

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

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

CI:  The rating CI is reserved for income bonds on which no
interest is being paid.

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

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.

Provisional ratings:  The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure
of, such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.

r:  This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the
credit rating. Examples include:  obligations linked or indexed
to equities, currencies, or commodities; obligations exposed to
severe prepayment risk - such as interest-only or principal-only
mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

The absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in
total return.

N.R.:  This indicates that no rating has been requested, that
there is insufficient information on which to base a rating, or
that Standard & Poor's does not rate a particular obligation as a
matter of policy.

Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and
related uncertainties.

   COMMERCIAL PAPER RATING DEFINITIONS

A Standard & Poor's commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded
into several categories, ranging from A for the highest quality
obligations to D for the lowest. These categories are as follows:

A-1:  A short-term obligation rated A-1 is rated in the highest
category by Standard & Poor's. 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:  A short-term obligation rated B is regarded as having
significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitment on the
obligation; however, it faces major ongoing uncertainties which
could lead to the obligor's inadequate capacity to meet 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 Standard & Poor's believes that such payments
will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.

A commercial paper rating is not a recommendation to purchase,
sell or hold a security inasmuch as it does not comment as to
market price or suitability for a particular investor. The
ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers
reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or
unavailability of such information.


FITCH RATINGS


BOND RATINGS

The ratings represent Fitch's assessment of the issuer's ability
to meet the obligations of a specific debt issue or class of
debt. The ratings take into consideration special features of the
issue, its relationship to other obligations of the issuer, the
current financial condition and operative performance of the
issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future
financial strength and credit quality.

AAA: Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.

AA: Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest
and repay principal is very strong, although not quite as strong
as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated
F-1+.

A: Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds
and, therefore, impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings.

BB: Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected over
time by adverse economic changes. However, business and financial
alternatives can be identified which could assist the obligor in
satisfying its debt service requirements.

B: Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and the
need for reasonable business and economic activity throughout the
life of the issue.

CCC: Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment.

CC: Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.

C: Bonds rated C are in imminent default in payment of interest
or principal.

DDD, DD and D: Bonds rated DDD, DD and D are in actual default of
interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor.
DDD represents the highest potential for recovery on these bonds
and D represents the lowest potential for recovery.

Plus (+) and minus (-) signs are used with a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the AAA
category covering 12-36 months.


SHORT-TERM RATINGS

Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of up to three
years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.

Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond
ratings on the existence of liquidity necessary to meet the
issuer's obligations in a timely manner.

F-1+: Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of assurance
for timely payment.

F-1: Very strong credit quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.

F-2: Good credit quality. Issues carrying this rating have a
satisfactory degree of assurance for timely payments, but the
margin of safety is not as great as the F-l+ and F-1 categories.

F-3: Fair credit quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for
timely payment is adequate; however, near-term adverse changes
could cause these securities to be rated below investment grade.

F-S: Weak credit quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.

D: Default. Issues assigned this rating are in actual or imminent
payment default.



                            APPENDIX B


                      PERFORMANCE RELATED AND
                 COMPARATIVE AND OTHER INFORMATION

      From time to time, the Fund, the Manager may report to
shareholders or to the public in advertisements concerning the
performance of the Manager as adviser to clients other than the
Fund, or on the comparative performance or standing of the
Manager in relation to other money managers. The Manager also may
provide current or prospective private account clients, in
connection with standardized performance information for the
Fund, performance information for the Fund gross of fees and
expenses for the purpose of assisting such clients in evaluating
similar performance information provided by other investment
advisers or institutions. Comparative information may be complied
or provided by independent ratings services or by news
organizations. Any performance information, whether related to
the Fund, the Manager, should be considered in light of the
Fund's investment objectives and policies, characteristics and
quality of the Fund, and the market conditions during the time
period indicated, and should not be considered to be
representative of what may be achieved in the future. Performance
information for the Fund may be compared to various unmanaged
indexes.


                            [BROCHURE]

[Page 1--Cover]

o  Portfolio managed for limited duration
o  High current income potential
o  Investment-grade weighted average portfolio credit quality
o  Investments in asset classes with a record of low
   correlation of returns
o  Professional management by Franklin Templeton, a leader in
   fixed income investing

Offering Period:
July 29-August 26, 2003

Franklin Templeton
Limited Duration Income Trust

Income

FUND SYMBOL
FTF
Application with the American
Stock Exchange (AMEX) pending.

The information in this document and in the preliminary
prospectus is not complete and may be amended or changed. A
registration statement relating to these securities has been
filed with the Securities and Exchange Commission (SEC), but has
not yet become effective. We may not sell these securities until
the registration statement filed with the SEC is effective. This
document is not an offer to sell these securities and is not a
solicitation to buy these securities in any state where the offer
or sale is not permitted. This brochure is accompanied by a
preliminary prospectus, which includes more complete information
about the Fund, including its risks, fees and expenses.
Additional copies of the preliminary prospectus may be obtained
by calling Franklin Templeton Investments at 1-800/DIAL-BEN(R)
(1-800/342-5236). Please read the preliminary prospectus
carefully before making any decision to invest in the Fund.

Experienced Portfolio
Management Team

Christopher Molumphy, CFA
Chief Investment Officer of
Franklin Templeton's Fixed Income Group
Executive Vice President and
Portfolio Manager
16 years of industry experience

Roger Bayston, CFA
Senior Vice President and
Portfolio Manager
15 years of industry experience

Richard D'Addario
Chief Investment Officer of
Franklin's Floating Rate Debt Group
Senior Vice President and
Portfolio Manager
25 years of industry experience

Eric Takaha, CFA
Director of High-Yield Research
Vice President and
Portfolio Manager
12 years of industry experience

Franklin Templeton:
A Leader In Fixed Income Investing

Franklin Advisers, Inc. is the Fund's investment manager. Founded
in 1947, Franklin Advisers, Inc. and its affiliates are known
collectively as Franklin Templeton Investments and have grown to
be one of the largest investment organizations in the United
States with $287 billion in assets under management. (1)

Franklin Templeton has been managing fixed income mutual funds
since 1970. In that time, the firm has become one of the most
respected names in the industry as well as one of the largest
fixed income managers in the country. Franklin Templeton's
approach is research intensive--portfolio managers and analysts
conduct in-depth proprietary research to determine optimal
portfolio allocations. Individual securities are subject to
stringent fundamental analysis and are closely monitored by a
team of dedicated analysts. Additionally, Franklin Templeton
focuses on risk management, using state-of the-art tools to help
manage the risk of the firm's fixed income investments.

Highlights:
Over $110 billion in fixed income assets under management,
including: (2)

o $16 billion in mortgage-backed securities
o $3 billion in floating rate bank loans
o $10 billion in high-yield debt

Over 100 portfolio managers, research analysts and traders in the
fixed income group, including: (1)

o 9 in the mortgage-backed securities group
o 10 in the floating rate bank loan group
o 15 in the high-yield debt group

Manage 5 of the 21 largest non-proprietary U.S. fixed income
mutual funds (3)

1. As of 6/30/03.
2. As of 6/30/03. Includes fixed income, money funds and fixed
income portion of hybrid/balanced assets under management.
3. Source: Strategic Insight. Based on open- and closed-end
assets under management (AUM) as of 5/31/03. Most recent data
available.

Introducing
Franklin Templeton Limited Duration Income Trust

Franklin Templeton Limited Duration Income Trust may be a timely
solution for investors searching for the potential for lower
return volatility and attractive yields. The Fund will generally
have an estimated average duration of between two and five years
in an effort to reduce sensitivity to interest rates.
Additionally, the Fund will invest primarily in three fixed
income asset classes that have historically shown low correlation
with one another, which may help to reduce overall portfolio
volatility.

Investment Objective
The Fund's primary investment objective is to seek high current
income. Capital appreciation is a secondary objective to the
extent it is possible and is consistent with the Fund's primary
objective.

Primary Investments:
Mortgage-backed securities
Floating rate bank loans
High-yield corporate bonds

Under normal market conditions, the Fund will invest at least 25%
of its total assets in each asset class.(4)

Use of Leverage May Help to Boost Yield

The Fund presently intends to use leverage by issuing shares of
preferred stock representing up to 38% of the Fund's total
capital (calculated after their issuance). By using leverage, the
Fund will seek to obtain a higher return for shareholders.
Special risks are involved with the use of leverage. Please see
the "What Are the Risks?" section for a discussion of risks
associated with this strategy.

The Advantages of a Closed-End Fund

A closed-end fund is not subject to the unpredictable daily cash
flows of open-end funds, which can make managing open-end fund
assets more
difficult. Also, closed-end funds can take advantage of financial
leverage, potentially offering investors enhanced income and
total return compared to other fixed income alternatives.
However, unlike open-end funds, shares of closed-end funds
frequently trade at a discount from their net asset value.

It should be noted that special risks are associated with the use
of financial leverage. However, the Fund's structure, which
includes investments in floating rate bank loans, may help to
limit volatility generally associated with leveraged strategies
in a rising rate environment. Because floating rate bank loan
rates reset periodically, any increase in leveraging costs due to
a rise in interest rates could potentially be offset by a
corresponding increase in the yield of the Fund's floating rate
bank loan assets.

o   Benefits  To You:  o Limited  duration.  The Fund  intends to  maintain  an
    estimated  average  duration within a range of two to five years,  with the
    intent of reducing interest rate risk.  Initially,  the Fund is expected to
    have an estimated average duration of approximately  three years (including
    the effect of anticipated leverage).

o   High current income potential.  The Fund's investments in the three primary
    fixed income asset  classes,  combined  with the  utilization  of financial
    leverage,  offer the potential for higher  current  income than other fixed
    income alternatives.

o   Investment-grade  weighted  average  portfolio  credit  quality.  The  Fund
    expects to maintain a weighted average portfolio credit quality of at least
    BBB-/Baa3.

o   Historically  low  correlation.  The three primary asset classes have shown
    low  correlations  with  one  another,   offering   different   risk/return
    characteristics  in  varying  market  conditions,  which may help to reduce
    overall portfolio volatility.

o   Investments in asset classes with relatively  lower  volatility of returns.
    Historically,  both mortgage-backed securities and floating rate bank loans
    have  shown  less  total   return   volatility   than  other  fixed  income
    investments, while high-yield bonds have shown less total return volatility
    than the broad equity markets.

o   Active  sector   allocation   strategy.   The  Fund's  portfolio   managers
    proactively  allocate investments across various fixed income sectors in an
    effort to best position the portfolio to achieve its investment goals.

o   Experienced, professional management. Franklin Templeton is recognized as a
    leader in fixed income investing.  The Fund's portfolio management team has
    68 years of combined industry experience.(1)

Investment in the Fund involves a number of risks, including the
risk of leverage, trading discount and default. The Fund may
differ from other investment companies in terms of credit risk,
liquidity, charges and expenses, and other important issues. See
"What Are the Risks?" on the back of this brochure.

4. The Fund may also invest in asset-backed securities other than
mortgage-backed securities. Such investments will be included for
purposes of applying the 25% threshold to mortgage-backed
securities.

Not FDIC Insured | May Lose Value | No Bank Guarantee

Reasons to Invest

Low Average Duration May Help to Reduce Volatility in a Rising
Rate Environment

Bond prices and interest rates tend to have an inverse
relationship. Generally, the longer the duration of a bond--a
measure of price sensitivity relative to changes in interest
rates--the higher the interest rate risk, or the more sensitive its
price will be to interest rate changes. The rule of thumb is that
for every 1% change in interest rates, the price of a bond will
be affected according to the duration. For example, if interest
rates go up 1% and the duration of a bond is 9 years, the price
of the bond will decrease by approximately 9%, as you can see in
the hypothetical example below. The shorter the duration, the
less the price of a bond should be affected by a change in
interest rates.

Change in Bond Prices(5)

Duration   Interest Rates Decline 1%Interest Rates Increase 1%
3 Years         +3%                 -3%
9 Years         +9%                 -9%

By generally maintaining an estimated average duration of between
two and five years (including the effect of leverage), the Fund
is positioned to be potentially less affected solely by a rise in
interest rates than a portfolio with a longer duration.

High Current Income Potential
Investing in three complementary fixed income asset
classes--mortgage-backed securities, floating rate bank loans and
high-yield bonds--coupled with the utilization of financial
leverage offers the potential for higher current income than many
other fixed income alternatives.

Investment-Grade Weighted Average Portfolio Credit Quality
The Fund generally expects to maintain a weighted average
portfolio credit quality of investment-grade by taking into
consideration the Fund's holdings of high-yield bonds and
floating rate bank loans, which are considered below
investment-grade credit quality, and averaging them with the
Fund's higher credit quality mortgage-backed securities holdings.

Low Correlation of Returns Among Asset Classes May Reduce the
Impact of Market Volatility
The returns of the three primary asset classes--mortgage-backed
securities, floating rate bank loans and high-yield bonds--have
historically shown low correlation with one another. Correlation
is an indication of the degree of correspondence in movement
among different asset classes, and is an important consideration
in constructing a well-diversified portfolio. By investing in
asset classes with low correlations, the Fund has the potential
to offer a well-diversified portfolio designed to reduce overall
volatility.

Low Correlation of Returns(6)
For the 10-Year Period Ended June 30, 2003

-----------------------------------------------------------------------------
                         Mortgage-Backed  Floating Rate
Asset Category(7)           Securities      Bank Loans    High-Yield Bonds
------------------------------------------------------------------------------
Mortgage-Backed Securities     1.00            -0.13          0.14
Floating Rate Bank Loans      -0.13             1.00          0.52
High-Yield Bonds               0.14             0.52          1.00

Correlation: 1 = perfect positive correlation  0 = no correlation
      -1 = perfect negative correlation

5. This example is intended to show the approximate effect of a
change in general interest rates on the price of a hypothetical
fixed income security based on its duration. Significant
assumptions include that interest rates move in parallel across
all maturities, the credit standing and likelihood of prepayment
of the hypothetical bond are unchanged, and sufficient buyers and
sellers are available for the security to be efficiently priced.
For a particular fixed income security, the relationship between
duration and interest rate-related price change may differ from
the example due to call features, credit considerations or other
factors. Because a fixed income security's own duration will
change over time, so too will its price sensitivity to changes in
interest rates.
6. Correlation is the statistical measure of the degree to which
the movements of two variables are related. Correlation figures
are based on calculations for the 10-year period ended 6/30/03.
7. Sources: Lehman Brothers, Credit Suisse First Boston (CSFB).
Mortgage-backed securities are represented by the Lehman Brothers
Mortgage Index; high-yield bonds are represented by the CSFB High
Yield Index; floating rate bank loans are represented by the CSFB
Leveraged Loan Index. Indexes are unmanaged and one cannot invest
directly in an index.

The Benefits of Investing in Three Distinct Fixed Income Asset
Classes

MORTGAGE-BACKED SECURITIES Mortgage-backed securities (MBS) are
comprised of pools of home mortgages, which pass through
principal and interest to the investor. Historically,
mortgage-backed securities have shown relatively lower volatility
of returns than other investment-grade, fixed income investments,
as shown in the chart below.

Lower Volatility(10)
For the 10-Year Period Ended June 30, 2003

[Graphic omitted]

This point chart displays lower volatility(10) comparing returns and
volatility for mortgage-backed securities, agencies, Treasuries and
investment-grade corporate bonds for the 10-year period ended June 30, 2003.

High credit quality.
Credit risk is considered minimal for mortgages backed by federal
agencies or federally sponsored agencies.

Low current duration.
The estimated effective duration of mortgage-backed securities as
of June 30, 2003, was 1.29 years. Historically, the estimated
effective duration has ranged between 0.93 and 4.83 years.(8)

High current income potential.
Mortgage-backed securities have typically offered higher yields
than Treasuries. As of June 30, 2003, mortgage-backed securities
provided a yield of 3.28% versus 1.32% for comparable
Treasuries.(9)

8. Source: Salomon Brothers Mortgage Index, as of 6/30/03. The
historical range of duration is for the 10-year period ended
6/30/03. Please be aware that as interest rates rise, the
duration of mortgage-backed securities will also increase.
9. Sources: Salomon Brothers Mortgage Index, Standard & Poor's
Micropal (Federal Reserve H15 Report, 2-Year Constant Maturity
Treasury Yield).
10. Source: Standard & Poor's Micropal. Mortgage-backed
securities are represented by the Lehman Brothers Mortgage Index;
agency bonds are represented by the Lehman Brothers Agency Index;
Treasuries are represented by the Lehman Brothers Treasury Index;
investment-grade corporate bonds are represented by the Lehman
Brothers Credit Index. Indexes are unmanaged and one cannot
invest directly in an index. Past performance does not guarantee
future results.

FLOATING RATE BANK LOANS Banks and other financial institutions
typically arrange floating rate bank loans for companies for a
variety of purposes to finance their business. Unlike fixed
income securities, floating rate bank loans are generally less
sensitive to interest rate risk because of their rate reset
feature, allowing floating rate bank loans to generally maintain
a spread over benchmark rates as well as potentially provide
solid returns in a rising rate environment, as shown below.

A Hedge Against Rising Interest Rates
1994 and 1999 Annual Total Returns

[Graphic omitted]

This horizontal bar chart illustrates the hedge against rising
interest retes for floating rate bank loans(11), investment grade
corporate bonds(12) and Treasury bonds(13) based on 1994 and
1999 annual total returns.

Relative price stability.
Bank loan rates reset periodically, so their prices are generally
less affected by interest rate changes than comparable fixed-rate
securities.

Senior and secured.
Because floating rate bank loans are near the top of the capital
structure, they are usually first in line for repayment and thus
have relatively greater protection from default than comparable
fixed-rate securities. They also are generally secured by
collateral.

High current income potential.
Bank loan yields float at margins above a benchmark lending rate,
such as the London Interbank Offered Rate (LIBOR). Therefore, in
a rising rate environment, they may offer higher yields than
comparable fixed-rate securities. Potential to offset financing
risk. In a rising rate environment, investments in floating rate
bank loans can help to manage the operating risk associated with
investment  vehicles using floating rate leverage.

12. Source: Standard & Poor's Micropal (Lehman Brothers Credit
Index).
13. Source: Standard & Poor's Micropal (Payden & Rygel, 10-Year
Treasury Index).

HIGH-YIELD BONDS High-yield bonds are issued by companies with
lower credit ratings and tend to carry some of the highest yields
amongst all fixed income asset classes. High-yield bonds have
recently appeared attractively valued relative to long-term
averages. In fact, the yield spread over comparable Treasuries
was approximately 6.76% as of June 30, 2003, whereas the ten-year
average was approximately 5.86%.14

High-Yield Bond Valuations Recently Have Appeared Relatively
Attractive
For the 10-Year Period Ended June 30, 2003

[Graphic omitted]

This line graph shows how high-yield bond valuations recently
have appeared relatively attractive for the 10-year period ended
June 30, 2003, illustrated by the CSFB High Yield Index yield
(yield-to-worst)(14) and the 7-year Constant Maturity Treasury Yield(14).

High current income potential.
Because of their lower credit ratings, high-yield bonds generally
offer higher yields than investment-grade bonds in order to
compensate investors for higher credit risk.

Portfolio diversification.
Historically, high-yield bonds have shown a low correlation to
other fixed income and equity asset classes.

Total return potential.
In a growing economy, high-yield bonds may benefit as the
corporate outlook improves and the risk of defaults starts to
diminish.

Low interest rate risk.
High-yield bonds tend to react more to changes in the underlying
company fundamentals rather than to changes in interest rates.

14. Sources: Standard & Poor's Micropal (Federal Reserve H15
Report), Credit Suisse First Boston (CSFB). As of 6/30/03.

Indexes are unmanaged and one cannot invest directly in an index.
Treasuries, if held to maturity, offer a fixed rate of return and
fixed principal value; interest payments and principal are
guaranteed.

franklintempleton.com

Franklin Templeton Limited Duration Income Trust

Income

One Franklin Parkway, San Mateo, CA 94403-1906
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
franklintempleton.com

Before investing, please talk to your financial advisor about how
the Fund differs from other funds regarding credit risk,
liquidity, charges and expenses, and other issues of importance.
Please read the prospectus carefully before investing or sending
money.

What Are the Risks?
Lack of Operating History. The Fund is a newly organized,
diversified, closed-end management investment company with no
history of operations. High Yield Risk. The Fund's investments in
securities that are rated below investment grade or unrated
generally have more credit risk than higher-rated securities. Due
to the risks involved in investing in high yield securities, an
investment in the Fund should be considered speculative. The
prices of high yield, fixed-income securities tend to fluctuate
more than higher-quality debt securities. Market Discount Risk.
Common shares of closed-end management investment companies
frequently trade at a discount from their net asset value. The
Fund's shares may fluctuate with market conditions and may trade
at a price that is less than the initial offering price. Credit
Risk. An issuer of a debt security, including a governmental
issuer, may be unable to make interest payments and repay
principal. Changes in an issuer's financial strength or in a
security's credit rating may affect a security's value, and thus,
impact Fund performance. Interest Rate Risk. Changes in interest
rates may present risks to the Fund. Because market interest
rates are currently near their lowest levels in many years, there
is a risk that the Fund's portfolio will decline in value. Shares
of preferred stock ("Preferred Shares"), if issued, may pay a
dividend rate that exceeds the rate of return on the investments
held by the Fund, in which case the returns to shareholders of
shares of common stock ("Common Shares") may be reduced. The
Fund's use of leverage will tend to increase Common Share interest
rate risk. Inflation Risk. The value of assets or income from the
Fund's investments may be worth less as inflation decreases the
value of money. Leverage Risk. The Fund's use of leverage through
the issuance of Preferred Shares or other similar transactions
creates special risks for Common Shareholders. The Fund's use of
leverage may, during periods of rising interest rates, adversely
affect the Fund's income, distributions and total returns to
Common Shareholders. Leverage creates two major types of risks
for Common Shareholders: (1) the likelihood of greater volatility
of net asset value and market price of Common Shares (2) the
possibility either that Common Share income will fall if the
Preferred Share dividend rate rises, or that Common Share income
will fluctuate because the Preferred Share dividend rate varies.
By using leverage, the Fund will seek to obtain a higher return
for holders of Common Shares than if the Fund did not use
leverage. Leveraging is a speculative technique and there are
special risks involved. There can be no assurance that a
leveraging strategy will be used or that it will be successful
during any period in which it is employed. Loan Risk. Bank loans
involve credit risk, interest rate risk, liquidity risk, and
other risks. Corporate loans in which the Fund may invest may be
unrated and generally will not be registered with the Securities
and Exchange Commission or listed on a securities exchange.
Portfolio Security Issuer Risk. The value of portfolio securities
may decline for a number of reasons that directly relate to the
issuer, such as management performance, financial leverage and
performance and factors affecting the issuer's industry.
Management Risk. The Fund is subject to management risk because
it is an actively managed portfolio. The Manager will apply
investment techniques and risk analysis in making investment
decisions for the Fund, but there can be no guarantee that these
will produce the desired results. Foreign (Non-U.S.) Investment
Risk. Investing in foreign securities, including securities of
foreign governments, typically involves more risks than investing
in U.S. securities. These risks can increase the potential for
losses in the Fund and may include, among others, currency risks,
country risks, different trading practices, less government
supervision, less publicly available information, limited trading
markets and greater volatility. Developing Markets Risk. Foreign
investment risk may be particularly high to the extent that the
Fund invests in securities of issuers based in or securities
denominated in the currencies of developing or emerging market
countries. Derivatives Risk. The Fund may utilize a variety of
derivative instruments for hedging, investment or risk management
purposes. Derivatives are subject to a number of risks, such as
liquidity risk, interest rate risk, credit risk, leverage risk,
volatility risk and management risk. Counterparty Risk. If a
counterparty fails to perform its obligations under a derivative
contract due to financial difficulties, the Fund may obtain only
a limited recovery or may obtain no recovery in such circumstances.
Volatility Risk. The market values for some or all of the Fund's
holdings may be volatile. The Fund's use of leverage may increase
the volatility of the Fund's investment portfolio and could
result in larger losses than if the strategies were not used.
Mortgage-Related Risk. The Fund may invest in a variety of
mortgage-related securities. Rising interest rates tend to extend
the duration of mortgage-related securities, making them more
sensitive to changes in interest rates, and may reduce the market
value of the securities. In addition, mortgage-related securities
are subject to the risk that borrowers may pay off their
mortgages sooner than expected, which can reduce the Fund's
returns because the Fund may have to reinvest that money at lower
prevailing interest rates. Reinvestment Risk. If the Fund
reinvests the proceeds from matured, traded or called debt
obligations at lower interest rates, the market price or the
overall return of the Common Shares may decline. Call Risk. A
debt security may be prepaid (called) before maturity. If a debt
security is called, the Fund may have to replace it with a
lower-yielding security. A call of some or all of these
securities may lower the Fund's income and yield and its
distributions to shareholders. Liquidity Risk. The Fund may
invest in securities which are illiquid at the time of
investment. Illiquid securities may trade at a discount from
comparable, more liquid investments, and may be subject to wide
fluctuations in market value. Also, the Fund may not be able to
dispose of illiquid securities when that would be beneficial at a
favorable time or price. Income Risk. Because the Fund can
distribute only what it earns, the Fund's distributions to
shareholders may decline. Zero Coupon Securities Risk. Zero
coupon securities are especially sensitive to changes in interest
rates, and their prices generally are more volatile than debt
securities that pay interest periodically. Sovereign Issuer Risk.
Sovereign debt issued by foreign governments or other
government-related entities, including debt of developing or
"emerging market" issuers, is subject to several risks, such as,
the possibility that a sovereign country might prevent capital
from flowing across its borders; adverse political and economic
developments; the extent and quality of government regulation of
financial markets and institutions; different standards for
bankruptcy proceedings; the imposition of foreign withholding
taxes; and the expropriation or nationalization of foreign
issuers. Smaller Company Risk. Companies with smaller market
capitalizations may be subject to greater levels of credit,
market and issuer risk. Securities of smaller companies may trade
less frequently and in lesser volume than more widely held
securities, and their values may fluctuate more sharply than
other securities. Real Estate Risk. The Fund may be subject to
risks similar to those associated with the direct ownership of
real estate (in addition to securities markets risks), including
declines in the value of real estate, risks related to general
and local economic conditions, dependency on management skill,
increases in interest rates, and other general real estate risks.
Market Disruption and Geopolitical Risk. The war with Iraq, its
aftermath and the continuing occupation of Iraq are likely to
have a substantial impact on the U.S. and world economies and
securities markets. These events could also adversely affect
individual issuers and securities markets, interest rates,
auctions, secondary trading, ratings, credit risk, inflation and
other factors relating to the Common Shares. Anti-Takeover
Provisions. Certain provisions in the Fund's Declaration of Trust
could limit the ability of other entities or persons to acquire
control of the Fund or convert the Fund to open-end status, which
could have the effect of depriving the Common Shareholders of
opportunities to sell their Common Shares at a premium over the
then-current market price of the Common Shares.

The information in this document is not complete and may be
changed. A registration statement relating to these securities
has been filed with the Securities and Exchange Commission but
has not yet become effective. These securities may not be sold,
nor may offers to buy be accepted, until the registration
statement is effective. This document is not an offer to sell
these securities and is not soliciting an offer to buy these
securities, nor shall there be any sale of these securities in
any state where the offer or sale is not permitted. This is not
an offering, which may be made only by a final prospectus. The
final prospectus should be read carefully before investing.
Please consult the preliminary prospectus for information
regarding the Fund, including investment objectives and
strategies, risks, charges and expenses and other information.
Upon effectiveness of the registration statement, these
securities will be offered and sold only by the Fund's
underwriters and their selected dealers as described in the
prospectus. For a final prospectus, please call your financial
advisor or 1-800/DIAL BEN(R) (1-800/342-5236).

Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and UBS Securities, LLC are acting as the lead
underwriters in connection with this offering.

FTF B 07/03



                         TABLE OF CONTENTS
                            (continued)
                                                               PAGE




                         TABLE OF CONTENTS

                                                               PAGE






                          Part C - Other Information

Item 24. Financial Statements and Exhibits

(1) Financial Statements: Registrant has not conducted any business as of the
date of this filing, other than in connection with its organization.

(2) Exhibits

(a) Charter

      (1) Amended Certificate of Trust dated June 19, 2003 - filed herewith.

      (2) Amended and Restated Agreement and Declaration of Trust dated June
19, 2003 - filed herewith.

(b) Amended and Restated By-Laws of Registrant dated June 19, 2003 - filed
herewith.

(c) Voting Trust Agreement - none.

(d)   (1) Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Agreement and Declaration of Trust -  filed herewith.

      (2) Article II (Meetings of Shareholders) of the Bylaws - filed herewith.

 (e) Form of Dividend Reinvestment Plan - filed herewith.

 (f) Long-Term Debt Instruments - none.

(g) Form of Investment Advisory Agreement between Registrant and Franklin
Advisers, Inc. - filed herewith.

(h)   (1) Form of Underwriting Agreement - to be filed.

      (2) Form of Master Selected Dealer Agreement - to be filed.

      (3) Form of Master Agreement Among Underwriters - to be filed.

      (4) Form of Additional Compensation Agreement - to be filed.

(i) Bonus, Profit Sharing, Pension Plans - not applicable.

(j) Form of Custody Agreement - filed herewith.

(k) Other Material Contracts

      (1) Form of Fund Administration Agreement between the Registrant and
Franklin Templeton Services, LLC -- filed herewith.

      (2) Form of Organizational and Offering Expenses Reimbursement Agreement
between Registrant and Franklin Advisers, Inc. - to be filed.

(l) Opinion and Consent of Paul, Hastings, Janofsky & Walker LLP - to be
filed.

(m) Non-Resident Officers/Directors - none.

(n) Other Opinions and Consents - Consent of Registrant's independent
accounts - to be filed.

(o) Omitted Financial Statements - none.

(p) Subscription Agreement - to be filed.

(q) Model Retirement Plans - none.

(r) Code of Ethics - filed herewith.

(s) Power of Attorney - filed herewith.

Item 25. Marketing Arrangements - to be filed.

Item 26. Other Expenses of Issuance and Distribution - to be completed by
amendment.

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

Securities and Exchange Commission Fees    $
Blue Sky Fees                              $
Printing and Engraving Expenses            $
Legal Fees                                 $
Listing Fees                               $
Audit Fees                                 $
Accounting Expenses                        $
Transfer Agent Fees                        $
Miscellaneous Expenses                     $
Total                                      $

Item 27. Persons Controlled by or Under Common Control with Registrant -
none.

Item 28. Number of Holders of Securities as of July 23, 2003

TITLE OF CLASS                   NUMBER OF RECORD HOLDERS
Common Shares                    None

Item 29. Indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to Trustees, officers and controlling
persons of the Registrant 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 Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling
person in connection with 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 is against public policy as expressed
in the 1933 Act and will be governed by the final adjudication of such issue.

Reference is made to Article VII of the Registrant's Agreement and
Declaration of Trust, which is incorporated by reference herein.

Item 30. Business and Other Connections of Investment Adviser.

Franklin Advisers, Inc. (the "Adviser"), an indirect, wholly owned subsidiary
of Franklin Resources, Inc., serves as the Registrant's investment adviser.
The officers of the Adviser also serve as officers and/or directors/trustees
for the Adviser's corporate parent, Franklin Resources, Inc. and/or other
investment companies in Franklin Templeton Investments.

Part B and Schedules A and D of Form ADV of the Adviser (SEC File
No. 801-26292), incorporated herein by reference, sets forth the officers of
the Adviser and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers during the
past two years.

Item 31. Location of Accounts and Records.

The accounts, books or 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 kept by the Registrant or its shareholder
services agent, PFPC, Inc., at P.O. Box 43027, Providence, RI 02940-3027.

Item 32. Management Services - not applicable.

Item 33. Undertakings.

 (1) Registrant undertakes to suspend the offering of its Common Shares until
it amends the prospectus filed herewith if (1) subsequent to the effective
date of its registration statement, the net asset value declines more than 10
percent from its net asset value as of the effective date of the registration
statement, or (2) the net asset value increases to an amount greater than its
net proceeds as stated in the prospectus.

 (2) Not Applicable.

 (3) Not Applicable.

 (4) Not Applicable.

 (5) Registrant undertakes that:

      (a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective; and

      (b) For the purpose of determining any liability under the Securities
Act of 1933, 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 the securities at that time shall be
deemed to be the initial bona fide offering thereof.

 (6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional Information.



                                  SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Mateo, and the
State of California, on the 24th day of July, 2003.

                     FRANKLIN TEMPLETON LIMITED DURATION INCOME TRUST

                     By:  /S/  MURRAY L. SIMPSON
                          -----------------------------------
                          Murray L. Simpson
                          Vice President and Secretary

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

SIGNATURE                  TITLE                  DATE

CHRISTOPHER MOLUMPHY       President & Chief      July 24, 2003
--------------------       Executive Officer
Christopher Molumphy*      - Investment
                           Management


JIMMY D. GAMBILL           Senior Vice            July 24, 2003
----------------           President & Chief
Jimmy D. Gambill*          Executive Officer
                           - Finance and
                           Administration

KIMBERLEY MONASTERIO       Treasurer and          July 24, 2003
--------------------       Chief Financial
Kimberley Monasterio*      Officer


CHARLES B. JOHNSON         Chairman of the        July 24, 2003
------------------         Board of Trustees
Charles B. Johnson


ROBERT F. CARLSON          Trustee                July 24, 2003
-----------------
Robert F. Carlson


HARRIS J. ASHTON           Trustee                July 24, 2003
----------------
Harris J. Ashton


S. JOSEPH FORTUNATO        Trustee                July 24, 2003
------------------
S. Joseph Fortunato


FRANK W.T. LAHAYE          Trustee                July 24, 2003
-----------------
 Frank W.T. LaHaye


GORDON S. MACKLIN          Trustee                July 24, 2003
-----------------
Gordon S. Macklin

FRANK H. ABBOTT, III       Trustee                July 24, 2003
--------------------
Frank H. Abbott, III


RUPERT H. JOHNSON, JR.     Trustee                July 24, 2003
----------------------
Rupert H. Johnson, Jr.


MARTIN L. FLANAGAN         Trustee                July 24, 2003
------------------
Martin L. Flanagan

*By:  /S/ MURRAY L. SIMPSON
         Murray L. Simpson, Attorney-in-Fact
         (Pursuant to Power of Attorney filed herewith)

                               INDEX TO EXHIBITS


EXHIBIT    EXHIBIT NAME
(a)(1)     Amended Certificate of Trust
(a)(2)     Amended and Restated Agreement and Declaration of
           Trust
(b)        Amended and Restated Bylaws
(g)        Form of Investment Advisory Agreement between
           Registrant and Franklin Advisers, Inc.
(j)        Form of Custody Agreement
(k)(1)     Form of Fund Administration Agreement between the
           Registrant and Franklin Templeton Services, LLC
(r)        Code of Ethics
(s)       Power of Attorney


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