Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher &
Flom LLP
Four Times Square
New York, New York 10036
(212) 735-3000 

James E. McKee, Esq.
The Gabelli Dividend & Income Trust
One Corporate Center
Rye, New York 10580-1422
(914) 921-5100

Sarah E. Cogan, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000

N-2 Item Number

Location in Part A (Caption)

Part A – Information Required in a Prospectus

1.

Outside Front Cover

Outside Front Cover Page

2.

Cover Pages, Other Offering Information

Outside Front Cover Page; Inside Front Cover Page

3.

Fee Table and Synopsis

Summary

4.

Financial Highlights

Financial Highlights

5.

Plan of Distribution

Outside Front Cover Page; Prospectus Summary; Underwriting

6.

Selling Shareholders

Not Applicable

7.

Use of Proceeds

Use of Proceeds; Investment Objective and Policies

8.

General Description of the Registrant

Outside Front Cover Page; Prospectus Summary; The Fund; Capitalization Investment Objective and Policies; Risk Factors & Special Considerations; How the Fund Manages Risk; Description of the Series D Preferred and Series E Auction Rate Preferred; Anti-takeover Provisions of the Fund’s Governing Documents

9.

Management

Outside Front Cover Page; Prospectus Summary; Management of the Fund; Custodian, Transfer Agent, Auction Agent, and Dividend-Disbursing Agent

10.

Capital Shares, Long-Term Debt, and Other Securities

Outside Front Cover Page; Prospectus Summary; Investment Objective and Policies; Description of the Series D Preferred and Series E Auction Rate Preferred; Authorized and Outstanding Shares ; Taxation

11.

Defaults and Arrears on Senior Securities

Not Applicable

12.

Legal Proceedings

Not Applicable

13.

Table of Contents of the Statement of Additional Information

Table of Contents of the Statement of Additional Information

Part B – Information Required in a Statement of Additional Information

14.

Cover Page

Outside Front Cover Page

15.

Table of Contents

Outside Front Cover Page

16.

General Information and History

Not Applicable 

17.

Investment Objective and Policies

Investment Objective and Policies; Investment Restrictions

18.

Management

Management of the Fund

19.

Control Persons and Principal Holders of Securities

Not Applicable

20.

Investment Advisory and Other Services

Management of the Fund

21.

Portfolio Managers

Management of the Fund

22.

Brokerage Allocation and Other Practices

Portfolio Transactions

23.

Tax Status

Taxation

24.

Financial Statements

Not Applicable 

Signatures 

Signature Page 

Series D
Cumulative
Preferred 
Per Share

Total

Series E
Auction Rate
Preferred
Per Share

Total

Public Offering Price⁽¹⁾

$

$

$

$

Underwriting Discount⁽²⁾

$

$

$

$

Proceeds to the Fund (before expenses)⁽³⁾

$

$

$

$

(1)

Plus accumulated distributions, if any, from                  .

(2)

The Fund and the Invesment Adviser have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended.

(3)

Offering expenses payable by the Fund (excluding underwriting discount) are estimated at $475,000.

Citigroup

Merrill Lynch & Co.

A. G. Edwards

Gabelli & Company, Inc.

Page

Summary

1

Financial Highlights

21

Use of Proceeds

24

The Fund

24

Capitalization

25

Investment Objective and Policies

26

Risk Factors and Special Considerations

34

How the Fund Manages Risk

42

Management of the Fund

44

Portfolio Transactions

47

Dividends and Distributions

47

Description of Series D Preferred and Series E Auction Rate Preferred

48

The Auction of Series E Auction Rate Preferred

59

Description of Capital Stock and Other Securities

63

Taxation

65

Anti-Takeover Provisions of the Fund’s Governing Documents

68

Custodian, Transfer Agent, Auction Agent, and Dividend-Disbursing Agent

69

Underwriting

70

Legal Matters

72

Experts

72

Additional Information

72

Privacy Principles of the Fund

72

Special Note Regarding Forward-Looking Statements

73

Table of Contents of the Statement of Additional Information

74

Appendix A - Corporate Bond Ratings

A-1

The Fund

The Fund is a non-diversified, closed-end management investment company organized under the laws of the State of Delaware on August 20, 2003. The Fund’s outstanding common shares, par value $0.001 per share, are listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “GDV.” As of September 30, 2005, the net assets of the Fund attributable to its common shares were $1,793,187,157. As of September 30, 2005, the Fund had outstanding 84,697,505 common shares, 3,200,000 5.875% Series A Cumulative Preferred Shares liquidation preference $25 per share (the “Series A Preferred”), 4,000 Series B Auction Market Preferred Shares liquidation preference $25,000 per share (the “Series B Auction Market Preferred”) and 4,800 Series C Auction Market Preferred  Shares liquidation preference $25,000 per share (the “Series C Auction Market Preferred”). The Series A Preferred, Series B Auction Market Preferred and Series C Auction Market Preferred (the “Existing Preferred”)  have the same seniority with respect to distributions and liquidation preference.

The Offering

The Fund offers by this prospectus, in the aggregate, $                  of preferred shares of either Series D Preferred or ARS, or a combination of both series. The Series D Preferred and the ARS are being offered by a group of underwriters led by  Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.  Upon issuance, the Series D Preferred and the ARS will have equal seniority with respect to distributions and liquidation preference to the Fund’s other outstanding preferred shares. See “Description of the Series D Preferred and Series E Auction Rate Preferred.”

Series D Preferred. The Fund is offering          shares of     % Series D Preferred, par value $0.001 per share, liquidation preference $25 per share, at a purchase price of $25 per share. Distributions on the shares of Series D Preferred will accumulate from the date on which such shares are issued. The Series D Preferred have been approved for listing on the NYSE and it is anticipated that trading of the Series D Preferred on the NYSE will commence within 30 days from the date of this prospectus.

Series E Auction Rate Preferred. The Fund is offering        shares of ARS, par value $0.001 per share, liquidation preference $25,000 per share at a purchase price of $25,000 per share, plus distributions, if any, that have accumulated from the commencement date of the dividend period during which such ARS are issued. The ARS will not be listed on an exchange. Instead, investors may buy or sell ARS in an auction by submitting orders to broker-dealers that have entered into an agreement with the auction agent.

Generally, investors in Series D Preferred or ARS will not receive certificates representing ownership of their shares. The Depository Trust Company (“DTC”), any successor or its nominee for the account of the investor’s broker-dealer will maintain record ownership of the preferred shares in book-entry form. An investor’s broker-dealer, in turn, will maintain records of that investor’s beneficial

ownership of preferred shares. 

Investment Objective

The Fund’s investment objective is to provide a high level of total return on its assets with an emphasis on dividends and income. No assurance can be given that the Fund will achieve its investment objective. The Fund will attempt to achieve its investment objective by investing, under normal market conditions, at least 80% of its assets in dividend paying securities (such as common and preferred stock) or other income producing securities (such as fixed-income securities and securities that are convertible into common stock). In addition, under normal market conditions, at least 50% of the Fund’s assets will consist of dividend paying equity securities. The Fund may invest up to 35% of its total assets in the securities of non-U.S. issuers and up to 25% of its total assets in securities of issuers in a single industry. There is no minimum credit rating for fixed-income debt securities in which the Fund may invest, although the Fund will not invest more than 10% of its total assets in fixed-income nonconvertible securities rated in the lower rating categories of recognized statistical rating agencies.   The Fund’s investments in the lower rating categories are typically those rated “BB” by S&P or “Ba” by Moody’s or unrated securities of comparable quality, all of which are commonly referred to as “junk bonds.”

The Investment Adviser’s investment philosophy with respect to both equity and fixed-income debt securities is to identify assets that are selling in the public market at a discount to their private market value. The Investment Adviser defines private market value as the value informed purchasers are willing to pay to acquire assets with similar characteristics. In making equity selections, the Fund’s Investment Adviser looks for securities that have a superior yield and capital gains potential. See “Investment Objective and Policies.” 

Dividends and Distributions

Series D Preferred. Distributions on the Series D Preferred, at the annual rate of    % of its $25 per share liquidation preference, are cumulative from the original issue date and are payable, when, as and if declared by the Board of Trustees of the Fund, out of funds legally available therefor, quarterly on March 26,  June 26,  September 26, and  December 26  in each year, commencing on December 26, 2005. 

Series E Auction Rate Preferred. The holders of ARS are entitled to receive cash distributions, stated at annual rates of its $25,000 per share liquidation preference, that will vary from dividend period to dividend period. The table below shows the dividend rate, the dividend payment date and the number of days for the initial dividend period on the ARS.

Initial
Dividend
Rate

Dividend Payment
Date for Initial
Dividend Period

Number of Days
of Initial
Dividend Period

Series E Auction Rate Preferred

%

   , 2005

For subsequent dividend periods, the ARS will make distributions based on a rate set at auctions, normally held weekly. In most instances, distributions are payable weekly, on the first business day following the end of the dividend period. If the day on which distributions otherwise would be paid is not a business day, then distributions will be made on the first business day after the end of the dividend period. The Fund may, subject to certain conditions, designate special dividend periods of more (or less)

than seven days. The dividend payment date for any such special dividend period will be set out in the notice designating the special dividend period. Distributions on shares of the ARS  will be cumulative from the date such shares are issued and will be paid out of legally available funds. 

Any designation of a special dividend period will be effective only if, among other things, proper notice has been given, the auction immediately preceding the special dividend period was not a failed auction and the Fund has confirmed that it has assets with an aggregate discounted value at least equal to the Basic Maintenance Amount (as described under “Description of the Series D Preferred and Series E Auction Rate Preferred — Rating Agency Guidelines”). See “Description of the Series D Preferred and Series E Auction Rate Preferred — Distributions on the Series E Auction Rate Preferred” and “The Auction of Series E Auction Rate Preferred.”

There is no minimum rate with respect to any dividend period. There is a maximum rate. The maximum rate for any dividend period other than a default period will be the greater of (i) the applicable percentage of the reference rate set forth in the table below and (ii) the applicable spread set forth in the table below plus the reference rate. The reference rate is the applicable LIBOR Rate (for a dividend period or a special dividend period of fewer than 365 days), or the applicable Treasury Index Rate (for a special dividend period of 365 days or more). The applicable percentage and applicable spread will be determined based on the lower of the credit ratings assigned to the ARS by Moody’s and S&P.

The applicable percentages and applicable spreads are as follows:

Credit Ratings

Applicable

Applicable

Moody’s

S&P

Percentage

Spread

Aaa

AAA

150

%

1.50

%

Aa3 to Aa1

AA– to AA+

250

%

2.50

%

A3 to A1

A– to A+

350

%

3.50

%

Baa1  or lower

BBB+ or lower

550

%

5.50

%

Assuming the Fund maintains an “Aaa” and “AAA” rating on the ARS, the practical effect of the different methods used to determine the maximum applicable rate is shown in the table below:

Reference
Rate

Maximum
Applicable Rate
Using the
Applicable
Percentage

Maximum
Applicable Rate
Using the
Applicable
Spread

Method
Used to
Determine
the
Maximum
Applicable
Rate

1%

1.50%

2.50%

Spread

2%

3.00%

3.50%

Spread

3%

4.50%

4.50%

Either

4%

6.00%

5.50%

Percentage

5%

7.50%

6.50%

Percentage

6%

9.00%

7.50%

Percentage

See “Description of the Series D Preferred and Series E Auction Rate Preferred  — Distributions on the Series E Auction Rate Preferred — Maximum Rate.” For example, calculated as of December 31, 2004 and June 30, 2005, respectively, the maximum rate for the ARS (assuming a rating of “Aaa” by Moody’s and “AAA” by S&P) would have been approximately    % and    %, for dividend periods of 90 days, and approximately    % and    % for dividend periods of two years.⁽¹⁾ There is no minimum rate with respect to any dividend period.

Preferred Share  Distributions. Under current law, all preferred shares of the Fund must have the same seniority with respect to distributions. Accordingly, no full distribution will be declared or paid on any series of preferred shares of the Fund for any dividend period, or part thereof, unless full cumulative dividends due through the most recent dividend payment dates for all series of outstanding preferred shares of the Fund are declared and paid. If full cumulative distributions due have not been declared and made on all outstanding preferred shares of the Fund ranking on a parity with the Series D Preferred and the ARS as to distributions, any distributions on such preferred shares (including any outstanding Series D Preferred and ARS) will be made as nearly pro rata as possible in proportion to the respective amounts of distributions accumulated but unmade on each such series of preferred shares on the relevant dividend date.

In the event that for any calendar year the total distributions on the Fund’s preferred shares exceed the Fund’s ordinary income and net capital gain allocable to those shares, the excess distributions will generally be treated as a tax-free return of capital (to the extent of the shareholder’s tax basis in his or her shares). The amount treated as a tax-free return of capital will reduce a shareholder’s adjusted tax basis in his or her preferred shares, thereby increasing the shareholder’s potential gain or reducing his or her potential loss on the sale of the shares.

Common Share Distributions. In order to allow its holders of common shares to realize a predictable, but not assured, level of cash flow and some liquidity periodically on their investment without having to sell shares, the Fund has adopted a policy, which may be changed at any time by the Board of Trustees, of paying distributions on its common shares of $0.10 per month, which is equal to an annual rate of 6% of the original offering price per common share. A portion of the Fund’s common share distributions since inception have 

included or have been estimated to include a return of capital. The composition of distributions is based on earnings as of the record date for the distribution. The actual composition of the distribution may change based on the Fund’s investment activity through December 31, 2005. 

Auction Procedures

You may buy, sell or hold ARS in the auction. The following is a brief summary of the auction procedures, which are described in more detail elsewhere in this prospectus and in the SAI. These auction procedures are complicated, and there are exceptions to these procedures. Many of the terms in this section have a special meaning as set forth in this prospectus or the SAI.

Provided that the Fund has not defaulted on its payment obligations to holders of the ARS, the auctions determine the dividend rate for the ARS, except that no dividend rate resulting from the auction process will be higher than the then-maximum rate. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Distributions on the Series E Auction Rate Preferred.”

If you own shares of ARS, you may instruct your broker-dealer to enter one of three kinds of orders in the auction with respect to your shares: sell, bid, and hold.

If you enter a sell order, you indicate that you want to sell ARS at $25,000 per share, no matter what the next dividend period’s rate will be.

If you enter a bid order, which must specify a dividend rate, you indicate that you want to purchase or hold the indicated number of shares of ARS at $25,000 per share if the dividend rate for the ARS for the next dividend period is not less than the rate specified in the bid. A bid order will be deemed an irrevocable offer to sell ARS if the next dividend period’s rate is less than the rate you specify.

If you enter a hold order you indicate that you want to continue to own ARS, no matter what the next dividend period’s rate will be.

You may enter different types of orders for different portions of your ARS. All orders must be for whole shares. All orders you submit are irrevocable after the submission deadline. There is a fixed number of ARS, and the dividend rate likely will vary from auction to auction depending on the number of bidders, the number of shares the bidders seek to buy, the rating of the ARS and general economic conditions including current interest rates. If you own ARS and submit a bid order specifying a rate that is higher than the then-maximum rate, your bid order will be treated as a sell order. If you do not enter an order, the broker-dealer will ordinarily assume that you want to continue to hold your ARS, but if you fail to submit an order and the dividend period is a special dividend period, the broker-dealer will treat your failure to submit an order as a sell order.

If you do not then own ARS, or want to buy more shares, you may instruct a broker-dealer to enter a bid order to buy shares in an auction at $25,000 per share at or above the dividend rate you specify. If you bid for shares you do not already own at a rate higher than the then-maximum rate, your bid will not be considered.

Broker-dealers will submit orders from existing and potential holders of ARS to the auction agent. Neither the Fund nor the auction agent will be responsible for a broker-dealer’s failure to submit orders from existing or potential holders of ARS. A broker-dealer’s failure to submit orders for ARS held by it or its customers will be treated in the same manner as a holder’s failure to submit an order to the broker-dealer. A broker-dealer may submit orders to the auction agent for its own account provided that the broker-dealer is not an affiliate of the Fund. If a broker-dealer submits an order for its own account in any auction, it may have knowledge of orders placed through it in that auction and therefore have an advantage over other bidders, but such broker-dealer would not have knowledge of orders submitted by other broker-dealers in that auction. As a result of bidding by the broker-dealer in an auction, the auction rate may be higher or lower than the rate that would have prevailed had the broker-dealer not bid. The Fund may not submit an order in any auction.

The auction agent after each auction for the ARS will pay to each broker-dealer, from funds provided by the Fund, a service charge equal to, in the case of any auction immediately preceding a dividend period of less than one year, the product of (i) a fraction, the numerator of which is the number of days in such dividend period and the denominator of which is 360, times (ii) ¼ of 1%, times (iii) $25,000, times (iv) the aggregate number of ARS placed by such broker-dealer at such auction. In the case of any auction immediately preceding a dividend period of one year or longer, the service charge shall be determined by mutual consent of the Fund and any such broker-dealer and shall be based upon a selling concession that would be applicable to an underwriting of fixed or variable rate preferred shares with a similar final maturity or variable rate dividend period, respectively, at the commencement of the dividend period with respect to such action. A broker-dealer may share a portion of any such fees with non-participating broker-dealers that submit orders to the broker-dealer for an auction that are placed by that broker-dealer in such auction.

There are sufficient clearing bids for shares of ARS in an auction if the number of ARS subject to bid orders by broker-dealers for potential holders with a dividend rate equal to or lower than the then-maximum rate is at least equal to the number of ARS subject to sell orders and the number of shares of ARS subject to bids specifying rates higher than the then-maximum rate for the ARS submitted or deemed submitted to the auction agent by broker-dealers for existing holders. If there are sufficient clearing bids for shares of ARS, then the dividend rate for the next dividend period will be the lowest rate submitted which, taking into account that rate and all lower rate bids submitted from existing and potential holders, would result in existing and potential holders owning all the ARS available for purchase in the auction. 

If there are not sufficient clearing bids for shares of ARS, then the auction is considered to be a failed auction, and the dividend rate for the next period will be the maximum rate. If the Fund has declared a special dividend period and there are not sufficient clearing bids, then the special dividend rate will not be effective and the dividend rate for the next period will be the same as during the current rate period. In either event, existing holders that have submitted sell orders (or are treated as having submitted sell orders) may not be able to sell any or all of the ARS for which they submitted sell orders.

The auction agent will not consider a bid above the then-maximum rate. The purpose of the maximum rate is to place an upper limit on distributions with respect to the ARS and in so doing to help protect the earnings available to pay distributions on the Fund’s common shares, and to serve as the dividend rate in the event of a failed auction (that is, an auction where there are more shares of ARS offered for sale than there are buyers for those shares). 

If broker-dealers submit or are deemed to submit hold orders for all outstanding ARS, the auction is considered an “all hold” auction and the dividend rate for the next dividend period will be the “all hold rate,” which is 90% of the then-current reference rate. This rate may be less than the rate that would have been determined if an auction had occurred.

The auction procedures include a pro rata allocation of each share of ARS for purchase and sale. This allocation process may result in an existing holder selling, or a potential holder buying, fewer shares than the number of ARS in its order. If this happens, broker-dealers that have designated themselves as existing holders or potential holders in respect of customer orders will be required to make appropriate pro rata allocations among their respective customers.

Settlement of purchases and sales will be made through DTC on the next business day after the auction date (which also is a dividend payment date). Purchasers will pay for their ARS through broker-dealers in same-day funds to DTC against delivery to the broker-dealers. DTC will make payment to the sellers’ broker-dealers in accordance with its normal procedures, which require broker-dealers to make payment against delivery in same-day funds. As used in this prospectus, a business day is a day on which the NYSE is open for trading, and which is not a Saturday, Sunday or any other day on which banks in New York City are authorized or obligated by law to close.

The first auction for ARS will be held on    , 2005, the business day preceding the dividend payment date for the initial dividend period. Thereafter, except during special dividend periods, auctions for ARS normally will be held every  Wednesday (or the next preceding business day if Wednesday is a holiday), and each subsequent dividend period for the ARS normally will begin on the following Thursday.

Tax Treatment of Preferred

Share Distributions

The Fund expects that distributions on the Series D Preferred and the ARS will consist of (i) long-term capital gain (gain from the sale of a capital asset held longer than 12 months), (ii) qualified dividend income (dividend income from certain domestic and foreign corporations) and (iii) investment company taxable income (other than qualified dividend income), including interest income, short-term capital gain and income from certain hedging and interest rate transactions. For individuals, the maximum federal income tax rate on long-term capital gain is currently 15%, on qualified dividend income is currently 15%, and on ordinary income (such as distributions from investment company taxable income that are not eligible for treatment as qualified dividend income) is currently 35%. These tax rates are scheduled to apply through 2008. We cannot assure you, however, as to what percentage of the distributions paid on the Series D Preferred or the ARS will consist of long-term capital gain

and qualified dividend income, which are taxed at lower rates for individuals than ordinary income. For a more detailed discussion, see “Taxation.”

Rating and Asset Coverage Requirements

Series D Preferred. In order to be issued, the Series D Preferred must receive a rating of “Aaa” from Moody’s. The Series D Statement of Preferences contains certain tests that the Fund must satisfy to obtain and maintain a rating of “Aaa” from Moody’s on the Series D Preferred. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Rating Agency Guidelines.”

Series E Auction Rate Preferred. In order to be issued, the ARS must receive both a rating of “Aaa” from Moody’s and a rating of “AAA” from S&P. As with the Series D Preferred, the Series E Statement of Preferences contains certain tests that the Fund must satisfy to obtain and maintain a rating of “Aaa” from Moody’s and “AAA” from S&P. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Rating Agency Guidelines.”

Asset Coverage Requirements. Under the asset coverage tests to which each of the Series D Preferred and the ARS is subject, the Fund is required to maintain (i) assets having in the aggregate a discounted value greater than or equal to a Basic Maintenance Amount (as described under “Description of the Series D Preferred and Series E Auction Rate Preferred — Rating Agency Guidelines”) for each such series calculated pursuant to the applicable rating agency guidelines and (ii) an asset coverage of at least 200% (or such higher or lower percentage as may be required at the time under the Investment Company Act of 1940 (the “1940 Act”)) with respect to all outstanding preferred shares of the Fund, including the Series D Preferred and the ARS. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Asset Maintenance Requirements.”

The Fund estimates that if the shares offered hereby had been issued and sold as of September 30, 2005, the asset coverage under the 1940 Act would have been approximately 458% immediately following such issuance (and after giving effect to the deduction of the estimated underwriting discounts of $4,150,000 and estimated offering expenses for such shares of $475,000). The asset coverage would have been computed as follows:

Value of Fund assets less liabilities
not constituting senior securities

$2,288,562,157

Senior securities representing indebtedness
plus liquidation preference of each class of preferred shares

=

$500,000,000

=

458%

The Statement of Preferences for each of the Series D Preferred and the ARS, which contain the technical provisions of the various components of the asset coverage tests, will be filed as exhibits to this registration statement and may be obtained through the web site of the Securities and Exchange Commission (http://www.sec.gov).

Mandatory Redemption

The Series D Preferred and the ARS may be subject to mandatory redemption by the Fund to the extent the Fund fails to maintain the asset

coverage requirements in accordance with the rating agency guidelines or the 1940 Act described above and does not cure such failure by the applicable cure date. If the Fund redeems preferred shares mandatorily, it may, but is not required to, redeem a sufficient number of such shares so that after the redemption the Fund exceeds the asset coverage required by the guidelines of each of the applicable rating agencies and the 1940 Act by 10%.

With respect to the Series D Preferred, any such redemption will be made for cash at a redemption price equal to $25 per share, plus an amount equal to accumulated and unmade distributions (whether or not earned or declared) to the redemption date.

With respect to the ARS, any such redemption will be made for cash at a redemption price equal to $25,000 per share, plus an amount equal to accumulated but unmade distributions (whether or not earned or declared) to the redemption date, plus, in the case of the ARS having a dividend period of more than one year, any applicable redemption premium determined by the Board of Trustees. See “Description of the Series D Preferred and the Series E Auction Rate Preferred — Redemption.”

In the event of a mandatory redemption, such redemption will be made from the Series D Preferred, the ARS or other preferred shares of the Fund in such proportions as the Fund may determine, subject to the limitations of the Governing Documents and 1940 Act. 

Optional Redemption

Subject to the limitations of the Governing Documents and 1940 Act, the Fund may, at its option, redeem the Series D Preferred and the ARS as follows:

Series D Preferred. Commencing          , 2010 and at any time thereafter, the Fund at its option may redeem the Series D Preferred, in whole or in part, for cash at a redemption price per share equal to $25, plus an amount equal to accumulated and unmade distributions (whether or not earned or declared) to the redemption date. If fewer than all of the shares of the Series D Preferred are to be redeemed, such redemption will be made pro rata in accordance with the number of such shares held. Prior to    , 2010 the Series D Preferred will be subject to optional redemption by the Fund at the redemption price only to the extent necessary for the Fund to continue to qualify for tax treatment as a regulated investment company. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Redemption — Optional Redemption of the Series D Preferred.” 

Series E Auction Rate Preferred. The Fund generally may redeem the ARS, in whole or in part, at its option at any time (usually on a dividend or distribution payment date), other than during a non-call period. The Fund may declare a non-call period during a dividend period of more than seven days. If fewer than all of the shares of the ARS are to be redeemed, such redemption will be made pro rata in accordance with the number of such shares held. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Redemption — Optional Redemption of the Series E Auction Rate Preferred.”

The redemption price per share of the ARS will equal $25,000, plus an amount equal to any accumulated but unmade distributions thereon (whether or not earned or declared) to the redemption date, plus, in the case of the ARS having a dividend period of more than one year, any redemption premium applicable during such dividend period.

See “Description of the Series D Preferred and Series E Auction Rate Preferred — Redemption — Optional Redemption of the Series E Auction Rate Preferred.”

Voting Rights

At all times, holders of the Fund’s outstanding preferred shares  (including the Series D Preferred and the ARS), voting as a single class, will be entitled to elect two members of the Fund’s Board of Trustees, and holders of the preferred shares and common shares, voting as a single class, will elect the remaining trustees. However, upon a failure by the Fund to make distributions on any of its preferred shares in an amount equal to two full years of distributions, holders of the preferred shares, voting as a single class, will have the right to elect additional trustees that would then constitute a simple majority of the Board of Trustees until all cumulative distributions on all preferred shares have been made or provided for.  Holders of outstanding Series D Preferred, ARS and any other preferred shares will vote separately as a class on certain other matters as required under the applicable Statement of Preferences, the Governing Documents and 1940 Act. Except as otherwise indicated in this prospectus and as otherwise required by applicable law, holders of Series D Preferred and ARS will be entitled to one vote per share on each matter submitted to a vote of shareholders and will vote together with holders of common shares and any other preferred shares as a single class. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Voting Rights.”

Liquidation Preference

The liquidation preference of the Series D Preferred is $25. The liquidation preference of the ARS is $25,000 per share. Upon liquidation, preferred shareholders will be entitled to receive the liquidation preference with respect to their preferred shares plus an amount equal to accumulated but unmade distributions with respect to such shares (whether or not earned or declared) to the date of liquidation. See “Description of the Series D Preferred and Series E Auction Rate Preferred — Liquidation Rights.”

Use of Proceeds

The Fund will use the net proceeds from the offering to purchase additional portfolio securities in accordance with its investment objective and policies. See “Use of Proceeds.”

Listing of the Series D Preferred

Prior to this offering, there has been no public market for the Series D Preferred. The Series D Preferred have been approved for listing on the NYSE and it is anticipated that trading of the Series D Preferred on the NYSE will commence within 30 days from the date of this prospectus. There can be no assurance that a secondary market will provide owners with liquidity.

Limitation on Secondary Market Trading of the Series E Auction Rate Preferred

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

Special Characteristics and Risks

Risk is inherent in all investing. Therefore, before investing in the Series D Preferred or the ARS you should consider the risks carefully. See “Risk Factors and Special Considerations.” 

Series D Preferred. Primary risks specially associated with an investment in the Series D Preferred include:

The market price for the Series D Preferred will be influenced by changes in interest rates, the perceived credit quality of the Series D Preferred and other factors. See “Risk Factors and Special Considerations — Special Risks of the Series D Preferred — Fluctuations in Market Price.”

Prior to the offering, there has been no public market for the Series D Preferred. The Series D Preferred have been approved for listing on the NYSE and it is anticipated that trading of the Series D Preferred on the NYSE will commence within 30 days from the date of this prospectus. During such 30-day period, the underwriters may make a market in the Series D Preferred, however, they have no obligation to do so. Consequently, the Series D Preferred may be illiquid during such period. No assurances can be provided that listing on any securities exchange or market making by the underwriters will result in the market for Series D Preferred being liquid at any time. See “Risk Factors and Special Considerations — Special Risks of the Series D Preferred — Illiquidity Risk.”

Series E Auction Rate Preferred. Primary risks specifically associated with an investment in ARS include:

You may not be able to sell your ARS at an auction if the auction fails, i.e., if there are more shares offered for sale than there are buyers for those shares. Also, if you place an order at an auction to retain ARS only at a specified rate that exceeds the rate set at the auction, you will not retain your shares. Additionally, if you place a hold order without specifying a rate below which you would not wish to continue to hold your shares and the auction sets a below-market rate, you will receive a lower rate of return on your shares than the market rate. Finally, the dividend period may be changed, subject to certain conditions and with notice to the holders of the affected series of ARS, which could also affect the liquidity of your investment. See “Risk Factors and Special Considerations — Special Risks of the Series E Auction Rate Preferred — Auction and Secondary Market Risk.”

If you try to sell your ARS between auctions, you may not be able to sell them for $25,000 per share or $25,000 per share plus accumulated distributions. If the Fund has designated a special dividend period of more than seven days, changes in interest rates could affect the price you would receive if you sold your shares in the secondary market. Broker-dealers that may maintain a secondary trading market for ARS are not required to maintain this market, and the Fund is not required to redeem ARS if either an auction or an attempted secondary market sale fails because of a lack of buyers. In addition, a broker-dealer may, in its own discretion, decide to sell ARS in the secondary market to investors at any time and at any price, including at prices equivalent to, below or above the par value of the ARS. The ARS are not listed on a stock exchange or the NASDAQ stock market.

If you sell your ARS  to a broker-dealer between auctions, you may receive less than the price you paid for the shares, especially when market interest rates have risen since the last auction or during a special dividend period. See “Risk Factors and Special Considerations — Special Risks of the Series E Auction Rate Preferred — Auction and Secondary Market Risk.”

Both the Series D Preferred and Series E Auction Rate Preferred. An investment in either the Series D Preferred or the ARS also includes the following primary risks:

You will have no right to require the Fund to repurchase or redeem your shares of Series D Preferred or ARS at any time.

The market value for the Series D Preferred and the ARS will be influenced by changes in interest rates, the perceived credit quality of the Series D Preferred or the ARS and other factors.

The credit rating on the Series D Preferred and the ARS could be reduced or withdrawn while an investor holds shares, and the credit rating does not eliminate or mitigate the risks of investing in the Series D Preferred and ARS. A reduction or withdrawal of the credit rating would likely have an adverse effect on the market value of the Series D Preferred and ARS.

The Fund may not meet the asset coverage requirements or earn sufficient income from its investments to make distributions on the Series D Preferred and/or the ARS.

The value of the Fund’s investment portfolio may decline, reducing the asset coverage for the Series D Preferred and the ARS. Further, if an issuer of a common stock in which the Fund invests experiences financial difficulties or if an issuer’s preferred stock or debt security is downgraded or defaults or if an issuer in which the Fund invests is affected by other adverse market factors, there may be a negative impact on the income and asset value of the Fund’s investment portfolio. In such circumstances, the Fund may be forced to mandatorily redeem shares of Series D Preferred and/or  ARS.

The Fund generally may redeem the ARS, in whole or in part, at its option at any time (usually on a dividend or distribution payment date), other than during a non-call period, and may redeem your Series D Preferred at any time after          , 2010, and may at any time redeem shares of either or both series to meet regulatory or rating agency requirements. Because of historically low interest rates, the current low cost of the ARS to the Fund may rise dramatically, which in turn may prompt the Fund to redeem the ARS earlier than it otherwise might. The Series D Preferred and the ARS are subject to redemption under specified circumstances and investors may not be able to reinvest the proceeds of any such redemption in an investment providing the same or a better rate than that of the Series D Preferred or the ARS. Subject to such circumstances, the Series D Preferred and the ARS are perpetual. 

The Series D Preferred and the ARS are not obligations of the Fund. The Series D Preferred and the ARS would be junior in respect of distributions and liquidation preference to any indebtedness incurred by the Fund, including any senior securities of the Fund representing debt. Although unlikely, precipitous declines in the value of the Fund’s assets could result in the Fund having insufficient assets to redeem all of the Series D Preferred and/or the ARS

for the full redemption price.

The Fund currently uses, and intends to continue to use, financial leverage for investment purposes by issuing preferred shares and senior securities representing debt. It is currently anticipated that, taking into account the Series D Preferred and the ARS being offered in this prospectus, the amount of leverage will represent approximately 22% of the Fund’s managed assets (as defined below). The Fund expects that depending on interest rates and available investment opportunities it will increase over time its financial leverage through the issuance of additional senior securities up to 33% of the Fund’s total assets including the proceeds of the Series D Preferred and the ARS. The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having a similar investment objective and policies. These include the possibility of greater loss and the likelihood of higher volatility of the net asset value of the Fund and the asset coverage for the Series D Preferred and the ARS. Such volatility may increase the likelihood of the Fund having to sell investments in order to meet its obligations to make distributions on the preferred shares or principal or interest payments on debt securities, or to redeem preferred shares or repay debt, when it may be disadvantageous to do so. Also, if the Fund is utilizing leverage, a decline in net asset value could affect the ability of the Fund to make common share distributions and such a failure to make distributions could result in the Fund ceasing to qualify as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”). See “Taxation.”

Because the fee paid to the Investment Adviser will be calculated on the basis of the Fund’s assets, which includes for this purpose assets attributable to the aggregate net asset value of the common shares plus assets attributable to any outstanding senior securities, with no deduction for the liquidation preference of any preferred shares, the fee may be higher when leverage in the form of preferred shares is utilized, giving the Investment Adviser an incentive to utilize such leverage. However, the Investment Adviser has agreed to reduce the management fee on the incremental assets attributable to the Existing Preferred and the Series D Preferred or ARS during the fiscal year if the total return of the net asset value of common shares, including distributions and management fee subject to reduction for that year, does not exceed the stated dividend rate or corresponding swap rate of each particular series of preferred shares for the period. The Fund's total return on the net asset value of the common shares is monitored on a monthly basis to assess whether the total return on the net asset value of the common shares exceeds the stated dividend rate or corresponding swap rate of each particular series of preferred shares for the period. The test to confirm the accrual of the management fee on the assets attributable to each particular series of preferred shares is annual.  The Fund will accrue for the management fee on these assets during the fiscal year if it appears probable that the Fund will incur the management fee on those additional assets.  For the six months ended June 30, 2005, the Fund’s total return on the net asset value of the common shares exceeded the stated dividend rate or net swap expense of the Series C Auction Market Preferred.  Thus, management fees were accrued on these assets.  The Fund’s total return on the net asset value of the common shares did not exceed the stated dividend rate or net swap expense of the Series A Preferred and Series B Auction Market Preferred.  Thus, management fees with respect to the liquidation value of those preferred shares in the amount of $892,603 were not accrued. See “Risk Factors and Special Considerations — Risks Associated with both Series D Preferred and the Series E Auction Rate Preferred — Leverage Risk.” 

As provided in the 1940 Act, and subject to compliance with the Fund’s investment limitations, the Fund may issue senior securities representing debt. In the event the Fund were to issue such securities, the Fund’s obligations to make distributions and, upon liquidation of the Fund, liquidation payments in respect of its preferred shares would be subordinate to the Fund’s obligations to make any principal and interest payments due and owing with respect to its outstanding debt securities. Accordingly, the Fund’s issuance of senior securities representing debt would have the effect of creating special risks for the Fund’s preferred shareholders (including the holders of Series D Preferred and ARS) that would not be present in a capital structure that did not include such securities. See “Risk Factors and Special Considerations — Risks Associated with both Series D Preferred and Series E Auction Rate Preferred — Special Risks to Preferred Shares of Senior Securities Representing Debt.”

Restrictions imposed on the declaration and payment of dividends or other distributions to the holders of the Fund’s common shares and preferred shares, both by the 1940 Act and by requirements imposed by rating agencies, might impair the Fund’s ability to maintain its qualification as a regulated investment company for federal income tax purposes. While the Fund intends to redeem its preferred shares (including the Series D Preferred and the ARS) to the extent necessary to enable the Fund to distribute its income as required to maintain its qualification as a regulated investment company under the Code, there can be no assurance that such actions can be effected in time to meet the Code requirements. See “Taxation” in the SAI.

Certain of the underwriters have advised the Fund that they and various other broker-dealers and other firms that participate in the auction rate securities market received letters from the staff of the Securities and Exchange Commission in the spring of 2004. The letters requested that each of these firms voluntarily conduct an investigation regarding its respective practices and procedures in that market.  Pursuant to these requests, each underwriter conducted its own voluntary review and reported its findings to the staff of the Securities and Exchange Commission.  At the request of the staff of the Securities and Exchange Commission, these underwriters are engaging in discussions with the staff concerning its inquiry.  Neither they nor the Fund can predict the ultimate outcome of the inquiry or how that outcome will affect the market for the auction rate securities or the auctions.

The Fund has adopted a policy, which may be changed at any time by the Board of Trustees, of making a distribution on its common shares of $0.10 per month, which is equal to an annual rate of 6% of the original issue price of the common shares. In the event investment returns do not provide sufficient amounts to fund such distributions, the Fund may be required to return capital as part of such distribution, which may have the effect of decreasing the asset coverage per share with respect to the Fund’s Series D Preferred and ARS. A portion of the Fund’s distributions to date have included or have been estimated to include a return of capital. The composition of distributions is based on earnings as of the record date for the distribution. The actual composition of the distribution may change based on the Fund’s investment activity through the end of the year.

The Fund focuses its investments on dividend-paying common and preferred stocks that the Investment Adviser believes are undervalued or inexpensive relative to other investments. These types of securities may present risks in addition to the general risks associated with investing in common and preferred stocks including the risk of incorrectly estimating certain fundamental factors. In addition, during certain time periods market dynamics may strongly favor “growth” stocks of issuers that do not display strong fundamentals relative to market price based upon positive price momentum and other factors. See “Risk Factors and Special Considerations — Risks of Investing in the Fund  — Value Investing Risk.”

As a non-diversified, closed-end management investment company under the 1940 Act, the Fund may invest a greater portion of its assets in a more limited number of issuers than may a diversified fund, and accordingly, an investment in the Fund may, under certain circumstances, present greater risk to an investor than an investment in a diversified company. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Non-Diversified Status.” 

The Fund may invest up to 25% of its assets in the securities of companies principally engaged in a single industry. In the event the Fund makes substantial investments in a single industry, the Fund would become more susceptible to adverse economic or regulatory occurrences affecting that industry. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Industry Concentration Risk.”

Special risks associated with the Fund’s investing in preferred securities include deferral of distributions or dividend payments, in some cases the right of an issuer never to pay missed dividends, subordination, illiquidity, limited voting rights and redemption by the issuer. Because the Fund has no limit on its investment in non-cumulative preferred securities, the amount of distributions the Fund makes may be adversely affected if an issuer of a non-cumulative preferred stock held by the Fund determines not to pay dividends on such stock. There is no assurance that distributions on preferred stock in which the Fund invests will be declared or otherwise made. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Special Risks Related to Preferred Securities.”

The Fund has no limit on the amount of its net assets it may invest in unregistered and otherwise illiquid investments. The Fund currently does not intend to invest more than 15% of its total net assets in illiquid securities. Unregistered securities are securities that cannot be sold publicly in the United States without registration under the Securities Act of 1933. Unregistered securities generally can be resold only in privately negotiated transactions with a limited number of purchasers or in a public offering registered under the Securities Act of 1933. Considerable delay could be encountered in either event and, unless otherwise contractually provided for, the Fund’s proceeds upon sale may be reduced by the costs of registration or underwriting discounts. The difficulties and delays associated with such transactions could result in the Fund’s inability to realize a favorable price upon disposition of unregistered securities, and at times might make disposition of such securities impossible. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Illiquid Securities.”

The Fund may invest up to 35% of its total assets in foreign securities. Investing in securities of foreign companies (or foreign governments), which are generally denominated in foreign currencies, may involve certain risks and opportunities not typically associated with investing in domestic companies and could cause the Fund to be affected favorably or unfavorably by changes in currency exchange rates and revaluation of currencies. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Foreign Securities Risk.”

While the Fund intends to focus on the securities of established suppliers of accepted products and services, the Fund may also invest in smaller companies which may benefit from the development of new products and services. These smaller companies may present greater opportunities for capital appreciation, and may also involve greater investment risk than larger, more established companies. For example, smaller companies may have more limited product lines, market or financial resources, and their securities may trade less frequently and in lower volume than the securities of larger, more established companies. As a result, the prices of the securities of such smaller companies may fluctuate to a greater degree than the prices of securities of other issuers. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Smaller Companies.”

The Fund may invest in the securities of other investment companies to the extent permitted by law. To the extent the Fund invests in the common equity of investment companies, the Fund will bear its ratable share of any such investment company’s expenses, including management fees. The Fund will also remain obligated to pay management fees to the Investment Adviser with respect to the assets invested in the securities of other investment companies. In these circumstances, holders of the Fund’s common shares will be subject to duplicative investment expenses. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Investment Companies.”

The Fund may invest up to 10% of its total assets in fixed-income securities rated below investment grade by recognized statistical rating agencies or unrated securities of comparable quality. The prices of these lower grade securities 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. Securities of below investment grade quality are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default and are commonly referred to as “junk bonds.” See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Lower Grade Securities.”

The Fund may participate in certain derivative transactions. Such transactions entail certain execution, market, liquidity, hedging and tax risks. Participation in the options or futures markets and in currency exchange transactions involves investment risks and transaction costs to which the Fund would not be subject absent the use of these strategies. The Fund’s current intention  is to invest less than 25% of its total net assets in options or other derivative securities. If the Investment Adviser’s prediction of movements in the direction of the securities, foreign currency or interest rate markets is inaccurate, the consequences to the Fund may leave the Fund in a worse position than if it had not used such strategies. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Special Risks of Derivative Transactions.”

The Fund has entered into an interest rate swap transaction with respect to its outstanding Series B Auction Market Preferred. The Fund may enter into an interest rate swap or cap transaction with respect to its outstanding Series C Auction Market Preferred, and may enter into an interest rate swap or cap transaction with respect to all or a portion of the ARS. The use of interest rate swaps and caps is a highly specialized activity that involves certain risks to the Fund including, among others, counterparty risk and early termination risk. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Interest Rate Transactions.”

The Fund may seek to earn income by lending portfolio securities to broker-dealers or other institutional borrowers. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in the securities loaned if the borrower of the securities violates the terms of the loan or fails financially. The Fund currently does not intend to lend securities representing more than 33% of its total net assets. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Loans of Portfolio Securities.”

The Fund is subject to management risk because it is an actively managed portfolio. The Investment Adviser 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. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Management Risk.”

The Investment Adviser is dependent upon the expertise of Mr. Mario J. Gabelli in providing advisory services with respect to the Fund’s investments. If the Investment Adviser were to lose the services of Mr. Gabelli, its ability to service the Fund could be adversely affected. There can be no assurance that a suitable replacement could be found for Mr. Gabelli in the event of his death, resignation, retirement or inability to act on behalf of the Investment Adviser. See “Risk Factors and Special Considerations — Risks of Investing in the Fund — Dependence on Key Personnel.”

The Fund’s Governing Documents (as defined herein) include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to an open-end fund. See “Anti-Takeover Provisions of the Fund’s Governing Documents.” 

The Fund has elected and has qualified for, and intends to remain qualified for, federal income tax purposes as a regulated investment company. Qualification requires, among other things, compliance by the Fund with certain distribution requirements. Statutory limitations on distributions on the common shares if the Fund fails to satisfy the 1940 Act’s asset coverage requirements could jeopardize the Fund’s ability to meet such distribution requirements. The Fund presently intends, however, to purchase or redeem preferred shares to the extent necessary in order to maintain compliance with such asset coverage requirements. See “Taxation” for a more complete discussion of these and

other federal income tax considerations.

Management and Fees

Gabelli Funds, LLC serves as the Fund’s Investment Adviser and its fee is calculated on the basis of the Fund’s assets, which includes for this purpose assets attributable to the aggregate net asset value of the common shares plus assets attributable to any outstanding senior securities, with no deduction for the liquidation preference of any preferred shares.  The fee may be higher when leverage in the form of preferred shares is utilized, giving the Investment Adviser an incentive to utilize such leverage. However, the Investment Adviser has agreed to reduce the management fee on the incremental assets attributable to the Existing Preferred and the Series D Preferred or ARS during the fiscal year if the total return of the net asset value of the common shares, including distributions and management fee subject to reduction for that year, does not exceed the stated dividend rate or corresponding swap rate of each particular series of preferred shares for the period. The Fund's total return on the net asset value of the common shares is monitored on a monthly basis to assess whether the total return on the net asset value of the common shares exceeds the stated dividend rate or corresponding swap rate of each particular series of preferred shares for the period. The test to confirm the accrual of the management fee on the assets attributable to each particular series of preferred shares is annual.  The Fund will accrue for the management fee on these assets during the fiscal year if it appears probable that the Fund will incur the management fee on those additional assets.  For the six months ended June 30, 2005, the Fund’s total return on the net asset value of the common shares exceeded the stated dividend rate or net swap expense of the Series C Auction Market Preferred.  Thus, management fees were accrued on these assets.  The Fund’s total return on the net asset value of the common shares did not exceed the stated dividend rate or net swap expense of the Series A Preferred and Series B Auction Market Preferred.  Thus, management fees with respect to the liquidation value of those preferred shares in the amount of $892,603 were not accrued. See “Risk Factors and Special Considerations — Risks Associated with both Series D Preferred and the Series E Auction Rate Preferred — Leverage Risk.”

The Securities and Exchange Commission, the New York Attorney General and officials of other states have been conducting inquiries into, and bringing enforcement and other proceedings regarding, trading abuses involving open-end investment companies. The Investment Adviser has received information requests and subpoenas from the Securities and Exchange Commission and the New York Attorney General in connection with these inquiries. The Investment Adviser and its affiliates have been complying with these requests for documents and testimony and have implemented additional compliance policies and procedures in response to recent industry initiatives and their internal reviews of their mutual fund practices in a variety of areas. For further details regarding the Investment Adviser’s review in connection with these requests, see “Management of the Fund — Regulatory Matters.”

Repurchase of Common Shares and Anti-takeover Provisions

The Fund’s Board of Trustees has authorized the Fund to repurchase its common shares in the open market when the common shares are trading at a discount of 7.5% or more from net asset value. Such repurchases are subject to certain notice and other requirements under the 1940 Act. Since the Fund commenced operations on November 28, 2003, it has repurchased 365,700 of its shares on the open market as of September 30, 2005.

Certain provisions of the Fund’s Agreement and Declaration of Trust and By-Laws (collectively, the “Governing Documents”) may be regarded as “anti-takeover” provisions. Pursuant to these provisions, only one of three classes of trustees is elected each year, and the affirmative vote of the holders of 75% of the outstanding shares of the Fund are necessary to authorize the conversion of the Fund from a closed-end to an open-end investment company. The overall effect of these provisions is to render more

difficult the accomplishment of a merger with, or the assumption of control by, a principal shareholder. These provisions may have the effect of depriving Fund common shareholders of an opportunity to sell their shares at a premium to the prevailing market price. See “Anti-Takeover Provisions of the Fund’s Governing Documents.”

Custodian, Transfer Agent, Auction Agent, and Dividend Disbursing Agent

State Street Bank and Trust Company (the “Custodian”), 1776 Heritage Drive, North Quincy, Massachusetts 02171, serves as the custodian of the Fund’s assets pursuant to a custody agreement. Under the custody agreement, the Custodian holds the Fund’s assets in compliance with the 1940 Act. For its services, the Custodian receives a monthly fee based upon, among other things, the average value of the total assets of the Fund, plus certain charges for securities transactions.

Computershare Shareholder Services, Inc., 250 Royall Street, Canton, Massachusetts 02021, serves as the Fund’s dividend disbursing agent, as agent under the Fund’s automatic dividend reinvestment and voluntary cash purchase plan, and as transfer agent and registrar with respect to the common shares of the Fund.

Series D Preferred.       Computershare Shareholder Services, Inc. will serve as the transfer agent, registrar, dividend paying agent and redemption agent with respect to the Series D Preferred.

Series E Auction Rate Preferred.       The Bank of New York will serve as the auction agent, transfer agent, registrar, dividend paying agent and redemption agent with respect to the ARS. 

Interest Rate Transactions

The Fund has entered into an interest rate swap transaction with respect to its outstanding Series B Auction Market Preferred, and may enter into an interest rate swap or cap transaction with respect to all or a portion of its outstanding Series C Auction Market Preferred or ARS.  Through these transactions the Fund may, for example, obtain the equivalent of a fixed rate for a series of the Series B Auction Market Preferred, and the Series C Auction Market Preferred (collectively, the “Auction Market Preferred”)  or ARS  that is lower than the Fund would have to pay if it issued fixed rate preferred. The use of interest rate swaps and caps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio security transactions.

In an interest rate swap, the Fund would agree to pay to the other party to the interest rate swap (which is known as the “counterparty”) periodically a fixed rate payment in exchange for the counterparty agreeing to pay to the Fund periodically a variable rate payment that is intended to approximate the Fund’s variable rate payment obligation on a series of the Auction Market Preferred or ARS. In an interest rate cap, the Fund would pay a premium to the counterparty to the interest rate cap and, to the extent that a specified variable rate index exceeds a predetermined fixed rate, the Fund would receive from the counterparty payments of the difference based on the notional amount of such cap. Interest rate swap and cap transactions introduce additional risk because the Fund would remain obligated to pay preferred share distributions when due in accordance with the Statement of Preferences of each of the series of Auction Market Preferred or ARS even if the counterparty defaulted. Depending on the general state of short-term interest rates and the returns on the Fund’s

portfolio securities at that point in time, such a default could negatively affect the Fund’s ability to make distributions on its preferred shares. In addition, at the time an interest rate swap or cap transaction reaches its scheduled termination date, there is a risk that the Fund will not be able to obtain a replacement transaction or that the terms of the replacement will not be as favorable as on the expiring transaction. If this occurs, it could have a negative impact on the Fund’s ability to make distributions on its preferred shares. 

A sudden and dramatic decline in interest rates may result in a significant decline in the asset coverage. If the Fund fails to maintain the required asset coverage on its outstanding preferred shares or fails to comply with other covenants, the Fund may, at its option (and in certain circumstances must require), consistent with its Governing Documents and the requirements of the 1940 Act, that some or all of its outstanding preferred shares (including the Series D Preferred or the ARS) be redeemed. Such redemption likely would result in the Fund seeking to terminate early all or a portion of any swap or cap transaction. Early termination of a swap could require the Fund to make a termination payment to the counterparty.

The Fund intends to segregate cash or liquid securities having a value at least equal to the value of the Fund’s net payment obligations under any swap transaction, marked to market daily. The Fund does not presently intend to enter into interest rate swap or cap transactions relating to the ARS in a notional amount in excess of the outstanding amount of the ARS. The Fund will monitor any such swap with a view to ensuring that the Fund remains in compliance with all applicable regulatory investment policy and tax requirements. See “How the Fund Manages Risk — Interest Rate Transactions.”

Selected data for a common share of beneficial
interest outstanding throughout each period: 

Six Months
Ended
June 30, 2005

Year Ended
December 31, 2004

Period Ended
December 31, 2003(a)

(Unaudited)

Operating Performance:

Net asset value, beginning of period

$

20.12

$

19.26

$

19.06

(b)

Net investment income (loss)

0.28

0.40

—

Net realized and unrealized gain on investments

0.69

1.80

0.20

Total from investment operations

0.97

2.20

0.20

Distributions to Preferred Shareholders:

Net investment income

(0.05

)(g)

(0.01

)

—

Net realized gain on investments

(0.01

)(g)

(0.01

)

—

Total distributions to preferred shareholders

(0.06

)

(0.02

)

—

Net Increase (Decrease) in Net Assets Attributable to Common Shareholders Resulting from Operations

0.91

2.18

—

Distributions to Common Shareholders:

Net investment income

(0.23

)(g)

(0.39

)

—

Net realized gain on investments

(0.07

)(g)

(0.24

)

—

Return of capital

(0.30

)(g)

(0.57

)

—

Total distributions to common shareholders

(0.60

)

(1.20

)

—

Capital Share Transactions:

Increase (decrease) in net asset value from common share transactions

0.01

(0.05

)

—

Offering costs for common shares charged to paid-in capital

—

(0.01

)

—

Offering costs for preferred shares charged to paid-in capital

—

(0.06

)

—

Total from capital share transactions

0.01

(0.12

)

—

Net Asset Value Attributable to Common Shareholders, End of Period

$

20.44

$

20.12

$

19.26

Net asset value total return***

4.68

%

11.56

%

1.0

%*

Market value, end of period

$

18.58

$

17.95

$

20.00

Total investment return****

6.99

%

(4.15

)%

0.0

%**

Six Months
Ended
June 30, 2005

Year Ended
December 31, 2004

Period Ended
December 31, 2003(a)

(Unaudited)

Ratios and Supplemental Data: 

Net assets including liquidation value of preferred shares, end of period (in 000’s)

$

2,032,679

$

2,006,703

—

Net assets attributable to common shares, end of period (in 000’s)

$

1,732,679

$

1,706,703

$1,451,650

Ratio of net investment income to average net assets attributable to common shares

2.82

%(c)

2.17

%

(0.04

)%(c)

Ratio of operating expenses to average net assets attributable to common shares (f)*****

1.19

%(c)

1.12

%

1.38

%(c)

Ratio of operating expenses to average net assets including liquidation value of preferred shares
(f)*****

1.01

%(c)

1.07

%

—

Portfolio turnover rate

7.3

%

33.3

%

0.4

%

5.875% Series A Cumulative Preferred Shares

Liquidation value, end of period (in 000’s)

$

80,000

$

80,000

—

Total shares outstanding (in 000’s)

3,200

3,200

—

Liquidation preference per share

$

25.00

$

25.00

—

Average market value (d)

$

24.82

$

24.68

—

Average coverage per share

$

169.39

$

167.23

—

Series B Auction Market  Preferred Shares

Liquidation value, end of period (in 000’s)

$

100,000

$

100,000

—

Total shares outstanding (in 000’s)

4

4

—

Liquidation preference per share

$

25,000

$

25,000

—

Average market value (d)

$

25,000

$

25,000

—

Average coverage per share

$

169,390

$

167,225

—

Series C Auction Market  Preferred Shares

Liquidation value, end of period (in 000’s)

$

120,000

$

120,000

—

Total shares outstanding (in 000’s)

5

5

—

Liquidation preference per share

$

25,000

$

25,000

—

Average market value (d)

$

25,000

$

25,000

—

Average coverage per share

$

169,390

$

167,225

—

Asset Coverage (e)

678

%

669

%

—

Title of Class 

Amount Authorized

Amount Outstanding*

Common Shares

Unlimited

84,697,505

Preferred Shares

Series A Preferred (liquidation preference $25 per share) 

Unlimited

3,200,000

Series B Auction Market Preferred (liquidation preference $25,000 per share)

Unlimited

4,000

Series C Auction Market Preferred  (liquidation preference $25,000 per share)

Unlimited

4,800

As of September 30, 2005 (unaudited)

Actual

As adjusted

Preferred shares, $0.001 par value, unlimited shares authorized.

(The “Actual” column reflects the Fund’s outstanding capitalization as of September 30, 2005; the “As adjusted” column assumes the issuance of 4,000,000 shares of Series D Preferred and 4,000 shares of ARS, $25 and $25,000 liquidation preference, respectively)

$

300,000,000

$

500,000,000

Shareholders’ equity applicable to common shares:

Common shares, $0.001 par value per share; 84,697,505 shares outstanding

84,698

84,698

Paid-in surplus*

1,561,188,785

1,556,563,785

Distributions in excess of net investment income

10,585,752

10,585,752

Net unrealized appreciation

221,327,922

221,327,922

Net assets applicable to common shares

1,793,187,157

1,788,562,157

Liquidation preference of preferred shares

300,000,000

500,000,000

Net assets, plus the liquidation preference of preferred shares 

2,093,187,157

2,288,562,157