Edgar Filing: Eaton Vance Short Duration Diversified Income Fund

As filed with the Securities and Exchange Commission on January 21, 2005
1933 Act File No. 333-114596
1940 Act File No. 811-21563

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-2

REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]

AND/OR

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 2 [X]
(CHECK APPROPRIATE BOX OR BOXES)

EATON VANCE SHORT DURATION DIVERSIFIED INCOME FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 482-8260

ALAN R. DYNNER
THE EATON VANCE BUILDING, 255 STATE STREET, BOSTON, MASSACHUSETTS 02109
NAME AND ADDRESS (OF AGENT FOR SERVICE)

COPIES OF COMMUNICATIONS TO:

MARK P. GOSHKO, ESQ. LEONARD B. MACKEY, ESQ.
KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP CLIFFORD CHANCE US LLP
75 STATE STREET 31 WEST 52ND STREET
BOSTON, MASSACHUSETTS 02109 NEW YORK, NY 10019

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 are to be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, as amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [ ]

It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

PROPOSED PROPOSED
AMOUNT BEING MAXIMUM MAXIMUM AMOUNT OF
REGISTERED OFFERING AGGREGATE REGISTRATION FEES
TITLE OF SECURITIES BEING REGISTERED (1) PRICE PER UNIT OFFERING PRICE (1)(2)(3)
(1) (1)

Common Shares of Beneficial 50,000 $20.00 $1,000,000 $126.70
Interest, $0.01 par value

(1) Estimated solely for purposes of calculating the registration fee,
pursuant to Rule 457(o) under the Securities Act of 1933.

(2) Includes Shares that may be offered to the Underwriters pursuant to an
option to cover over-allotments.

(3) A Registration fee of $126.70 was previously paid in connection with the
initial filing filed on April 19, 2004.

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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

NOTICE

A copy of the Agreement and Declaration of Trust of Eaton Vance Short
Duration Diversified Income Fund is on file with the Secretary of the
Commonwealth of Massachusetts and notice is hereby given that this instrument is
executed on behalf of the Registrant by an officer of the Registrant as an
officer and not individually and that the obligations of or arising out of this
instrument are not binding upon any of the Trustees, officers or shareholders
individually, but are binding only upon the assets and property of the
Registrant.

[Remainder of page left intentionally blank]

THE INFORMATION IN THIS PROSPECTUS IS INCOMPLETE 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 WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JANUARY 21, 2005

PROSPECTUS
SHARES
EATON VANCE SHORT DURATION
DIVERSIFIED INCOME FUND

COMMON SHARES
$20.00 PER SHARE
(EATON VANCE LOGO)
----------------------

Eaton Vance Short Duration Diversified Income Fund (the "Fund") is a
newly organized, diversified, closed-end management investment company. The
Fund's investment objective is to provide a high level of current income. The
Fund may, as a secondary objective, also seek capital appreciation to the extent
consistent with its primary goal of high current income.
Under normal market conditions, the Fund will maintain a duration of no
more than three years (including the effect of anticipated leverage). Initially,
the Fund is expected to have a duration of approximately 1.5 to 2 years
(including the effect of anticipated leverage). 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
fixed interest and principal payments. The Adviser's staff monitors the credit
quality and price of securities held by the Fund, as well as other securities
that are available to the Fund. Under normal market conditions, the Fund expects
to maintain a weighted average portfolio credit quality of investment grade
(which is at least BBB- as determined by Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc. ("S&P"), or Fitch Ratings Inc.
("Fitch"), or Baa3 as determined by Moody's Investors Service, Inc. ("Moody's")
or, if unrated, determined to be of comparable quality by Eaton Vance
Management, the Fund's investment adviser ("Eaton Vance" or the "Adviser")).

(continued on inside cover page)

INVESTING IN THE FUND'S COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 38 OF THIS PROSPECTUS.
----------------------

PER SHARE TOTAL(3)
--------- --------

Public offering price....................................... $20.00 $
Sales load(1)............................................... $.90 $
Estimated offering expenses................................. $.04 $
Proceeds, after expenses, to the Fund(2).................... $19.06 $

(1) The Fund has agreed to pay the underwriters $.00667 per Common Share
as a partial reimbursement of expenses incurred in connection with
the offering. Eaton Vance (not the Fund) will pay additional
compensation to certain qualifying underwriters. See "Underwriting"
on page 56 of this prospectus.
(2) In addition to the sales load, the Fund will pay offering expenses of
up to $.04 per Common Share, estimated to total $ , which will
reduce the proceeds to the Fund. Eaton Vance or an affiliate has
agreed to pay the amount by which the aggregate of all of the Fund's
offering costs (other than sales load) exceeds $.04 per Common Share.
Eaton Vance or an affiliate has agreed to reimburse all Fund
organizational costs.
(3) The underwriters have an option to purchase up to an additional
shares of the Fund at the public offering price, less the sales load,
within 45 days of the date of this prospectus to cover any
overallotments. If the underwriters exercise this option in full, the
total public offering price, sales load, estimated offering expenses
and proceeds, after expenses, to the Fund will be $ , $ , $
and $ , respectively. See "Underwriting" on page 56 of this
prospectus.

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

BECAUSE THE FUND IS NEWLY ORGANIZED, ITS COMMON SHARES HAVE NO HISTORY OF
PUBLIC TRADING.

The Common Shares will be ready for delivery on or about , 2005.
----------------------
MERRILL LYNCH & CO. UBS INVESTMENT BANK
A.G. EDWARDS ADVEST, INC. BB&T CAPITAL MARKETS
ROBERT W. BAIRD & CO. H&R BLOCK FINANCIAL ADVISORS, INC. FERRIS, BAKER WATTS
INCORPORATED
FIXED INCOME SECURITIES, L.P. J.J.B. HILLIARD, W.L. LYONS, INC. KEYBANC
CAPITAL MARKETS
OPPENHEIMER & CO. RBC CAPITAL MARKETS SUNTRUST ROBINSON HUMPHREY
WELLS FARGO SECURITIES

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

The date of this prospectus is , 2005.

(continued from previous page)

The Fund pursues its objectives by investing its assets primarily in
three distinct investment categories: (1) senior, secured floating rate loans
made to corporate and other business entities ("Senior Loans"); (2) bank
deposits denominated in foreign currencies, debt obligations of foreign
governmental and corporate issuers, including emerging market issuers, which are
denominated in foreign currencies or U.S. dollars, and positions in foreign
currencies ("Foreign Obligations"); and (3) mortgage-backed securities that are
issued, backed or otherwise guaranteed by the U.S. Government or its agencies or
instrumentalities or that are issued by private issuers ("MBS"). Senior Loans in
which the Fund invests are typically of below "investment grade" quality
("Non-Investment Grade Securities"), as may be certain Foreign Obligations and
other Fund investments. Non-Investment Grade Securities, commonly referred to as
"junk" securities, are debt obligations that are rated below investment grade by
each of the national rating agencies that cover the security, or, if unrated,
are determined to be of comparable quality by Eaton Vance Management, the Fund's
investment adviser ("Eaton Vance" or the "Adviser"). S&P and Fitch consider
securities rated below BBB- to be below investment grade and Moody's considers
securities rated below Baa3 to be below investment grade. In addition to holding
investments directly, the Fund may also obtain investment exposure to any
category of investments through the use of long or short derivative instruments
and through investment in other investment companies. The Adviser has broad
discretion to allocate the Fund's assets among these investment categories
subject to the following guidelines. Under normal market circumstances, at least
80% of the Fund's total leveraged assets will be invested in its three principal
investment categories collectively, including through the use of derivatives;
and the Fund's exposure to each of these categories will equal at least 25% of
the Fund's net assets, including through the use of derivatives.

"Net assets" means the value of the Fund's assets less all liabilities
not taking into account financial leverage. "Total leveraged assets" means the
value of all assets of the Fund (including assets acquired with financial
leverage) less ordinary liabilities not associated with leverage, plus the
notional value of long and short forward foreign currency contracts and other
Foreign Obligation derivatives held by the Fund. When the Fund holds both long
and short forward currency contracts in the same foreign currency, the
offsetting positions will be netted for purposes of determining total leveraged
assets. When the Fund holds other long and short positions in Foreign
Obligations in a given country denominated in the same currency, total leveraged
assets will be calculated by excluding the smaller of the long or short
position. See "Management of the Fund -- The Adviser."

As of October 31, 2004, Eaton Vance and its subsidiaries managed
approximately $94.3 billion on behalf of funds, institutional clients and
individuals.

The Fund has applied for the listing of its common shares on the New York
Stock Exchange under the symbol "EVG."

Because the Fund is newly organized, its common shares have no history of
public trading. Shares of closed-end management investment companies frequently
trade at a discount from their net asset value. The returns earned by holders of
the Fund's common shares ("Common Shareholders") who purchase their shares in
this offering and sell their shares below net asset value will be reduced.

Eaton Vance believes that the Fund could be an appropriate investment for
investors seeking an investment vehicle that provides a high level of current
income. The Fund's net asset value and distribution rate will vary and may be
affected by numerous factors, including changes in the credit quality of
issuers, changes in currency exchange rates, changes in interest rates, changes
in mortgage and credit spreads and other market factors. Fluctuations in net
asset value may be magnified as a result of the Fund's use of leverage, which is
a speculative investment technique. An investment in the Fund may not be
appropriate for all investors. There is no assurance that the Fund will achieve
its investment objectives.

This prospectus sets forth concisely information you should know before
investing in the shares of the Fund. Please read this prospectus carefully and
retain it for future reference. A Statement of Additional Information dated
, 2005, has been filed with the Securities and Exchange Commission and
can be obtained without charge by calling 1-800-225-6265 or by writing to the
Fund. A table of contents to the Statement of Additional Information is located
at page 60 of this prospectus. This prospectus incorporates by reference the
entire Statement of Additional Information. The Statement of Additional
Information is available along with other Fund-related materials: at the
Securities and Exchange Commission's public reference room in Washington, DC
(call 1-202-942-8090 for information on the operation of the reference room);
the EDGAR database on the Securities and Exchange Commission's internet site
(http://www.sec.gov); upon payment of copying fees by writing to the Securities
and Exchange Commission's public reference section, 450 Fifth Street, NW,
Washington, DC 20549-0102; or by electronic mail at publicinfo@sec.gov. The
Fund's address is The Eaton Vance Building, 255 State Street, Boston,
Massachusetts 02109 and its telephone number is 1-800-225-6265.

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

The Fund expects to use financial leverage. The Fund expects initially to
obtain financial leverage as soon as practicable after the completion of the
offering of the Common Shares through the use of derivative instruments and/or
through the reinvestment of securities lending collateral. The Fund initially
intends to have financial leverage of between approximately 30% to 40% of its
total leveraged assets. The Adviser anticipates that the use of leverage will
result in higher income to Common Shareholders over time. Use of financial
leverage creates an opportunity for increased income but, at the same time,
creates special risks. There can be no assurance that a leveraging strategy will
be utilized or will be successful. See "Risk Factors" at page 38 and "Use of
Leverage and Related Risks" at page 36 of this prospectus.

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.......................................... 1
Summary of Fund Expenses.................................... 19
The Fund.................................................... 21
Use of Proceeds............................................. 21
Investment Objectives and Policies.......................... 21
Use of Leverage and Related Risks........................... 36
Risk Factors................................................ 38
Management of the Fund...................................... 44
Distributions............................................... 47
Tax Matters................................................. 48
Dividend Reinvestment Plan.................................. 49
Description of Capital Structure............................ 51
Underwriting................................................ 56
Custodian and Transfer Agent................................ 58
Legal Opinions.............................................. 59
Reports to Stockholders..................................... 59
Independent Registered Public Accounting Firm............... 59
Additional Information...................................... 59
Table of Contents for the Statement of Additional
Information............................................... 60
The Fund's Privacy Policy................................... 60

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

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 any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. The Fund is not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should not assume that the information provided by this prospectus is accurate
as of any date other than the date on the front of this prospectus. The Fund's
business, financial condition and results of operations may have changed since
the date of this prospectus.

PROSPECTUS SUMMARY

The following provides a summary of certain information contained in this
prospectus relating to the Eaton Vance Short Duration Diversified Income Fund
and its shares and does not contain all of the information that you should
consider before investing in the Fund or purchasing its shares. The information
is qualified in all respects by the more detailed information included elsewhere
in this prospectus and in the appropriate registration statements filed with the
Securities and Exchange Commission.

THE FUND......................... Eaton Vance Short Duration Diversified
Income Fund (the "Fund") is a newly
organized, diversified, closed-end
management investment company. The Fund
offers investors the opportunity to receive
a high level of current income from a
diversified short duration portfolio. The
Fund may also offer an opportunity for
capital appreciation. Under normal market
conditions, the Fund will maintain a
duration of no more than three years
(including the effect of anticipated
leverage). Initially, the Fund is expected
to have a duration of approximately 1.5 to
2 years (including the effect of
anticipated leverage). 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
fixed interest and principal payments.
Investments are based on Eaton Vance's
internal research and ongoing securities
analysis, which is generally not available
to individual investors. An investment in
the Fund may not be appropriate for all
investors. There is no assurance that the
Fund will achieve its investment
objectives.

THE OFFERING..................... The Fund is offering common
shares of beneficial interest, par value
$0.01 per share (the "Common Shares"),
through a group of underwriters (the
"Underwriters") led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated. The
Underwriters have been granted an option to
purchase up to additional Common
Shares solely to cover overallotments, if
any. The initial public offering price is
$20.00 per Common Share. The minimum
purchase in this offering is 100 Common
Shares ($2,000). See "Underwriting." Eaton
Vance or an affiliate has agreed to (i)
reimburse all organizational costs of the
Fund and (ii) pay all offering costs of the
Fund (other than sales load) that exceed
$.04 per Common Share.

INVESTMENT OBJECTIVES AND
POLICIES......................... The Fund's investment objective is to
provide a high level of current income. The
Fund may, as a secondary objective, also
seek capital appreciation to the extent
consistent with its primary objective of
high current income. The Fund pursues its
objectives by investing its assets
primarily in three distinct investment
categories: (1) senior, secured floating
rate loans made to corporate and other
business entities ("Senior Loans"); (2)
bank deposits denominated in foreign
currencies, debt obligations of foreign
governmental and corporate issuers,
including emerging market issuers, which
are denominated in foreign

currencies or U.S. dollars, and positions
in foreign currencies ("Foreign
Obligations"); and (3) mortgage-backed
securities that are issued, backed or
otherwise guaranteed by the U.S. Government
or its agencies or instrumentalities or
that are issued by private issuers ("MBS").
Senior Loans in which the Fund invests are
typically of below "investment grade"
quality ("Non-Investment Grade
Securities"), as may be certain Foreign
Obligations and other Fund investments.
Non-Investment Grade Securities, commonly
referred to as "junk" securities, are debt
obligations that are rated below investment
grade by each of the national rating
agencies that cover the security, or, if
unrated, are determined to be of comparable
quality by the Adviser. S&P and Fitch
consider securities rated below BBB- to be
below investment grade and Moody's
considers securities rated below Baa3 to be
below investment grade. In addition to
holding investments directly, the Fund may
also obtain investment exposure to any
category of investments through the use of
long or short derivative instruments and
through investment in other investment
companies. The Adviser has broad discretion
to allocate the Fund's assets among these
investment categories subject to the
following guidelines. Under normal market
circumstances, at least 80% of the Fund's
total leveraged assets will be invested in
its three principal investment categories
collectively, including through the use of
derivatives; and the Fund's exposure to
each of these categories will equal at
least 25% of the Fund's net assets,
including through the use of derivatives.

"Net Assets" means the value of the Fund's
assets less all liabilities not taking into
account financial leverage. "Total
leveraged assets" means the value of all
assets of the Fund (including assets
acquired with financial leverage) less
ordinary liabilities not associated with
leverage, plus the notional value of long
and short forward foreign currency
contracts and other Foreign Obligation
derivatives held by the Fund. When the Fund
holds both long and short forward currency
contracts in the same foreign currency, the
offsetting positions will be netted for
purposes of determining total leveraged
assets. When the Fund holds other long and
short positions in Foreign Obligations in a
given country denominated in the same
currency, total leveraged assets will be
calculated by excluding the smaller of the
long or short position.

obligated to repay the principal amount of
a debt instrument), 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
fixed interest and principal 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
responsive 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.

A team of Eaton Vance investment
professionals is responsible for the
overall management of the Fund's
investments as well as allocations among
the Fund's three principal investment
categories. Individual members of this team
with specialized experience are responsible
for the day-to-day portfolio management
within each of the Fund's main investment
categories. The Fund's investments are
actively managed, and positions may be
bought or sold on a daily basis.

The Adviser's staff monitors the credit
quality and price of securities held by the
Fund, as well as other securities that are
available to the Fund. Under normal market
conditions, the Fund expects to maintain a
weighted average portfolio credit quality
of investment grade (which is at least BBB-
as determined by S&P or Fitch, or Baa3 as
determined by Moody's or, if unrated,
determined to be of comparable quality by
the Adviser). For this purpose, when a
security is rated by more than one of these
rating agencies, the Adviser generally will
use the highest rating. Within this general
guideline, the Fund may invest in
individual securities of any credit
quality. In order to maintain compliance
with this policy, the Fund's holdings of
Senior Loans and other investments of below
investment grade quality will be offset by
investments in MBS and other investments of
high quality. The extremely high credit
quality of MBS will substantially raise the
average portfolio credit quality on a
dollar-weighted basis. The Fund will
monitor and adjust its portfolio on an
ongoing basis in order to remain in
compliance with this credit quality policy.

portfolio of similar average quality
consisting mostly of securities of a
quality near this average. Most notably,
the Fund's portfolio will contain a higher
percentage of assets of lower quality that
each individually involve a higher degree
of credit risk and may be considered to be
speculative in nature. As indicated above,
the Fund may invest in unrated obligations
for which Eaton Vance will make a credit
quality determination for purposes of the
Fund's credit quality policy. To the extent
that the Fund invests in such unrated
obligations, the Fund's credit quality will
be more dependent on Eaton Vance's credit
analysis than if the Fund invested in only
rated obligations. Investment in unrated
obligations also involves a potential
conflict of interest. In general,
investment quality involves a trade-off
between potential enhanced return and
assumption of additional credit risk. In
making credit quality determinations for
unrated obligations, there is a possibility
of an investment adviser being unduly
influenced by the goal of seeking to
maximize investment performance. For a
description of the risks of investing in
Non-Investment Grade Securities, see "Risk
Factors -- Non-Investment Grade Securities
Risk."

Although the Adviser considers ratings when
making investment decisions, it performs
its own credit and investment analysis and
does not rely primarily on the ratings
assigned by the rating services. In
evaluating the quality of a particular
security, whether rated or unrated, the
Adviser will normally take into
consideration, among other things, the
issuer's financial resources and operating
history, its sensitivity to economic
conditions and trends, the ability of its
management, its debt maturity schedules and
borrowing requirements, and relative values
based on anticipated cash flow, interest
and asset coverage, and earnings prospects.
The Adviser will attempt to reduce the
risks of investing in lower rated or
unrated debt instruments through active
portfolio management, credit analysis and
attention to current developments and
trends in the economy and the financial
markets. When purchasing and selling MBS,
the Adviser focuses primarily on the
expected principal and interest payments
and price of the MBS, as well as current
and anticipated market conditions.

As stated above, the Fund will normally
have substantial exposure to Foreign
Obligations. The Adviser believes that a
portfolio of carefully selected Foreign
Obligations can earn attractive rates of
return relative to U.S. instruments of
comparable duration and credit quality. In
current market circumstances, the Adviser
believes that desired exposures to
short-term investments in certain foreign
countries may best be obtained through
forward foreign currency contracts with
respect to such countries' currencies. The
Adviser believes that this approach reduces
the credit risk associated with investment
in the debt of foreign

governmental and corporate issuers. In
addition, utilizing forward foreign
currency contracts reduces the transaction
costs of obtaining this exposure as
compared to investment in foreign debt
obligations. Through its investments in
non-dollar denominated Foreign Obligations,
the Fund may have substantial exposure to
fluctuations in the values of foreign
currencies. The Adviser intends to select
currencies for both long and short
investment exposure based upon such factors
as a country's (i) economic and political
structure, (ii) long run economic and
productivity gain, (iii) fiscal and
monetary policies, (iv) inflation and
interest rates, (v) balance of payments and
terms of trade and (vi) other factors, such
as flow of funds.

The Fund estimates an average annual
portfolio turnover rate of between 50% and
75%.

The Fund may purchase and sell derivative
instruments (which derive their value from
another instrument, security or index) for
investment purposes, such as obtaining
investment exposure to foreign currencies;
risk management purposes, such as hedging
against fluctuations in securities prices
or interest rates; diversification
purposes; or to change the duration of the
Fund. Transactions in derivative
instruments may include, but are not
limited to, the purchase and sale of
forward foreign currency contracts, futures
contracts on securities, currencies,
indices and other financial instruments and
options thereon, credit-linked notes,
tranches of collateralized loan
obligations, exchange-traded and
over-the-counter options on securities,
currencies and indices, and currency,
interest rate, total return and credit
default swaps. The Fund initially may
invest up to 30% of its total leveraged
assets in derivative instruments other than
forward foreign currency contracts. Subject
to compliance with the Fund's
diversification and other portfolio
guidelines, the Fund may invest in forward
foreign currency contracts without
limitation.

LISTING.......................... The Fund has applied for the listing of the
Common Shares on the New York Stock
Exchange under the symbol "EVG."

LEVERAGE......................... The Fund expects to use financial leverage.
The Fund expects initially to obtain
financial leverage as soon as practicable
after the completion of the offering of the
Common Shares through the use of derivative
instruments and/or through the reinvestment
of securities lending collateral. The Fund
expects initially to have financial
leverage of between approximately 30% to
40% of its total

leveraged assets. The Fund reserves the
right in the future to adjust the amount of
leverage used and/or to leverage in a
different manner. The Fund, in its sole
discretion, may employ other forms of
financial leverage, including the
establishment of borrowing or commercial
paper programs and/or the issuance of debt
securities or preferred shares. The Adviser
anticipates that the use of leverage should
result in higher income to Common
Shareholders over time. Use of financial
leverage creates an opportunity for
increased income for Common Shareholders,
but, at the same time, creates special
risks (including the likelihood of greater
volatility in the net asset value, the
market price of and distributions on Common
Shares), and there can be no assurance that
a leveraging strategy will be successful
during any period in which it is employed.
During periods in which the Fund is using
leverage, the fees paid to Eaton Vance for
investment advisory services 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 total leveraged
assets. "Total leveraged assets" means the
value of all assets of the Fund (including
assets acquired with financial leverage)
less ordinary liabilities not associated
with leverage, plus the notional value of
long and short forward foreign currency
contracts and other Foreign Obligation
derivatives held by the Fund. When the Fund
holds both long and short forward currency
contracts in the same foreign currency, the
offsetting positions will be netted for
purposes of determining total leveraged
assets. When the Fund holds other long and
short positions in Foreign Obligations in a
given country denominated in the same
currency, total leveraged assets will be
calculated by excluding the smaller of the
long or short position. See "Use of
Leverage and Related Risks" and "Management
of the Fund -- The Adviser."

INVESTMENT ADVISER AND
ADMINISTRATOR.................... Eaton Vance, a wholly-owned subsidiary of
Eaton Vance Corp., is the Fund's investment
adviser and administrator. The Adviser and
its subsidiaries managed approximately
$94.3 billion on behalf of funds,
institutional clients and individuals as of
October 31, 2004. Twenty-nine of the funds
are closed-end. See "Management of the
Fund."

DISTRIBUTIONS.................... Commencing with the Fund's first dividend,
the Fund intends to make regular monthly
cash distributions to Common Shareholders.
The amount of each monthly distribution
will vary depending on a number of factors,
including interest payable on debt or other
costs of financial leverage. As portfolio
and market conditions change, the rate of
distributions on the Common Shares and the
Fund's distribution policy could change. In
its distributions, the Fund intends to
include amounts attributable to the imputed
interest on foreign currency exposures
through long and short positions in forward
currency exchange contracts (represented by
the difference between

the foreign currency spot rate and the
foreign currency forward rate) and the
imputed interest derived from certain other
derivative positions. In certain
circumstances, this practice may result in
a portion of distributions to Common
Shareholders being characterized as return
of capital for federal income tax purposes
as discussed below. The Fund's Board of
Trustees (the "Board") may modify the
Fund's distribution policy at any time
without obtaining the approval of Common
Shareholders. The initial distribution is
expected to be declared approximately 45
days and paid approximately 60 to 90 days
after the completion of this offering,
depending on market conditions. See
"Distributions" and "Tax Matters."

The net investment income of the Fund will
consist of all interest income accrued on
portfolio investments, short-term capital
gain (including short-term gains on
terminated options and forward positions
and gains on the sale of portfolio
investments held for one year or less) in
excess of long-term capital loss and income
from certain hedging transactions, less all
expenses of the Fund. Expenses of the Fund
will be accrued each day. Substantially all
of the Fund's investment company taxable
income will be distributed each year. In
addition, at least annually, the Fund
intends to distribute any net capital gain
(which is the excess of net long-term
capital gain over net short-term capital
loss). To the extent that the Fund's net
investment income and net capital gain for
any year exceed the total monthly
distributions paid during the year, the
Fund will make a special distribution at or
near year-end of such excess amount as may
be required. If the Fund's total monthly
distributions in any year exceed the amount
of its net investment income and net
capital gain for the year, any such excess
would be characterized as a return of
capital for federal income tax purposes.
Under the Investment Company Act of 1940,
as amended (the "1940 Act"), for any
distribution that includes amounts from
sources other than net income, the Fund is
required to provide Common Shareholders a
written statement regarding the components
of such distribution.

Common Shareholders may elect automatically
to reinvest some or all of their
distributions in additional Common Shares
under the Fund's dividend reinvestment
plan. See "Dividend Reinvestment Plan."

DIVIDEND REINVESTMENT PLAN....... The Fund has established a dividend
reinvestment plan (the "Plan"). Under the
Plan, a Shareholder may elect to have Fund
distributions automatically reinvested in
additional Common Shares either purchased
in the open market, or newly issued by the
Fund if the Common Shares are trading at or
above their net asset value. Common
Shareholders may elect to participate in
the Plan by completing the dividend
reinvestment plan application

form. Common Shareholders who do not elect
to participate in the Plan will receive all
distributions in cash paid by check mailed
directly to them by PFPC Inc., as dividend
paying agent. Common Shareholders who
intend to hold their Common Shares through
a broker or nominee should contact such
broker or nominee to determine whether or
how they may participate in the Plan. See
"Dividend Reinvestment Plan."

CLOSED-END STRUCTURE............. Closed-end funds differ from traditional,
open-end management investment companies
(commonly referred to as mutual funds) in
that closed-end funds generally list their
shares for trading on a securities exchange
and do not redeem their shares at the
option of the shareholder. By comparison,
mutual funds issue securities that are
redeemable at net asset value at the option
of the shareholder and typically engage in
a continuous offering of their shares.

Shares of closed-end funds frequently trade
at a discount from their net asset value.
In recognition of this possibility and that
any such discount may not be in the
interest of Common Shareholders, the Board,
in consultation with Eaton Vance, from time
to time may review possible actions to
reduce any such discount. The Board might
consider open market repurchases or tender
offers for Common Shares at net asset
value. There can be no assurance that the
Board will decide to undertake any of these
actions or that, if undertaken, such
actions would result in the Common Shares
trading at a price equal to or close to net
asset value per Common Share. The Board
might also consider the conversion of the
Fund to an open-end mutual fund. The Board
believes, however, that the closed-end
structure is desirable, given the Fund's
investment objectives and policies.
Investors should assume, therefore, that it
is highly unlikely that the Board would
vote to convert the Fund to an open-end
investment company.

SPECIAL RISK CONSIDERATIONS...... No Operating History. The Fund is a
closed-end investment company with no
history of operations and is designed for
long-term investors and not as a trading
vehicle.

Income Risk. 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 adversely
when prevailing short-term interest rates
increase and the Fund is utilizing
leverage.

Credit Risk. Credit risk is the risk that
one or more debt obligations in the Fund's
portfolio will decline in price, or fail to
pay interest or principal when due, because
the

issuer of the obligation experiences a
decline in its financial status. For MBS,
credit risk involves two types: delinquency
and default. Delinquency refers to
interruptions in the payment of interest
and principal. Default refers to the
potential for unrecoverable principal loss
from the sale of foreclosed collateral or
the Fund's inherent right to forgive
principal or modify a debt instrument. For
MBS, 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. For corporate debt
securities and Senior Loans, credit risk
refers to default risk, which typically
means the nonpayment of interest and/or
principal when it is due.

Prepayment Risk. During periods of
declining interest rates or for other
purposes, borrowers may exercise their
option to prepay principal earlier than
scheduled, potentially causing the Fund to
incur capital loss and/or to reinvest in
lower yielding securities. This is known as
call or prepayment risk. Certain income
securities have call protection features
that permit the issuer to redeem the
security prior to a stated date only if
certain prescribed conditions are met
("call protection"). An issuer may redeem a
security 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.
Senior Loans and MBS typically have no such
call protection. For premium bonds and
premium loans (bonds and loans priced above
their par or principal value) held by the
Fund, prepayment risk is enhanced.

Issuer Risk. The value of corporate
income-producing securities may decline for
a number of reasons which directly relate
to the issuer, such as management
performance, financial leverage and reduced
demand for the issuer's goods and services.

Non-Investment Grade Securities Risk. Most
of the Fund's investments in Senior Loans
are of below investment grade quality, as
may be certain Foreign Obligations and
other Fund investments. Non-Investment
Grade Securities are considered
predominantly speculative because of the
credit risk of their issuers. While
offering a greater potential opportunity
for capital appreciation and higher yields,
Non-Investment Grade Securities typically
entail greater potential price volatility
and may be less liquid than higher-rated
securities. Issuers of Non-Investment Grade
Securities are more likely to default on
their payments of interest and principal
owed to the Fund, and such defaults will
reduce the Fund's net asset value and
income distributions. The prices of these
lower rated obligations are more sensitive
to negative developments than higher rated
securities. Adverse business conditions,
such as a decline in the issuer's revenues
or an economic downturn, generally

lead to a higher non-payment rate. In
addition, a security may lose significant
value before a default occurs as the market
adjusts to expected higher non-payment
rates.

Senior Loans Risk. The risks associated
with Senior Loans are primarily the risks
of investing in Non-Investment Grade
Securities. Senior Loans are typically
senior and secured, in contrast to other
types of Non-Investment Grade Securities,
which are often subordinated and unsecured.
The Fund's investments in Senior Loans are
typically of below investment grade quality
and are considered speculative because of
the credit risk of their issuers. Such
companies are more likely to default on
their payments of interest and principal
owed to the Fund, and such defaults will
reduce the Fund's net asset value and
income distributions. An economic downturn
generally leads to a higher non-payment
rate, and a debt obligation may lose
significant value before a default occurs.
Moreover, any specific collateral used to
secure a loan may lose a portion or all of
its value or become illiquid, which would
adversely affect the loan's value.

Economic and other events (whether real or
perceived) can reduce the demand for
certain Senior Loans or Senior Loans
generally, which may reduce market prices
and cause the Fund's net asset value per
share to fall. The frequency and magnitude
of such changes cannot be predicted.

Senior Loans are also subject to the risk
of price declines due to increases in
prevailing interest rates, although
floating-rate debt instruments are
substantially less exposed to this risk
than fixed-rate debt instruments. Interest
rate changes may also increase prepayments
of debt obligations and require the Fund to
invest in assets at lower yields. No active
trading market may exist for certain loans,
which may impair the ability of the Fund to
realize full value in the event of the need
to liquidate such assets. Adverse market
conditions may impair the liquidity of some
actively traded loans.

Valuation of Senior Loans. The Fund will
value its Senior Loans daily. However,
because the secondary market for Senior
Loans is limited, it may be difficult to
value some loans. Market quotations may not
be readily available for some Senior Loans
and valuation may require more research
than for liquid securities. In addition,
elements of judgment may play a greater
role in valuation of Senior Loans than for
securities with a more active secondary
market because there is less reliable
objective data available.

Currency Risk. Since the Fund will
generally maintain substantial exposure to
investments denominated in foreign
currencies, the Fund will be affected by
changes in foreign

currency exchange rates (and exchange
control regulations) that affect the value
of the Fund's foreign investments and the
accrued income of the investments. The
value of the Fund's foreign assets in U.S.
dollars and the accrued income of the Fund
in U.S. dollars may be affected favorably
or unfavorably by fluctuations in currency
rates.

Currency exchange rates also can be
affected unpredictably by intervention (or
the failure to intervene) by U.S. or
foreign governments or central banks, or by
currency controls or political developments
in the United States or abroad. Currencies
in which the Fund holds long positions or
in which portfolio assets are denominated
may depreciate against the U.S. dollar,
resulting in a loss to the Fund. Currencies
in which the Fund holds short positions may
appreciate against the U.S. dollar, also
resulting in a loss to the Fund. In certain
countries, the central bank manages the
currency rate against a basket of one or
more index currencies of other major
countries. In some of these countries, the
Fund may employ a strategy seeking to limit
exposure to the index currencies while
retaining exposure to the local currency.
In such a situation, the Fund's strategy
could fail if a country changes the
announced or implied components of the
index currencies against which the Fund has
hedged its exposure.

The Fund may buy or sell foreign currencies
and may deal in forward foreign currency
contracts, that is, agree to buy or sell a
specified currency at a specified price and
future date. The Fund may use forward
contracts for (1) obtaining long or short
investment exposures to foreign currencies,
(2) hedging or (3) currency risk
management. Currency risk management may
include taking active currency positions
relative to the Fund's securities
portfolio.

Other risks involved in currency
investments include the dependence on the
Adviser's ability to forecast movements in
exchange rates and imperfect correlations
between movements in exchange rates.
Currency investments could be adversely
affected by delays in, or a refusal to
grant, repatriation of funds or conversions
of certain currencies. The currencies of
emerging market countries may experience
significant declines against the U.S.
dollar, and significant devaluations may
occur during periods in which the Fund
holds investments in these currencies.

Certain currency investments, including
those in emerging market countries, may be
highly volatile, and movement in these
currencies may result in substantial loss
to the Fund.

Certain currency-related investments may be
acquired in the "over-the-counter" or
"interdealer" markets, where participants
typically are not subject to credit
evaluation and regulatory oversight as are
members of "exchange based" markets. In the
absence of a regulated market to facilitate
settlement, the Fund is subject to the risk
that a counterparty will not settle a
transaction (such as a forward currency
contract) in accordance with its terms and
conditions because of a dispute over the
terms of contract or because of a credit or
liquidity problem.

A portion of the Fund's currency
investments may be or become illiquid.
Illiquidity may result from the small
quantities in which the securities held
were issued and or from lower trading
volumes in the securities markets and/or
currencies of certain countries. If
illiquid currency investments need to be
liquidated quickly, the Fund could sustain
significant transaction costs.

Foreign Debt Obligations Risk. The Fund
will generally maintain substantial
investments in Foreign Obligations.

Foreign governmental securities include
securities issued or guaranteed by foreign
governments (including political
subdivisions) and their authorities,
agencies or instrumentalities and by
supra-national agencies. Foreign
governmental securities may have different
levels of government support. For example,
some foreign governmental securities are
supported by the full faith and credit of a
foreign national government or political
subdivision and some are not. In the case
of certain countries, foreign governmental
securities may involve varying degrees of
credit risk as a result of financial or
political instability in such countries and
the possible inability of the Fund to
enforce its rights against the government
issuer. Foreign governmental securities
denominated in currencies other than the
U.S. dollar are subject to currency risk,
and such risk may be substantial. Like
other fixed income securities, foreign
governmental securities are subject to
market risk. Their market values fluctuate
as interest rates change, generally falling
during times of rising interest rates.
Yields on foreign governmental securities
tend to be lower than those of corporate
securities of comparable maturities.

to domestic issues of similar investment
quality. Like other fixed income
securities, foreign corporate securities
are subject to market risk. Their market
values fluctuate as interest rates change,
generally falling during times of rising
interest rates.

Investment in foreign governmental and
corporate issuers may involve certain
special risks due to foreign economic,
political and legal developments, including
favorable or unfavorable changes in
currency exchange rates, exchange control
regulations (including currency blockage),
expropriation or nationalization of assets,
imposition of withholding taxes on dividend
or interest payments, and possible
difficulty in obtaining and enforcing
judgments against foreign entities.
Furthermore, issuers of foreign debt
obligations are subject to different, often
less comprehensive, accounting, reporting
and disclosure requirements than domestic
issuers. The debt obligations of some
foreign governments and companies and
foreign markets are less liquid and at
times more volatile than comparable U.S.
debt obligations and markets. Foreign
brokerage commissions and other fees are
also generally higher than in the United
States. The laws of some foreign countries
may limit the Fund's ability to invest in
securities of certain issuers located in
these foreign countries. There are also
special tax considerations which apply to
securities of foreign issuers and
securities principally traded overseas.
Investors should also be aware that under
certain circumstances, markets which are
perceived to have similar characteristics
to troubled markets may be adversely
affected whether or not similarities
actually exist.

tries with which they trade. These
economies also have been and may continue
to be adversely affected by economic
conditions in the countries with which they
trade. The economies of countries with
emerging markets may also be predominantly
based on only a few industries or dependent
on revenues from particular commodities. In
addition, custodial services and other
costs relating to investment in foreign
markets may be more expensive in emerging
markets than in many developed foreign
markets, which could reduce the Fund's
income from such securities. Furthermore,
because publicly traded debt instruments of
emerging markets represent a relatively
recent innovation in the world debt
markets, there is little historical data or
related market experience concerning the
attributes of such instruments under all
economic, market and political conditions.

In many cases, governments of emerging
countries continue to exercise significant
control over their economies, and
government actions relative to the economy,
as well as economic developments generally,
may affect the capacity of issuers of
emerging country debt instruments to make
payments on their debt obligations,
regardless of their financial condition. In
addition, there is a heightened possibility
of expropriation or confiscatory taxation,
imposition of withholding taxes on interest
payments, or other similar developments
that could affect investments in those
countries. There can be no assurance that
adverse political changes will not cause
the Fund to suffer a loss of any or all of
its value or a disruption of income from
investments in such countries.

Mortgage-Backed Securities Risk. The value
of Fund shares may be adversely affected by
fluctuations in interest rates and the
prepayment of the mortgage loans underlying
the MBS held by the Fund. Mortgage loans
are most likely to be prepaid in a
declining interest rate environment and
when MBS are trading at a substantial
premium. Prepayments may cause the Fund to
incur capital loss and may reduce the
Fund's income distributions because the
proceeds of a prepayment may be invested in
lower-yielding securities. In a rising
interest rate environment, a declining
prepayment rate will extend the average
life of many MBS which in turn would
lengthen the duration of the Fund's
portfolio. This possibility is often
referred to as extension risk. Extending
the average life of an MBS increases the
risk of depreciation due to future
increases in market interest rates. The
value of Common Shares can also be
adversely affected by erosion in premiums
on MBS held.

Certain government agencies or
instrumentalities, such as the Government
National Mortgage Association ("GNMA"),
Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage
Corpora-

tion ("FHLMC"), provide a guarantee as to
timely payment of principal and interest
for MBS each entity issues, backs or
otherwise guarantees. Such guarantees may
or may not be backed by the full faith and
credit of the U.S. Government.

Derivatives Risk. Derivative transactions
(such as forward contracts, futures
contracts and options thereon, options,
swaps and short sales) may subject the Fund
to substantial loss of principal in
relation to the Fund's investment amount.
The Fund also will be subject to credit
risk with respect to the counterparties to
the derivatives positions held 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.

Effects of Leverage. There can be no
assurance that a leveraging strategy will
be utilized by the Fund or that, if
utilized, it will be successful during any
period in which it is employed. Leverage
creates risks for Common Shareholders,
including the likelihood of greater
volatility of net asset value and market
price of the Common Shares and the risk
that fluctuations in the costs of leverage
may affect the income and return to Common
Shareholders. To the extent the income
derived from securities purchased with
financial leverage or investment exposures
created with leverage exceeds the cost of
leverage, the Fund's distributions will be
greater than if leverage had not been used.
Conversely, if the income from the
securities purchased with leverage or
investment exposures created with leverage
is not sufficient to cover the cost of
leverage, the amount available for
distribution to Common Shareholders will be
less than if leverage had not been used.
Even if leveraging the Fund results in loss
of value or lower distribution amounts,
Eaton Vance in its best judgment may
nevertheless determine to maintain the
Fund's leveraged position if it deems such
action to be appropriate. The costs of any
future borrowing/commercial paper program
will be borne by the Common Shareholders
and consequently will result in a reduction
of the net asset value of the Common
Shares.

As discussed in detail under "Management of
the Fund," the fee paid to Eaton Vance will
be calculated on the basis of the Fund's
average daily total leveraged assets.
"Total leveraged assets" means the value of
all assets of the Fund (including assets
acquired with financial leverage) less
ordinary liabilities not associated with
leverage, plus the notional value of long
and short forward foreign currency
contracts and other Foreign Obligation
derivatives held by the Fund. When the Fund
holds both long and short forward

currency contracts in the same foreign
currency, the offsetting positions will be
netted for purposes of determining total
leveraged assets. When the Fund holds other
long and short positions in Foreign
Obligations in a given country denominated
in the same currency, total leveraged
assets will be calculated by excluding the
smaller of the long or short position. See
"Risk Factors."

The Fund intends to manage its use of
financial leverage through derivatives and
the reinvestment of securities lending
collateral so that these arrangements will
not be considered to create a "senior
security" within the meaning of the 1940
Act. In this regard, in accordance with
guidelines established by the Securities
and Exchange Commission, the Fund's
custodian on a daily basis will segregate
in the Fund's custody account liquid
portfolio assets equal to the then current:
(1) settlement value of the Fund's
obligations under derivative instruments
used to create leverage; and (2) rebate
value of any securities lending collateral
that has been reinvested to create
financial leverage. In addition, the
Securities and Exchange Commission has
established guidelines that restrict a
registered investment company from loaning
portfolio securities in excess of one third
of its total assets. Accordingly, this
restriction places a practical limit on the
amount of financial leverage that may be
obtained through reinvestment of securities
lending collateral.

To the extent that the Fund in the future
engages in borrowing, establishes a
commercial paper program and/or issues debt
securities to create financial leverage,
under the 1940 Act its obligations in
respect thereof would be subject to a three
to one asset coverage requirement. To the
extent that the Fund in the future issues
preferred shares to create financial
leverage, under the 1940 Act its
obligations in respect thereof would be
subject to a two to one asset coverage
requirement. In addition,
borrowing/commercial paper program
covenants and/or the terms of debt
securities or preferred shares issued may
impose asset coverage or portfolio
composition requirements that are more
stringent than those currently imposed on
the Fund by the 1940 Act. The Fund would
only utilize such additional methods of
financial leverage if it anticipated that
these asset coverage requirements,
covenants or guidelines would not
significantly impede Eaton Vance in
managing the Fund's portfolio in accordance
with its investment objectives and
policies. See "Description of Capital
Structure."

Financial leverage achieved through the
purchase of derivative instruments such as
forward foreign currency contracts exposes
the Fund to special risks. See "Risk
Factors."

Interest Rate Risk. The value of Fund
shares will usually change in response to
interest rate fluctuations. When interest
rates decline, the value of fixed-rate
securities held

by the Fund can be expected to rise.
Conversely, when interest rates rise, the
value of fixed-rate securities held by the
Fund can be expected to decline.
Floating-rate securities held by the Fund
may also fluctuate in value due to changes
in interest rates because of a time lag
between when interest rates rise and when
rates on the securities are reset. Because
U.S. interest rates have recently been at
or near their lowest levels in many years,
there is a greater than normal risk that
the Fund's portfolio will decline in value
due to rising interest rates. Fluctuations
in the value of fixed-rate securities held
by the Fund will not affect interest income
received on the securities, but will be
reflected in the Fund's net asset value.
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 a dollar-weighted average duration of
no more than three years (including the
effects of anticipated leverage), the
Common Shares' net asset value and market
price per Common Share will tend to
fluctuate more in response to changes in
market interest rates than if the Fund
invested in shorter duration securities and
less than if the Fund invested mainly in
longer duration securities. The Fund may
utilize certain strategies, including
taking positions in futures or interest
rate swaps, for the purpose of reducing the
interest rate sensitivity of the portfolio
and decreasing the Fund's exposure to
interest rate risk, although there can be
no assurance that it will do so or that
such strategies will be successful. The
Fund is intended to have a relatively low
level of interest rate risk.

Liquidity Risk. The Fund may invest
without limitation in securities for which
there is no readily available trading
market or which are otherwise illiquid,
including certain Senior Loans. The Fund
may not be able to readily dispose of
illiquid securities at prices that
approximate those at which the Fund could
sell such securities 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. In addition, the
limited liquidity could affect the market
price of the securities, thereby adversely
affecting the Fund's net asset value.

Reinvestment Risk. Income from the Fund's
portfolio will decline if and when the Fund
invests the proceeds from matured, traded
or called debt obligations into lower
yielding instruments. A decline in income
could affect the Common Shares'
distribution rate and their overall return.

Inflation Risk. Inflation risk is the risk
that the value of assets or income from
investment 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 periods of rising
inflation, short-term interest rates and
the Fund's cost of leverage would likely
increase, reducing returns to Common
Shareholders to the extent that such
increased cost is not offset by
commensurately higher income.

Market Price of Shares. The shares of
closed-end management investment companies
often trade at a discount from their net
asset value, and the Common Shares may
likewise trade at a discount from net asset
value. The trading price of the Common
Shares may be less than the public offering
price. The risk will be greater for
investors who sell their Common Shares in a
relatively short period after completion of
the public offering.

Management Risk. The Fund is subject to
management risk because it is an actively
managed portfolio. Eaton Vance and the
individual portfolio managers 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. This
includes the possibility of investment
loss.

Adviser Fee Conflict Risk. The fee paid to
the Adviser for investment management
services will be higher when the Fund uses
financial leverage, whether through
derivative instruments, through the
reinvestment of securities lending
collateral or otherwise, because the fee
will be paid on the basis of the Fund's
assets including this financial leverage.
Consequently, the Adviser may have a
financial interest for the Fund to utilize
such financial leverage, which may create a
conflict of interest between the Adviser
and the Common Shareholders.

Market Disruption. The terrorist attacks
in the United States on September 11, 2001
had a disruptive effect on the securities
markets. The Fund cannot predict the
effects of similar events in the future on
the U.S. economy. These terrorist attacks
and related events, including the war in
Iraq, its aftermath, and continuing
occupation of Iraq by coalition forces,
have raised short-term market risk and may
have adverse long-term effects on U.S. and
world economies and markets. A similar
disruption of the financial markets could
impact the value of securities held by the
Fund, interest rates, auctions, secondary
trading, ratings, credit risk, inflation
and other factors relating to the Common
Shares.

Anti-Takeover Provisions. The Fund's
Agreement and Declaration of Trust includes
provisions that could have the effect of
limiting the ability of other persons or
entities to acquire control of the Fund or
to change the composition of its Board. See
"Description of Capital Structure -- Anti-
Takeover Provisions in the Declaration of
Trust."

SUMMARY OF FUND EXPENSES

The purpose of the table below is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The following table assumes leverage (through the use of forward foreign
currency contracts and the re-investing of securities lending collateral) in an
amount equal to 40% of the Fund's total leveraged assets, and shows Fund
expenses as a percentage of net assets attributable to Common Shares. THE FUND'S
METHOD OF CALCULATING THE MANAGEMENT FEE PAYABLE TO THE ADVISER IS DIFFERENT
THAN THE WAY CLOSED-END INVESTMENT COMPANIES TYPICALLY CALCULATE MANAGEMENT
FEES. The management fee borne by Common Shareholders will increase to the
extent the Adviser uses forward foreign currency contracts and other Foreign
Obligations derivatives to create financial leverage on behalf of the Fund. See
"Management of the Fund -- The Adviser" for an explanation of the method of
calculating the management fee and how this method differs from the way
closed-end investment companies typically calculate management fees.

SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load (as a percentage of offering price).... 4.50%
Estimated offering expenses borne by the Fund............. .20%(1)
Dividend reinvestment plan fees........................... None(2)

PERCENTAGE OF NET
ASSETS ATTRIBUTABLE
TO COMMON SHARES
(ASSUMING LEVERAGING)(3)
------------------------

ANNUAL EXPENSES
Management fee............................................ 1.25%
Other expenses............................................ .20%(4)
Payments relating to leverage............................. 1.55%(5)
-----
Total annual expenses..................................... 3.00%
Fee and expense reimbursements (years 1-5)................ (.33)%(5)
-----
Net annual expenses (years 1-5)........................... 2.67%(5)
=====

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

(1) Eaton Vance or an affiliate has agreed to reimburse all organizational costs
and pay all offering costs (other than sales load) that exceed $.04 per
Common Share (.20% of the offering price).

(2) You will be charged a $5.00 service charge and pay brokerage charges if you
direct the plan agent to sell your Common Shares held in a dividend
reinvestment account.

(3) Stated as percentages of net assets attributable to Common Shares assuming
no leverage, the Fund's expenses would be estimated to be as follows:

PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO
COMMON SHARES
(ASSUMING NO LEVERAGE)
------------------------

ANNUAL EXPENSES
Management fee............................................ .75%
Other expenses............................................ .17%(4)
-----
Total annual expenses..................................... .92%
Fee and expense reimbursements (years 1-5)................ (.20)%(5)
-----
Net annual expenses (years 1-5)........................... .72%(5)
=====

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

(4) Estimated expenses based on the current fiscal year.

(5) To illustrate the effect of costs relating to leverage, the table assumes
all financial leverage consists of reinvestment of securities lending
collateral on which the Fund pays securities lending counterparties a rebate
rate. The rebate rate is deducted from any income paid on the securities
lent and accordingly is not reflected in the Fund's financial statements as
an expense. This information is intended to provide investors with the
estimated expense of leveraging the Fund by reinvesting securities lending
collateral. It currently is anticipated that only a portion of the Fund's
leverage will be achieved in this manner. Leverage achieved through forward
foreign currency contracts or other Foreign Obligations derivatives would
not be subject to a rebate rate.

(6) Eaton Vance has contractually agreed to reimburse the Fund for fees and
other expenses in the amount of .20% of average daily total leveraged assets
of the Fund for the first five full years of the Fund's operations, .15% of
average daily total leveraged assets of the Fund in year six, .10% in year
seven and .05% in year eight. For this purpose, total leveraged assets shall
be calculated in the same manner as "total leveraged assets" as described
under "Management of the Fund -- The Adviser." Without the reimbursement,
net annual expenses would be estimated to be 3.00% of average daily net
assets (or, assuming no leverage, .92% of average daily net assets)
attributable to Common Shares. Eaton Vance may voluntarily reimburse
additional fees and expenses, but is under no obligation to do so. Any such
voluntary reimbursements may be terminated at any time.

The expenses shown in the table are based on estimated amounts for the
Fund's first year of operations and assume that the Fund issues approximately
15,000,000 Common Shares. If the Fund issues fewer Common Shares, then, all
other things being equal, the Fund's expenses as a percentage of net assets
attributable to Common Shares would increase. See "Management of the Fund" and
"Dividend Reinvestment Plan."

EXAMPLE

The following example illustrates the expenses that you would pay on a
$1,000 investment in Common Shares (including the sales load of $45, estimated
offering expenses of this offering of $2), assuming (i) total net annual
expenses of 2.67% of net assets attributable to Common Shares in years one
through five increasing to 3.00% in years nine and ten and (ii) a 5% annual
return(1)*:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------

Total expenses incurred...................... $73 $126 $182 $346

*THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE HIGHER OR LOWER.
------------

(1) The example assumes that the estimated other expenses and estimated payments
relating to leverage set forth in the Summary of Fund Expenses table are
accurate, that fees and expenses increase as described in note (2) below and
that all 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% return shown in
the example.

(2) Assumes reimbursement of fees and expenses of .15% of average daily total
leveraged assets of the Fund in year six, .10% in year seven and .05% in
year eight and no reimbursement of fees or expenses in years nine and ten.
Eaton Vance has not agreed to reimburse the Fund for any portion of its fees
and expenses beyond February 2015.

THE FUND

The Fund is a newly organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on April 15, 2004 pursuant to an Agreement and
Declaration of Trust governed by the laws of The Commonwealth of Massachusetts
and has no operating history. The Fund's principal office is located at The
Eaton Vance Building, 255 State Street, Boston, Massachusetts 02109 and its
telephone number is 1-800-225-6265.

This prospectus relates to the initial public offering of the Common
Shares. See "Underwriting."

USE OF PROCEEDS

The net proceeds of this offering of Common Shares will be approximately
$ (or $
assuming exercise of the overallotment option in full), which, after payment of
the estimated offering expenses, will be invested in accordance with the Fund's
investment objectives and policies as soon as practicable, but, in no event,
under normal market conditions, later than three months after the receipt
thereof. Pending such investment, the proceeds may be invested in high-quality,
short-term debt securities. Eaton Vance or an affiliate has agreed to (i)
reimburse all organizational costs and (ii) pay all offering costs of the Fund
(other than sales loads) that exceed $.04 per Common Share.

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES

The Fund's investment objective is to provide a high level of current
income. The Fund may, as a secondary objective, also seek capital appreciation
to the extent consistent with its primary objective of high current income. The
Fund pursues its objectives by investing its assets primarily in three distinct
investment categories: (1) senior, secured floating rate loans made to corporate
and other business entities ("Senior Loans"); (2) bank deposits denominated in
foreign currencies, debt obligations of foreign governmental and corporate
issuers, including emerging market issuers, which are denominated in foreign
currencies or U.S. dollars, and positions in foreign currencies ("Foreign
Obligations"); and (3) mortgage-backed securities that are issued, backed or
otherwise guaranteed by the U.S. Government or its agencies or instrumentalities
or that are issued by private issuers ("MBS"). Senior Loans in which the Fund
invests are typically of below "investment grade" quality ("Non-Investment Grade
Securities"), as may be certain Foreign Obligations and other the Fund
investments. Non-Investment Grade Securities, commonly referred to as "junk"
securities, are debt obligations that are rated below investment grade by each
of the national rating agencies that cover the security, or, if unrated, are
determined to be of comparable quality by the Adviser. S&P and Fitch consider
securities rated below BBB- to be below investment grade and Moody's considers
securities rated below Baa3 to be below investment grade. In addition to holding
investments directly, the Fund may also obtain investment exposure to any
category of investments through the use of long or short derivative instruments
and through investment in other investment companies. The Adviser has broad
discretion to allocate the Fund's assets among these investment categories
subject to the following guidelines. Under normal market circumstances, at least
80% of the Fund's total leveraged assets will be invested in its three principal
investment categories collectively, including through the use of derivatives;
and the Fund's exposure to each of these categories will equal at least 25% of
the Fund's net assets, including through the use of derivatives. Through the use
of leverage, the Fund's investment of at least 25% or more of its net assets in
each investment category may represent significantly less than 25% of its total
leveraged assets.

currency, the offsetting positions will be netted for purposes of determining
total leveraged assets. When the Fund holds other long and short positions in
Foreign Obligations in a given country denominated in the same currency, total
leveraged assets will be calculated by excluding the smaller of the long or
short position.

PRIMARY INVESTMENT POLICIES

A team of Eaton Vance investment professionals is responsible for the
overall management of the Fund's investments as well as allocations among the
Fund's three principal investment categories. Individual members of this team
with specialized expertise are responsible for the day-to-day portfolio
management within each of the Fund's three main investment categories. The
Fund's investments are actively managed, and securities may be bought or sold on
a daily basis. The Adviser attempts to manage income and achieve returns through
timely trading.

Under normal market conditions, the Fund will maintain a duration of no
more than three years (including the effect of anticipated leverage). Initially,
the Fund is expected to have a duration of approximately 1.5 to 2 years
(including the effect of anticipated leverage). 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
fixed interest and principal payments. This duration policy may only be changed
following provision of 60 days' prior written notice to the Common Shareholders.
In comparison to maturity (which is the date on which the issuer is obligated to
repay the principal amount of a debt instrument), duration is a measure of the
price volatility of a debt instrument as a result in changes in market rates of
interest, based on the weighted average timing of the instrument's expected
fixed interest and principal payments. Duration differs from maturity in that it
considers a security's yield, coupon payments, principal payments, rate reset
features 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 responsive
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 Adviser's staff monitors the credit quality and the price of
securities held by the Fund, as well as other securities that are available to
the Fund. Under normal market conditions, the Fund will invest significantly in
MBS that are expected to be of the highest credit quality (generally AAA as
determined by S&P or Fitch, Aaa as determined by Moody's or, if unrated,
determined to be of comparable quality by the Adviser) and significantly in
Senior Loans (which are typically below investment grade quality) and certain
Foreign Obligations and other Fund investments that may be of below investment
grade quality. Under normal market conditions, the Fund will structure and seek
to maintain its overall portfolio in such a manner so that the Fund has an
average dollar weighted portfolio quality of investment grade (which is at least
BBB- as determined by S&P or Fitch, or Baa3 as determined by Moody's or, if
unrated, determined to be of comparable quality by the Adviser). Within this
general guideline, the Fund may invest in securities of any credit quality. In
order to maintain compliance with this policy, the Fund's holdings of Senior
Loans and other investments of below investment grade quality will be offset by
investments in MBS and other investments of high quality. The extremely high
credit quality of MBS will substantially raise the average portfolio credit
quality on a dollar-weighted basis. For this purpose, when a security is rated
by more than one of these rating agencies, the Adviser generally will use the
highest rating. The Fund will monitor and adjust its portfolio on an ongoing
basis in order to remain in compliance with this credit quality policy.

A "barbell" portfolio, such as the Fund, that achieves a weighted average
investment grade credit quality by investing partly in below investment grade
securities and partly in very high quality securities involves certain risk
characteristics that differ from fixed income securities with credit ratings
equivalent to the portfolio average or from a portfolio of similar average
quality consisting mostly of securities of a quality near this average. Most
notably, the Fund's portfolio will contain a higher percentage of assets of
lower quality that each individually involve a higher degree of credit risk and
may be considered to be speculative in nature. As indicated above, the Fund may
invest in unrated obligations for which Eaton
22

Vance will make a credit quality determination for purposes of the Fund's credit
quality policy. To the extent that the Fund invests in such unrated obligations,
the Fund's credit quality will be more dependent on Eaton Vance's credit
analysis than if the Fund invested in only rated obligations. Investment in
unrated obligations also involves a potential conflict of interest. In general,
investment quality involves a trade-off between potential enhanced return and
assumption of additional credit risk. In making credit quality determinations
for unrated obligations, there is a possibility of an investment adviser being
unduly influenced by the goal of seeking to maximize investment performance. For
a description of the risks of investing in Non-Investment Grade Securities, see
"Risk Factors -- Non-Investment Grade Securities Risk."

Although the Adviser considers ratings when making investment decisions,
it performs its own credit and investment analysis and does not rely primarily
on the ratings assigned by the rating services. In evaluating the quality of a
particular security, whether rated or unrated, the Adviser will normally take
into consideration, among other things, the issuer's financial resources and
operating history, its sensitivity to economic conditions and trends, the
ability of its management, its debt maturity schedules and borrowing
requirements, and relative values based on anticipated cash flow, interest and
asset coverage, and earnings prospects. The Adviser will attempt to reduce the
risks of investing in lower rated or unrated debt instruments through active
portfolio management, credit analysis and attention to current developments and
trends in the economy and the financial markets. When purchasing and selling
MBS, the Adviser focuses on the expected principal and interest payments and
price of the MBS as well as current and anticipated market conditions.

Subject to its obligation on a portfolio-wide basis to remain in ongoing
compliance with the weighted average portfolio credit policy discussed above,
the Fund is not required to dispose of a security in the event that a nationally
recognized statistical rating agency (each a "Rating Agency") downgrades its
assessment of the credit characteristics of a particular issue or withdraws its
assessment, including in the event of a default. In determining whether to
retain or sell such a security, Eaton Vance may consider such factors as Eaton
Vance's assessment of the credit quality of the issuers of such security, the
price at which such security could be sold and the rating, if any, assigned to
such security by other Rating Agencies.

As stated above, the Fund will normally have substantial exposure to
Foreign Obligations. The Adviser believes that a portfolio of carefully selected
Foreign Obligations may earn attractive rates of return relative to U.S.
instruments of comparable duration and credit quality. In current market
circumstances, the Adviser believes that desired exposures to short-term
investments in certain foreign countries may best be obtained through forward
foreign currency contracts with respect to such countries' currencies. The
Adviser believes that this approach reduces the credit risk associated with
investment in the debt of foreign governmental and corporate issuers. In
addition, utilizing forward foreign currency contracts reduces the transaction
costs of obtaining this exposure as compared to investment in foreign debt
obligations. Through its investments in non-dollar denominated Foreign
Obligations, the Fund may have substantial exposure to fluctuations in the
values of foreign currencies.

The Fund's investments may have significant exposure to certain
countries, economies, economic sectors and markets and thus may react
differently to political or economic developments than the global income
securities market as a whole. The Fund initially may invest up to 30% of its
total leveraged assets in derivative instruments other than forward foreign
currency contracts. Subject to compliance with the Fund's diversification and
other portfolio guidelines, the Fund may invest in forward foreign currency
contracts without limitation.

SENIOR LOANS

Senior Loans are floating rate loans made to corporations and other
business entities. Senior Loans hold the most senior position in the capital
structure of a business entity (the "Borrower"), are typically secured with
specific collateral and have a claim on the assets and/or stock of the Borrower
that is senior to that held by subordinated debt holders and stockholders of the
Borrower. The proceeds of

Senior Loans primarily are used to finance leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases, dividends, and, to a lesser extent, to
finance internal growth and for other corporate purposes. Senior Loans typically
have rates of interest that are redetermined either daily, monthly, quarterly or
semi-annually by reference to a base lending rate, plus a premium or credit
spread. These base lending rates are primarily the London-Interbank Offered Rate
("LIBOR"), and secondarily the prime rate offered by one or more major U.S.
banks (the "Prime Rate") and the certificate of deposit ("CD") rate or other
base lending rates used by commercial lenders. The Senior Loans held by the Fund
will have a dollar-weighted average period until the next interest rate
adjustment of approximately 90 days or less. In the experience of the Adviser,
the average life of Senior Loans over the last decade has been two to four years
because of prepayments.

The Fund may also purchase unsecured loans, other floating rate debt
securities such as notes, bonds and asset-backed securities (such as special
purpose trusts investing in bank loans), credit-linked notes, synthetic lease
financings, tranches of collateralized loan obligations, investment grade fixed
income debt obligations and money market instruments, such as commercial paper.

The Fund may retain in its portfolio Senior Loans where the Borrowers
have experienced, or may be perceived to be likely to experience, credit
problems, including default, involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. At times, in
connection with the restructuring of a Senior Loan either outside of bankruptcy
court or in the context of bankruptcy court proceedings, the Fund may determine
or be required to accept equity securities or junior debt securities in exchange
for all or a portion of a Senior Loan.

Like other debt instruments, Senior Loans 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 per Common Share of the Fund.
There can be no assurance that the liquidation of any collateral securing a 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 the
collateral securing a Senior Loan. The collateral securing a Senior Loan may
lose all or substantially all of its value in the event of bankruptcy of a
Borrower. Some Senior Loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate such Senior Loans
to presently existing or future indebtedness of the Borrower or take other
action detrimental to the holders of Senior Loans including, in certain
circumstances, invalidating such Senior 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 Senior Loans in which the Fund will invest may not be rated by a
Rating Agency, will not be registered with the Securities and Exchange
Commission or any state securities commission and will not be listed on any
national securities exchange. The amount of public information available with
respect to Senior Loans will generally be less extensive than that available for
registered or exchange listed securities. In evaluating the creditworthiness of
Borrowers, the Adviser 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. Many of the Senior Loans in the
Fund will have been assigned ratings below investment grade by a Rating Agency.
In the event Senior Loans are not rated, they are likely to be the equivalent of
below investment grade quality. Because of the protective features of Senior
Loans, the Adviser believes that Senior Loans tend to have more favorable loss
recovery rates as compared to more junior types of below investment grade debt
obligations. The Adviser does not view ratings as the determinative factor in
its investment decisions and relies more upon its own credit analysis abilities
than upon ratings determined by Rating Agencies.

No active trading market may exist for some 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. During periods of limited supply
and liquidity of Senior Loans, the Fund's net asset value may be adversely
affected.

Although changes in prevailing interest rates can be expected to cause
some fluctuations in the value of Senior Loans (due to the fact that floating
rates on Senior Loans only reset periodically), the value of Senior Loans is
substantially less sensitive to changes in market interest rates than fixed-rate
instruments. As a result, the Adviser expects the Fund's policy of investing a
portion of its assets in floating-rate Senior Loans will make the Fund less
volatile and less sensitive to changes in market interest rates than if the Fund
invested exclusively in fixed-rate obligations. Nevertheless, a sudden and
significant increase in market interest rates may cause a decline in the value
of these investments and in the Fund's net asset value. Other factors
(including, but not limited to, rating downgrades, credit deterioration, a large
downward movement in stock prices, a disparity in supply and demand of certain
securities or market conditions that reduce liquidity) can reduce the value of
Senior Loans and other debt obligations, impairing the Fund's net asset value.

The Fund may purchase and retain in its portfolio a Senior Loan where the
Borrower has experienced, or may be perceived to be likely to experience, credit
problems, including involvement in or recent emergence from bankruptcy
reorganization proceedings or other forms of debt restructuring. Such
investments may provide opportunities for enhanced income as well as capital
appreciation. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Fund may determine or be required to accept equity securities
or junior debt securities in exchange for all or a portion of a Senior Loan.

Senior Loan assignments and participations. The Fund expects primarily
to purchase Senior Loans by assignment from a participant in the original
syndicate of lenders or from subsequent assignees of such interests. The Fund
may also purchase participations in the original syndicate making Senior Loans.
Loan participations typically represent direct participations in a loan to a
corporate borrower, and generally are offered by banks or other financial
institutions or lending syndicates. The Fund may participate in such
syndications, or can buy part of a loan, becoming a part lender. When purchasing
loan participations, the Fund assumes the credit risk associated with the
corporate borrower and may assume the credit risk associated with an interposed
bank or other financial intermediary.

Senior Loan valuation. The Adviser uses an independent pricing service
to value most Senior Loans held. The Adviser may use the fair value method to
value loans or other securities if market quotations for them are not readily
available or are deemed unreliable, or if events occurring after the close of a
securities market and before the Fund values its assets would materially affect
net asset value. Because foreign securities trade on days when the Common Shares
are not priced, net asset value can change at a time when Common Shares cannot
be redeemed.

SAMIs and other Senior Loan-based Derivatives. The Fund may obtain
exposure to Senior of Loans and baskets of Senior Loans through the use of
derivative instruments. Such derivative instruments have recently become
increasingly available. The Adviser reserves the right to utilize these
instruments and similar instruments that may be available in the future. The
Fund currently intends to invest in a derivative instrument known as the Select
Aggregate Market Index ("SAMI") which provides investors with exposure to a
reference basket of Senior Loans. SAMIs are structured as floating-rate
instruments and consist of a basket of credit default swaps whose underlying
reference securities are senior secured loans. While investing in SAMIs will
increase the universe of floating rate debt securities to which the Fund is
exposed, such investments entail risks that are not typically associated with
investments in other floating-rate debt securities. The liquidity of the market
for SAMIs will be subject to liquidity in the secured loan and credit
derivatives markets. Investment in SAMIs involves many of the risks associated
with investments in derivative instruments discussed generally below. Among
other derivatives-related risks, the Fund will be subject to the risk that the
counterparty in a derivative transaction will default on its obligations.
Derivative transactions, generally involve the risk of loss due to unanticipated
adverse changes in securities prices, interest rates, the inability to close out
a position, imperfect correlation between a position and the desired hedge, tax
constraints on closing out positions and portfolio

management constraints on securities subject to such transactions. The potential
loss on derivative instruments may be substantial relative to the initial
investment therein.

Investment companies investing in Senior Loans. The Fund may purchase
shares of other closed-end investment companies investing primarily in Senior
Loans as a means of gaining exposure to Senior Loans to the extent permitted
under the 1940 Act. Such investments are limited to not more than 10% of the
Fund's assets, with no more than 5% of Fund assets invested in any one issuer.
An investment in shares of other closed-end investment companies is affected by
risks similar to those of the Fund, including the possibility of shares trading
at a discount to net asset value. Investment companies bear fees and expenses
that the Fund, as a shareholder, will bear indirectly, so Common Shareholders
will be subject to duplication of fees on investments by the Fund in other
investment companies.

FOREIGN OBLIGATIONS

Foreign Obligations include bank deposits denominated in foreign
currencies, debt obligations of foreign governmental and corporate issuers,
including emerging market issuers, which are denominated in foreign currencies
or U.S. dollars, and positions in foreign currencies. The Adviser believes that
a portfolio of carefully selected Foreign Obligations may earn attractive rates
of return relative to U.S. instruments of comparable duration and credit
quality. In current market circumstances, the Adviser believes that desired
exposures to short-term investments in certain foreign countries may best be
obtained through forward foreign currency contracts with respect to such
countries' currencies. The Adviser believes that this approach reduces the
credit risk associated with investment in the debt of foreign governmental and
corporate issuers. In addition, utilizing forward foreign currency contracts
reduces the transaction costs of obtaining this exposure as compared to
investment in foreign debt obligations. Through its investments in non-dollar
denominated Foreign Obligations, the Fund may have substantial exposure to
fluctuations in the values of foreign currencies.

Foreign Currencies. The Adviser intends to select currencies for both
long and short investment based upon such factors as a country's (i) economic
and political structure, (ii) long run economic and productivity gain, (iii)
fiscal and monetary policies, (iv) inflation and interest rates, (v) balance of
payments and terms of trade and (vi) other factors, such as flow of funds.

In its currency investments, the Fund may buy or sell foreign currencies
or may deal in forward foreign currency contracts, that is, agree to buy or sell
a specified currency at a specified price and future date. The Fund's investment
in forward foreign currency contracts may include, for all purposes described
herein, currency contracts that are non-deliverable and settle in U.S. dollars.
In addition to obtaining long or short investment exposure to foreign
currencies, the Fund may use forward contracts and other currency related
investments for hedging, or for currency risk management. Currency risk
management may include taking active currency positions relative to the Fund's
securities portfolio.

The value of foreign assets as measured in U.S. dollars may be affected
favorably or unfavorably by changes in foreign currency rates and exchange
control regulations. Foreign currency exchange rates may fluctuate significantly
over short periods of time. They generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or perceived changes in interest
rates and other complex factors. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or foreign
governments or central banks, or by currency controls or political developments
in the United States or abroad. Currencies in which the Fund invests or in which
its portfolio assets are denominated may be devalued against the U.S. dollar,
resulting in a loss to the Fund. In certain countries, the central bank manages
the currency rate against a basket of one or more index currencies of other
major countries. In some of these countries, the Fund may employ a strategy
seeking to limit exposure to the index currencies while retaining exposure to
the local currency. In such a situation, the Fund's strategy could fail if a
country changes the announced or implied components of the index currencies
against which the Fund has hedged its exposure.

Other risks involved in currency investments include the Fund's
dependence on the Adviser's ability to predict movements in exchange rates and
imperfect correlations between movements in exchange rates. Currency investments
could be adversely affected by delays in, or a refusal to grant, repatriation of
funds or conversions of certain currencies. The currencies of emerging market
countries may experience significant declines against the U.S. dollar, and
significant devaluation may occur subsequent to investments in these currencies
by the Fund.

Forward foreign currency exchange contracts are individually negotiated
and privately traded so they are dependent upon the creditworthiness of the
counterparty. Certain currency related investments may be acquired in the
"over-the-counter" or "interdealer" markets, where participants typically are
not subject to credit evaluation and regulatory oversight as are members of
"exchange based" markets. In the absence of a regulated market to facilitate
settlement, the Fund is subject to the risk that a counterparty will not settle
a transaction (such as a forward currency contract) in accordance with its terms
and conditions because of a dispute over the terms of contract or because of a
credit or liquidity problem. Moreover, certain currency investments, such as in
emerging markets, may be highly volatile, and movement in these instruments may
result in substantial loss to the Fund.

A portion of the Fund's currency related investments may be or become
illiquid. Illiquidity may result from the small quantities in which the
securities held were issued and or from lower trading volumes in the securities
markets and/or currencies of certain countries. If illiquid currency investments
need to be liquidated quickly, the Fund could sustain significant transaction
costs.

Currency transactions are subject to the risk of a number of complex
political and economic factors applicable to the countries issuing the
underlying currencies. Furthermore, unlike trading in many other types of
instruments, there is no systematic reporting of last sale information with
respect to the foreign currency transactions. As a result, current pricing
information may not be completely available. In an over-the-counter trading
environment, there are no daily price fluctuation limits. There may be no liquid
secondary market for currency options purchased or written, or forward contracts
entered into, until their exercise, expiration or maturity. There is also the
risk of default by, or the bankruptcy of, the financial institution serving as a
counterparty.

The Fund may, but is not obligated to, engage in transactions to hedge
against changes in foreign currencies, and will use such hedging techniques when
the Adviser deems appropriate. The Fund may enter into forward contracts or
other currency-related investments for hedging in several circumstances. First,
when the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of dollars, of the amount of foreign currency involved
in the underlying security transaction, the Fund will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold and the date on
which payment is made or received. Second, when the Adviser believes that the
currency of a particular foreign country may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell, for a
fixed amount of dollars, the amount of foreign currency approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. Maintaining a match between the forward contract amounts and the value
of the securities involved will not generally be possible since the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Third, the Fund may engage in currency
"cross hedging" when, in the opinion of the Adviser, the historical relationship
among foreign currencies suggests that the Fund may achieve protection for a
foreign security at reduced cost through the use of a forward foreign currency
contract relating to a currency other than the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with other investments in foreign currencies. The Fund is not
required to enter into hedging transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the
27

Adviser. By entering into the above hedging transactions, the Fund may be
required to forego the benefits of advantageous changes in the exchange rates.

The Fund may enter into foreign currency forward contracts to give
securities denominated in one currency (generally the U.S. dollar) the risk
characteristics of similar securities denominated in another currency or for
risk management or investment in a manner similar to the Fund's use of futures
contracts and related options.

When the Fund uses currency instruments for investment and currency risk
management, the foreign currency exposure of the Fund may differ substantially
from the currencies in which the Fund's investment securities are denominated.
The Fund may therefore be subject to the risk of adverse currency movements.

Foreign Governmental Securities. Foreign governmental securities include
securities issued or guaranteed by foreign governments (including political
subdivisions) and their authorities, agencies or instrumentalities and by
supra-national agencies. Foreign governmental securities may have different
levels of government support. For example, some foreign governmental securities
are supported by the full faith and credit of a foreign national government or
political subdivision and some are not. In the case of certain countries,
governmental securities may involve varying degrees of credit risk as a result
of financial or political instability in such countries and the possible
inability of the Fund to enforce its rights against the governmental issuer.

Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include such entities as
the International Bank for Reconstruction and Development (the World Bank), the
Asian Development Bank, the European Coal and Steel Community and the
Inter-American Development Bank.

Foreign governmental securities denominated in currencies other than the
U.S. dollar are subject to currency risk, and such risk may be substantial. Like
other fixed income securities, foreign governmental securities are subject to
market risk and their market values fluctuate as interest rates change,
generally falling during times of rising interest rates. Yields on foreign
governmental securities tend to be lower than those of corporate securities of
comparable maturities.

In addition to investing directly in foreign governmental securities, the
Fund may purchase certificates of accrual or similar instruments evidencing
undivided ownership interests in interest payments or principal payments, or
both, in foreign government securities. These certificates of accrual and
similar instruments may be more volatile than other governmental securities.

Foreign Corporate Securities. Foreign corporate securities include
securities issued or backed by corporations domiciled outside the United States
and securities issued or backed by foreign subsidiaries of U.S. corporations.
Foreign corporate securities denominated in currencies other than the U.S.
dollar are subject to currency risk, and such risk may be substantial. Foreign
corporate securities are exposed to credit risks comparable to domestic issues
of similar investment quality. Such risks will be greater for foreign corporate
securities that are Non-Investment Grade Securities. Like other fixed income
securities, foreign corporate securities are subject to market risk. Their
market values fluctuate as interest rates change, generally falling during times
of rising interest rates.

Foreign Debt Obligations Generally. Investment in foreign issuers or
securities principally traded overseas may involve certain special risks due to
foreign economic, political and legal developments, including favorable or
unfavorable changes in currency exchange rates, exchange control regulations
(including currency blockage), expropriation or nationalization of assets,
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against foreign entities.
Furthermore, issuers of foreign debt obligations are subject to different, often
less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. Debt obligations of some foreign governments and companies and
foreign markets for such obligations are less liquid and at times more volatile
than comparable U.S. debt obligations and markets for such obligations. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of
28

some foreign countries may limit the Fund's ability to invest in securities of
certain issuers located in these foreign countries. There are also special tax
considerations which apply to securities of foreign issuers and securities
principally traded overseas. Under certain circumstances, markets which are
perceived to have similar characteristics to troubled markets may be adversely
affected whether or not similarities actually exist.

Emerging Markets. The securities markets of emerging countries are
generally smaller, less developed, less liquid, and more volatile than the
securities markets of the United States and developed foreign markets.
Disclosure and regulatory standards in many respects are less stringent in
emerging markets than in the United States and developed foreign markets. There
also may be a lower level of monitoring and regulation of securities markets in
emerging market countries and the activities of investors in such markets, and
enforcement of existing regulations may been extremely limited. Many emerging
countries 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 very negative effects on the economies
and securities markets of certain emerging countries. Economies in emerging
markets generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be affected adversely by trade
barriers, exchange controls, managed adjustments in relative currency values,
and other protectionist measures imposed or negotiated by the countries with
which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries in which they trade.
The economies of countries with emerging markets may also be predominantly based
on only a few industries or dependent on revenues from particular commodities.
In addition, custodial services and other costs relating to investment in
foreign markets may be more expensive in emerging markets than in many developed
foreign markets, which could reduce the Fund's income from such securities.
Because publicly traded debt instruments of emerging markets represent a
relatively recent innovation in the world debt markets, there is little
historical data or related market experience concerning the attributes of such
instruments under various economic, market and political conditions.

In many cases, governments of emerging market countries continue to
exercise significant control over their economies, and government actions
relative to the economy, as well as economic developments generally, may affect
the capacity of issuers of emerging market country debt instruments to make
payments on their debt obligations, regardless of their financial condition. In
addition, there is a heightened possibility of expropriation or confiscatory
taxation, imposition of withholding taxes on interest payments, or other similar
developments that could affect investments in those countries. There can be no
assurance that adverse political changes will not cause the Fund to suffer a
loss of any or all of its investments in such countries and the interest
thereon.

MORTGAGE-BACKED SECURITIES

MBS are mortgage-backed securities that are issued, backed or otherwise
guaranteed by the U.S. Government or its agencies or instrumentalities or that
are issued by private issuers. The Fund expects to invest typically in MBS that
are issued, backed or otherwise guaranteed by the U.S. Government or its
agencies or instrumentalities, although privately issued MBS may also be held.
MBS represent participation interests in pools of fixed-rate, hybrid and
adjustable-rate mortgage loans. Unlike conventional debt obligations, MBS
provide monthly payments derived from the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans. The Fund may invest in mortgage loans that have had a
history of refinancing opportunities (so called "seasoned MBS"). Seasoned MBS
tend to have a higher collateral to debt ratio than other MBS because a greater
percentage of the underlying debt has been repaid and the collateral property
may have appreciated in value. The Adviser expects that under current market
conditions many of the MBS, including seasoned MBS, held by the Fund will be
premium bonds held at prices that exceed their par or principal value.

The mortgage loans underlying MBS are generally subject to a greater rate
of principal prepayments in a declining interest rate environment and to a
lesser rate of principal prepayments in an
29

increasing interest rate environment. Under certain prepayment scenarios, the
Fund will fail to recover the full amount of its investment in MBS purchased at
a premium. Because faster than expected prepayments must usually be invested in
lower yielding securities, MBS are less effective than conventional bonds in
"locking in" a specified interest rate. The value of the Common Shares may be
adversely affected by fluctuations in interest rates underlying the MBS held by
the Fund. In a rising interest rate environment, a declining prepayment rate
will extend the average life of many MBS, which in turn would lengthen the
duration of the Fund's portfolio. This possibility is often referred to as
extension risk. Extending the average life of a mortgage-backed security
increases the risk of depreciation due to future increases in market interest
rates. MBS, that are purchased at a premium, generally including seasoned MBS,
may generate current income that exceeds market rates for comparable investments
but tend to decrease in value as they mature, which may cause a resulting
decrease in the Fund's net asset value per Common Share.

The Fund may invest in classes of collateralized mortgage obligations
("CMOs") and various other MBS instruments. In choosing among CMO classes, the
Adviser will evaluate the total income potential of each class and other
factors. See "Investment Objectives and Policies -- Additional Investment
Practices -- Securitized interests."

Certain government agencies or instrumentalities, such as GNMA, FNMA and
FHLMC provide a guarantee as to timely payment of principal and interest for MBS
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.

SECURITIES LENDING

The Fund expects to utilize the reinvestment of securities lending
collateral as a source of financial leverage. In this regard, the Fund may seek
to earn income on securities loans by reinvesting cash collateral in any
investments consistent with its investment objectives and policies, seeking to
invest at rates that are higher than the "rebate" rate that it normally will pay
to the borrower with respect to such cash collateral. Securities loans may
result in delays in recovering, or a failure of the borrower to return, the
loaned securities. The defaulting borrower ordinarily would be liable to the
Fund for any losses resulting from such delays or failures, and the collateral
provided in connection with the loan normally would also be available for that
purpose. Securities loans normally may be terminated by either the Fund or the
borrower at any time. Upon termination and the return of the loaned securities,
the Fund would be required to return the related cash or securities collateral
to the borrower and it may be required to liquidate longer term portfolio
securities in order to do so. To the extent that such securities have decreased
in value, this may result in the Fund realizing a loss at a time when it would
not otherwise do so. The Fund also may incur losses if it is unable to reinvest
cash collateral at rates higher than applicable rebate rates paid to borrowers
and related administrative costs. These risks are substantially the same as
those incurred through other forms of financial leverage, and will be subject to
the investment policies, restrictions and risk considerations described in this
prospectus and in the Statement of Additional Information.

The Fund intends to manage its use of financial leverage through the
reinvestment of securities lending collateral so that this arrangement will not
be considered to create a "senior security" within the meaning of the 1940 Act.
In this regard, in accordance with guidelines established by the Securities and
Exchange Commission, the Fund's custodian on a daily basis will segregate in the
Fund's custody account liquid portfolio assets equal to the value of any
securities lending collateral that has been reinvested to create financial
leverage. In addition, the Securities and Exchange Commission has established
guidelines that restrict a registered investment company from loaning portfolio
securities in excess of one third of its total leveraged assets. Accordingly,
this restriction places a practical limit on the amount of financial leverage
that may be obtained through reinvestment of securities lending collateral.

In addition to providing a source of financial leverage, 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 fails financially. In the judgment of the Adviser, the loans will
be made only to organizations whose credit quality or claims paying ability is
considered to be at least investment grade and when the expected returns, net of
administrative expenses and any finders' fees, justifies the attendant risk. All
securities loans will be collateralized on a continuous basis by cash or liquid
securities having a value, marked to market daily, of at least 100% of the
market value of the loaned securities. The Fund may receive loan fees in
connection with loans that are collateralized by securities or on loans of
securities for which there is special demand.

The Fund will receive amounts equivalent to any interest or other
distributions paid on securities while they are on loan, and the Fund will not
be entitled to exercise any voting or other beneficial rights on loaned
securities. The Fund will exercise its right to terminate loans and thereby
regain these rights whenever the Adviser considers it to be in the Fund's
interest to do so, taking into account the related loss of reinvestment income
and other factors.

ADDITIONAL INVESTMENT PRACTICES

Other U.S. Government securities. U.S. Government securities in which
the Fund may invest include (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuances such as: U.S. Treasury bills
(maturities of one year or less), U.S. Treasury notes (maturities of one year to
ten years) and U.S. Treasury bonds (generally maturities of greater than ten
years) and (2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the U.S. Treasury, (c)
discretionary authority of the U.S. Government to purchase certain obligations
of the U.S. Government agency or instrumentality or (d) the credit of the agency
or instrumentality. The Fund may also invest in other securities or agreements
collateralized or otherwise secured by U.S. Government securities. Agencies and
instrumentalities of the U.S. Government include, but are not limited to,
Federal Land Banks, Federal Financing Banks, Banks for Cooperatives, Federal
Intermediate Credit Banks, Farm Credit Banks, Federal Home Loan Banks, FHLMC,
FNMA, GNMA, United States Postal Service, Small Business Administration,
Tennessee Valley Authority and any other enterprise established or sponsored by
the U.S. Government. Because the U.S. Government generally is not obligated to
provide support to its instrumentalities (i.e., such obligations are not backed
by the full faith and credit of the U.S. Government), the Fund will invest in
obligations issued by these instrumentalities only if the Adviser has determined
that the anticipated returns from such investments are attractive in relation to
the credit and other risks assumed in investing therein.

The principal of and/or interest on certain U.S. Government securities
that may be purchased by the Fund could be (a) payable in foreign currencies
rather than U.S. dollars or (b) increased or diminished as a result of changes
in the value of the U.S. dollar relative to the value of foreign currencies. The
value of such portfolio securities denominated in foreign currencies may be
affected favorably or unfavorably by changes in the exchange rate between
foreign currencies and the U.S. dollar.

Securitized interests. The Fund may invest in certain asset-backed
securities as discussed below. Asset-backed securities are payment claims that
are securitized in the form of negotiable paper that is issued by a financing
company (generically called a Special Purpose Vehicle or "SPV"). These
securitized payment claims are, as a rule, corporate financial assets brought
into a pool according to specific diversification rules. The SPV is a company
founded solely for the purpose of securitizing these claims and its assets are
this diversified asset pool. On this basis, marketable securities are issued
which, due to the diversification of the underlying risk, generally represent a
lower level of risk than the underlying assets individually. The redemption of
the securities issued by the SPV takes place at maturity out of the cash flow
generated by the collected claims. Asset-backed securities may be issued by the
U.S. Government, its agencies or instrumentalities, other governmental issuers
or by private issuers.

CMOs. The CMO classes in which the Fund may invest include, but are not
limited to, sequential and parallel pay CMOs, including planned amortization
class and target amortization class securities. CMOs are debt securities issued
by either the U.S. Government (or one of its agencies or

instrumentalities) or private issuers. The key feature of the CMO structure is
the prioritization of the cash flows from a pool of mortgages among the several
classes of CMO holders, thereby creating a series of obligations with varying
rates and maturities appealing to a wide range of investors. CMOs generally are
secured by an assignment to a trustee under an indenture pursuant to which the
bonds are issued on collateral consisting of a pool of mortgages. Payments with
respect to the underlying mortgages generally are made to the trustee under the
indenture. CMOs are issued in two or more classes or series with varying
maturities and stated rates of interest determined by the issuer. Senior CMO
classes will typically have priority over residual CMO classes as to the receipt
of principal and/or interest payments on the underlying mortgages. CMOs of
varying maturities may be secured by the same pool of mortgages, the payments on
which are used to pay interest to each class and to retire successive maturities
in sequence. CMOs are designed to be retired as the underlying mortgages are
repaid. In the event of sufficient early prepayments on such mortgages, the
class or series of CMO first to mature generally will be retired prior to
maturity. Although in most cases the issuer of CMOs will not supply additional
collateral in the event of such prepayments, there will normally be sufficient
collateral to secure CMOs that remain outstanding.

Collateralized Debt Obligations ("CDOs"). The Fund may invest in CDOs. A
CDO is a structured credit security issued by a special purpose entity that was
created to reapportion the risk and return characteristics of a pool of assets.
The assets, typically non-investment grade bonds, leveraged loans, and other
asset-backed obligations, are used as collateral supporting the various debt and
equity tranches issued by the special purpose entity. CDOs operate similarly to
CMOs and are subject to similar risks.

Collateralized Loan Obligations ("CLOs"). A CLO is a type of CDO that
invests primarily in leveraged loans as collateral underlying the obligations of
the special purpose entity. CLOs operate similarly to CMOs and are subject to
similar risks.

Sub-prime mortgages. Sub-prime mortgages are mortgages rated below "A"
by S&P, Moody's or Fitch. Historically, sub-prime mortgage loans have been made
to borrowers with blemished (or non-existent) credit records, and the borrower
is charged a higher interest rate to compensate for the greater risk of
delinquency and the higher costs of loan servicing and collection. Sub-prime
mortgages are subject to both state and federal anti-predatory lending statutes
that carry potential liability to secondary market purchasers such as the Fund.
Sub-prime mortgages have certain characteristics and associated risks similar to
Non-Investment Grade Securities, including a higher degree of credit risk, and
certain characteristics and associated risks similar to MBS, including
prepayment risk. See "Risk Factors."

Second lien loans and debt securities. The Fund may invest in loans and
other debt securities that rank below Senior Loans in liquidation and interest
rate preferences within an issuer's debt structure, but which are generally
senior in such respects to more subordinated debt. "Second lien" loans, like
Senior Loans, typically have adjustable floating rate interest payments. Because
second lien loans and debt securities are subordinate to Senior Loans, they
present a greater degree of investment risk but often pay interest at higher
rates reflecting this additional risk. Such investments generally are of below
investment grade quality. Other than their subordinated status, such investments
have many characteristics and risks similar to Senior Loans discussed above. In
addition, second lien loans and debt securities of below investment grade
quality have the risk characteristics of Non-Investment Grade Securities.

The foregoing discussion on the Fund's investment in derivative
instruments is subject to the following limitations: other than forward foreign
currency contracts, the Fund initially may invest up to 30% of total leveraged
assets in derivative instruments.

Mortgage rolls. The Fund may enter into mortgage "dollar rolls" in which
the Fund sells mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type, coupon
and maturity) securities on a specified future date. During 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 sales. A
"covered roll" is a specific type of dollar roll for which there is an
offsetting cash position or a cash equivalent security position which matures on
or before the forward settlement date of the dollar
32

roll transaction. The Fund will only enter into covered rolls. Covered rolls are
not treated as a borrowing or other senior security and will be excluded from
the calculation of the Fund's borrowings and other senior securities.

Indexed securities and derivatives. The Fund may invest in indexed
securities, structured notes and derivatives based on indices or financial
indicators. Indexed securities are securities the redemption values and/or the
coupons of which are indexed to the prices of a specific instrument or
statistic. Indexed securities typically, but not always, are debt securities or
deposits whose value at maturity or coupon rate is determined by reference to
inflation, other securities, securities indices, currencies or other financial
indicators such as economic statistics and pre-payment rates. Each of these
indices or financial indicators may also be invested in through the use of
derivative instruments. Inflation-indexed securities, for example, typically
provide for a maturity value that depends on the rate of inflation, resulting in
a security whose price tends to rise and fall together with the rate of
inflation. Currency-indexed securities typically are short-term to
intermediate-term debt securities whose maturity values or interest rates are
determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a short position in the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline if the issuer's creditworthiness deteriorates. Recent issuers of indexed
securities have included banks, corporations and certain U.S. Government
agencies.

The Fund may invest in inflation-indexed securities issued by the U.S.
Treasury, by foreign governments or by corporate entities, which are fixed
income securities whose principal value is periodically adjusted according to
the rate of inflation in the United States or another reference country. The
interest rate on these bonds is fixed at issuance, but over the life of the bond
this interest may be paid on an increasing or decreasing principal value which
has been adjusted for inflation. Repayment of the original bond principal upon
maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation indexed bonds, even during a period of deflation. However, the current
market value of the bonds is not guaranteed, and will fluctuate. The Fund may
also invest in other bonds which may or may not provide a similar guarantee. If
a guarantee of principal is not provided, the adjusted principal value of the
bond repaid at maturity may be less than the original principal.

The value of inflation-indexed bonds fluctuates in response to changes in
real interest rates, which are in turn tied to the relationship between nominal
interest rates and the rate of inflation. Therefore, if inflation were to rise
at a faster rate than nominal interest rates, real interest rates might decline,
leading to an increase in value of inflation-indexed bonds. In contrast, if
nominal interest rates increased at a faster rate than inflation, real interest
rates might rise, leading to a decrease in value of inflation indexed bonds.

The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect an inflation index for that country. No assurance can be
given that the CPI-U or any foreign inflation index will accurately measure the
true rate of inflation in the prices of goods and services. In addition, no
assurance can be given that the rate of inflation in a foreign country will be
correlated to the rate of inflation in the United States.

Coupon payments received by the Fund from inflation indexed bonds will be
includable in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond will
be considered taxable ordinary income, even though investors do not receive
their principal until maturity.

The Fund's investments in indexed securities, including inflation indexed
securities, may create taxable income in excess of the cash they generate. In
such cases, the Fund may be required to sell assets to generate the cash
necessary to distribute to its Shareholders all of its income and gains and
therefore to eliminate any tax liability at the Fund level.

Credit-linked notes. The Fund may invest in credit-linked notes ("CLN"),
a form of derivative instrument. A CLN is a synthetic obligation between two or
more parties where the payment of principal and/or interest is based on the
performance of some obligation (a reference obligation). In addition to the
credit risk of the reference obligation and interest rate risk, the buyer/seller
of the CLN is subject to counterparty risk.

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.

When-issued securities and forward commitments. Securities may be
purchased on a "forward commitment" or "when-issued" basis (meaning securities
are purchased or sold with payment and delivery taking place in the future) in
order to secure what is considered to be an advantageous price and yield at the
time of entering into the transaction. However, the yield on a comparable
security when the transaction is consummated may vary from the yield on the
security at the time that the forward commitment or when-issued transaction was
made. From the time of entering into the transaction until delivery and payment
is made at a later date, the securities that are the subject of the transaction
are subject to market fluctuations. In forward commitment or when-issued
transactions, if the seller or buyer, as the case may be, fails to consummate
the transaction the counterparty may miss the opportunity of obtaining a price
or yield considered to be advantageous. Forward commitment or when-issued
transactions may be expected to occur a month or more before delivery is due.
However, no payment or delivery is made until delivery is made or payment is
received from the other party to the transaction.

Illiquid securities. The Fund may invest without limitation in
securities for which there is no readily available trading market or that are
otherwise illiquid. Illiquid securities include securities legally restricted as
to resale, such as commercial paper issued pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and securities eligible for resale pursuant
to Rule 144A thereunder. Section 4(2) and Rule 144A securities may, however, be
treated as liquid by the Adviser pursuant to procedures adopted by the Board,
which require consideration of factors such as trading activity, availability of
market quotations and number of dealers willing to purchase the security. If the
Fund invests in Rule 144A securities treated as liquid securities, the level of
portfolio illiquidity nevertheless may be increased to the extent that eligible
buyers become uninterested in purchasing such securities.

It may be difficult to sell illiquid securities at a price representing
their fair value until such time as such securities may be sold publicly. Where
registration is required, a considerable period may elapse between a decision to
sell the securities and the time when the Fund would be permitted to sell. Thus,
the Fund may not be able to obtain as favorable a price as that prevailing at
the time of the decision to sell. The Fund may also acquire securities through
private placements under which it may agree to contractual restrictions on the
resale of such securities. Such restrictions might prevent their sale at a time
when such sale would otherwise be desirable.

Swaps. Swap contracts may be purchased or sold to obtain investment
exposure and/or to hedge against fluctuations in securities prices, currencies,
interest rates or market conditions, to change the duration of the overall
portfolio or to mitigate default risk. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return) on
different currencies, securities, baskets

of currencies or securities, indices or other instruments, which returns are
calculated with respect to a "notional value," i.e., the designated reference
amount of exposure to the underlying instruments. The Fund intends to enter into
swaps primarily on a net basis, i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments.

If the other party to a swap contract defaults, the Fund's risk of loss
will consist of the net amount of payments that the Fund is contractually
entitled to receive. The net amount of the excess, if any, of the Fund's
obligations over its entitlements will be maintained in a segregated account by
the Fund's custodian. The Fund will not enter into a swap agreement unless the
claims-paying ability of the other party thereto is considered to be investment
grade by the Adviser. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction. Swap instruments are not exchange-listed securities
and may be traded only in the over-the-counter market.

Interest Rate Swaps. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest (e.g., an exchange of fixed rate payments for floating rate payments).
The Fund may use interest rate swaps for risk management purposes and as a
speculative investment.

Total Return Swaps. Total return swaps are contracts in which one party
agrees to make payments of the total return from the designated underlying
asset(s), which may include securities, baskets of securities, or securities
indices, during the specified period, in return for receiving payments equal to
a fixed or floating rate of interest or the total return from the other
designated underlying asset(s). The Fund may use total return swaps for risk
management purposes and as a speculative investment.

Currency Swaps. Currency swaps involve the exchange of the two parties'
respective commitments to pay or receive fluctuations with respect to a notional
amount of two different currencies (e.g., an exchange of payments with respect
to fluctuations in the value of the U.S. dollar relative to the Japanese yen).
The Fund many enter into currency swap contracts and baskets thereof for risk
management purposes and as a speculative investment.

Credit Default Swaps. When the Fund is the buyer of a credit default
swap contract, the Fund is 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 corporate
issuer, on the debt obligation. In return, the Fund would pay 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 credit default 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 net assets, the Fund would be subject to investment
exposure on the notional amount of the swap. The Fund may enter into credit
default swap contracts and baskets thereof for investment and risk management
purposes, including diversification.

The use of interest rate, total return, currency, credit default and
other swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of the Fund would be unfavorably affected.

Futures and options on futures. The Fund may purchase and sell various
kinds of financial futures contracts and options thereon to obtain investment
exposure and/or to seek to hedge against changes in interest rates or for other
risk management purposes. Futures contracts may be based on various debt
securities and securities indices. Such transactions involve a risk of loss or
depreciation due to unanticipated adverse changes in securities prices, which
may exceed the Fund's initial investment in these contracts. The Fund will only
purchase or sell futures contracts or related options in compliance with the
rules of the Commodity Futures Trading Commission. Transactions in financial
futures and options on

futures involve certain costs. There can be no assurance that the Fund's use of
futures contracts will be advantageous. Financial covenants related to any
future Fund borrowings may limit use of these transactions.

Exchange traded and over-the-counter options. The Fund may purchase or
write (sell) exchange traded and over-the-counter options. Writing call options
involves giving third parties the right to buy portfolio securities from the
Fund for a fixed price at a future date and writing put options involves giving
third parties the right to sell securities to the Fund for a fixed price at a
future date. Buying an options contract gives the Fund the right to purchase
securities from third parties or give the Fund the right to sell securities to
third parties for a fixed price at a future date. In addition to options on
individual securities, the Fund may buy and sell put and call options on
currencies, baskets of securities or currencies, indices and other instruments.
Options bought or sold by the Fund may be "cash settled," meaning that the
purchaser of the option has the right to receive a cash payment from the writer
of the option to the extent that the value of the underlying position rises
above (in the case of a call) or falls below (in the case of a put) the exercise
price of the option. There can be no assurance that the Fund's use of options
will be successful.

Borrowings. The Fund may borrow money to the extent permitted under the
1940 Act as interpreted, modified or otherwise permitted by the regulatory
authority having jurisdiction. The Fund may borrow money to add financial
leverage to the portfolio and for temporary administrative purposes.

Portfolio turnover. The Fund cannot accurately predict its portfolio
turnover rate, but estimates an annual turnover rate of between 50% and 75%
(excluding turnover of securities having a maturity of one year or less). A high
turnover rate (100% or more) necessarily involves greater expenses to the Fund
and may result in a realization of net short-term capital gains. The Fund may
engage in active short-term trading to benefit from yield disparities among
different issues of securities or among the markets for fixed income securities
of different countries, to seek short-term profits during periods of fluctuating
interest rates, or for other reasons. Such trading will increase the Fund's rate
of turnover and may increase the incidence of net short-term capital gains
which, upon distribution by the Fund, are taxable to Common Shareholders as
ordinary income.

USE OF LEVERAGE AND RELATED RISKS

The Fund expects to use financial leverage. The Fund expects initially to
obtain financial leverage immediately after the completion of the offering of
the Common Shares through derivative instruments and/or through the reinvestment
of securities lending collateral. The Fund expects initially to have financial
leverage of between approximately 30% to 40% of its total leveraged assets. The
Fund reserves the right in the future to adjust the amount of leverage used
and/or to leverage in a different manner. The Fund, in its sole discretion, may
employ other forms of financial leverage, including borrowings and/or a
commercial paper program and/or the issuance of debt securities or preferred
shares. The Fund also may borrow money as a temporary measure for extraordinary
or emergency purposes, including the payment of distributions and the settlement
of securities transactions, which otherwise might require untimely dispositions
of Fund securities. The Adviser anticipates that the use of leverage should
result in higher income to Common Shareholders over time.

Use of financial leverage creates an opportunity for increased return for
Common Shareholders, but, at the same time, creates special risks (including the
likelihood of greater volatility of net asset value and market price of the
Common Shares), and there can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. There is a risk that
fluctuations in the cost of leverage may adversely affect the return to the
Common Shareholders. If the income from the securities purchased with leverage
or investment exposures created with leverage is not sufficient to cover the
cost of leverage, the amount available for distribution to Common Shareholders
will be less than if leverage had not been used. Even if leveraging the Fund
results in loss of value or lower distribution amounts, Eaton Vance in its best
judgment may nevertheless determine to maintain the Fund's leveraged position if
it deems such action to be appropriate.
36

Changes in the value of the Fund's portfolio (including investments
bought with financial leverage) 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 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 Eaton Vance
for investment advisory services 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
average daily total leveraged assets. "Total leveraged assets" means the value
of all assets of the Fund (including assets acquired with financial leverage)
less ordinary liabilities not associated with leverage, plus the initial
notional value of long and short forward foreign currency contracts and other
Foreign Obligation derivatives held by the Fund. When the Fund holds both long
and short forward currency contracts in the same foreign currency, the
offsetting positions will be netted for purposes of determining total leveraged
assets. When the Fund holds other long and short positions in Foreign
Obligations in a given country denominated in the same currency, total leveraged
assets will be calculated by excluding the smaller of the long or short
position. See "Management of the Fund" for a detailed description of the
calculation of the advisory fee.

In utilizing securities lending for financial leverage, the Fund will
seek to earn income on securities loans by reinvesting cash collateral in
securities consistent with its investment objectives and policies, seeking to
invest at rates that are higher than the "rebate" rate that it normally will pay
to the borrower with respect to such cash collateral. Securities loans may
result in delays in recovering, or a failure of the borrower to return, the
loaned securities. The defaulting borrower ordinarily would be liable to the
Fund for any losses resulting from such delays or failures, and the collateral
provided in connection with the loan normally would also be available for that
purpose. Securities loans normally may be terminated by either the Fund or the
borrower at any time. Upon termination and the return of the loaned securities,
the Fund would be required to return the related cash or securities collateral
to the borrower and it may be required to liquidate portfolio securities in
order to do so. To the extent that such securities have decreased in value, this
may result in the Fund realizing a loss at a time when it would not otherwise do
so. The Fund also may incur losses if it is unable to reinvest cash collateral
at rates higher than applicable rebate rates paid to borrowers and related
administrative costs.

The Fund intends to manage its use of financial leverage through the
reinvestment of securities lending collateral and through derivatives so that
these arrangements will not be considered to create a "senior security" within
the meaning of the 1940 Act or the Fund's investment policies. In this regard,
in accordance with guidelines established by the Securities and Exchange
Commission, the Fund's custodian on a daily basis will segregate in the Fund's
custody account liquid portfolio assets equal to the then current (1) settlement
value of the Fund's obligations under derivative instruments used to create
leverage; and (2) value of any securities lending collateral that has been
reinvested to create financial leverage. In addition, the Securities and
Exchange Commission has established guidelines that restrict a registered
investment company from loaning portfolio securities in excess of one third of
its total assets, including the value of any collateral received. Accordingly,
this restriction places a practical limit on the amount of financial leverage
that may be obtained through reinvestment of securities lending collateral.

Capital raised through forms of financial leverage other than through
derivatives and the reinvestment of securities lending collateral will be
subject to interest or dividend payments, which may exceed the income and
appreciation on the assets purchased. Any future commencement of a borrowing or
commercial paper program would involve expenses and other costs and may limit
the Fund's ability to pay distributions on Common Shares or to engage in other
activities.

Under the 1940 Act, the Fund is not permitted to incur debt obligations,
including borrowings, unless immediately after such issuance the total asset
value of the Fund's portfolio is at least 300% of the liquidation value of the
outstanding debt (i.e., such liquidation value may not exceed 33 1/3% of the
Fund's total assets). In addition, the Fund is not permitted to declare any cash
distribution on its Common Shares unless, at the time of such declaration, the
net asset value of the Fund's portfolio (determined after deducting the amount
of such distribution) is at least 300% of such liquidation value.

When debt obligations are incurred, the Fund intends, to the extent possible, to
retire such obligations, as necessary, to maintain coverage of any debt
obligations of at least 300%.

In addition, borrowing/commercial paper program covenants and/or the
terms of debt securities or preferred shares issued may impose asset coverage or
portfolio composition requirements that are more stringent than those currently
imposed on the Fund by the 1940 Act or the Fund's investment policies. The Fund
would only utilize such additional methods of financial leverage if it
anticipated that these asset coverage requirements, covenants or guidelines
would not significantly impede Eaton Vance in managing the Fund's portfolio in
accordance with its investment objectives and policies. See "Description of
Capital Structure."

To qualify for federal income taxation as a "regulated investment
company," the Fund must distribute in each taxable year at least 90% of its net
investment income (including net interest income and net short-term gain). The
Fund also will be required to distribute annually substantially all of its
income and capital gain, if any, to avoid imposition of a nondeductible 4%
federal excise tax. If the Fund is precluded from making distributions on the
Common Shares because of any applicable asset coverage requirements, the terms
of a borrowing facility may provide that any amounts so precluded from being
distributed, but required to be distributed for the Fund to meet the
distribution requirements for qualification as a regulated investment company,
will be paid to the lenders. Such a payment can be expected to decrease the
principal amount of debt owed to such lenders.

The Fund's willingness to utilize financial leverage for investment
purposes, and the amount the Fund will use, will depend on many factors, the
most important of which are market conditions and interest rates. Successful use
of a leveraging strategy may depend on the Adviser's ability to predict
correctly interest rates and market movements, and there is no assurance that a
leveraging strategy will be successful during any period in which it is
employed.

Assuming the utilization of financial leverage in the amount of 40% of
the Fund's total leveraged assets and a collateral rebate rate of 2.33% payable
on such financial leverage based on market rates as of the date of this
prospectus, the additional income that the Fund must earn (net of expenses) in
order to cover such leverage costs is 1.55%. The Fund's actual cost of leverage
will be based on market rates at the time the Fund undertakes a leveraging
strategy, and such actual cost of leverage may be higher or lower than that
assumed in this example.

The following table is designed to illustrate the effect on the return to
a Common Shareholder of leverage in the amount of approximately 40% of the
Fund's total leveraged assets, assuming hypothetical annual returns of the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to Common Shareholders when portfolio return is
positive and greater than the cost of leverage and decreases the return when the
portfolio return is negative or less than the cost of leverage. The figures
appearing in the table are hypothetical and actual returns may be greater or
less than those appearing in the table.

Assumed portfolio return (net of
expenses)........................... (10)% (5)% 0% 5% 10%
Corresponding Common Share return
assuming 40% leverage............... (18.22)% (9.89)% (1.55)% 6.78% 15.11%

Financial leverage achieved through the purchase of derivative
instruments such as forward foreign currency contracts exposes the Fund to
special risks. See "Investment Objectives and Policies -- Additional Investment
Practices" and "Risk Factors."

RISK FACTORS

NO OPERATING HISTORY

The Fund is a closed-end investment company with no history of operations
and is designed for long-term investors and not as a trading vehicle.

INCOME RISK

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
adversely when prevailing short-term interest rates increase and the Fund is
utilizing leverage.

CREDIT RISK

Credit risk is the risk that one or more debt obligations in the Fund's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the obligation experiences a decline in its financial
status. For MBS, credit risk involves two types: delinquency and default.
Delinquency refers to interruptions in the payment of interest and principal.
Default refers to the potential for unrecoverable principal loss from the sale
of foreclosed collateral or the Fund's inherent right to forgive principal or
modify a debt instrument. For MBS, 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. For corporate debt
securities and Senior Loans, credit risk refers to default risk, which typically
means the nonpayment of interest and/or principal when it is due.

PREPAYMENT RISK

During periods of declining interest rates or for other purposes,
borrowers may exercise their option to prepay principal earlier than scheduled,
potentially causing the Fund to incur capital loss and/or to reinvest in lower
yielding securities. This is known as call or prepayment risk. Certain income
securities have call protection features that permit the issuer to redeem the
security prior to a stated date only if certain prescribed conditions are met
("call protection"). An issuer may redeem a security 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. Senior Loans and MBS typically
have no such call protection. For premium bonds and premium loans (bonds and
loans priced above their par or principal value) held by the Fund, prepayment
risk is enhanced.

ISSUER RISK

The value of corporate income-producing securities may decline for a
number of reasons which directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the issuer's goods and
services.

NON-INVESTMENT GRADE SECURITIES RISK

Most of the Fund's investments in Senior Loans are of below investment
grade quality, as may be certain Foreign Obligations and other Fund investments.
Non-Investment Grade Securities are considered predominantly speculative because
of the credit risk of their issuers. While offering a greater potential
opportunity for capital appreciation and higher yields, Non-Investment Grade
Securities typically entail greater potential price volatility and may be less
liquid than higher-rated securities. Issuers of Non-Investment Grade Securities
are more likely to default on their payments of interest and principal owed to
the Fund, and such defaults will reduce the Fund's net asset value and income
distributions. The prices of these lower rated obligations are more sensitive to
negative developments than higher rated securities. Adverse business conditions,
such as a decline in the issuer's revenues or an economic downturn, generally
lead to a higher non-payment rate. In addition, a security may lose significant
value before a default occurs as the market adjusts to expected higher
non-payment rates.

SENIOR LOANS RISK

The risks associated with Senior Loans are primarily the risks of
investing in Non-Investment Grade Securities. Senior Loans are typically senior
and secured, in contrast to other types of Non-Investment Grade Securities,
which are often subordinated and unsecured. The Fund's investments in
39

Senior Loans are typically of below investment grade quality and are considered
speculative because of the credit risk of their issuers. Such companies are more
likely to default on their payments of interest and principal owed to the Fund,
and such defaults will reduce the Fund's net asset value and income
distributions. An economic downturn generally leads to a higher non-payment
rate, and a debt obligation may lose significant value before a default occurs.
Moreover, any specific collateral used to secure a loan may lose a portion or
all of its value or become illiquid, which would adversely affect the loan's
value.

Economic and other events (whether real or perceived) can reduce the
demand for certain Senior Loans or Senior Loans generally, which may reduce
market prices and cause the Fund's net asset value per share to fall. The
frequency and magnitude of such changes cannot be predicted.

Senior Loans are also subject to the risk of price declines due to
increases in prevailing interest rates, although floating-rate debt instruments
are substantially less exposed to this risk than fixed-rate debt instruments.
Interest rate changes may also increase prepayments of debt obligations and
require the Fund to invest in assets at lower yields. No active trading market
may exist for certain loans, which may impair the ability of the Fund to realize
full value in the event of the need to liquidate such assets. Adverse market
conditions may impair the liquidity of some actively traded loans.

VALUATION OF SENIOR LOANS

The Fund will value its Senior Loans daily. However, because the
secondary market for Senior Loans is limited, it may be difficult to value some
loans. Market quotations may not be readily available for some Senior Loans and
valuation may require more research than for liquid securities. In addition,
elements of judgment may play a greater role in valuation of Senior Loans than
for securities with a more active secondary market because there is less
reliable objective data available.

CURRENCY RISK

Since the Fund will generally maintain substantial exposure to
investments denominated in foreign currencies, the Fund will be affected by
changes in foreign currency exchange rates (and exchange control regulations)
that affect the value of the Fund's foreign investments and the accrued income
of the investments. The value of the Fund's foreign assets in U.S. dollars and
the accrued income of the Fund in U.S. dollars may be affected favorably or
unfavorably by fluctuations in currency rates.

Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors. Currency exchange rates also can be affected unpredictably by
intervention (or the failure to intervene) by U.S. or foreign governments or
central banks, or by currency controls or political developments in the United
States or abroad. Currencies in which the Fund holds long positions or in which
portfolio assets are denominated may depreciate against the U.S. dollar,
resulting in a loss to the Fund. Currencies in which the Fund holds short
positions may appreciate against the U.S. dollar, also resulting in a loss to
the Fund. In certain countries, the central bank manages the currency rate
against a basket of one or more index currencies of other major countries. In
some of these countries, the Fund may employ a strategy seeking to limit
exposure to the index currencies while retaining exposure to the local currency.
In such a situation, the Fund's strategy could fail if a country changes the
announced or implied components of the index currencies against which the Fund
has hedged its exposure.

The Fund may buy or sell foreign currencies and may deal in forward
foreign currency contracts, that is, agree to buy or sell a specified currency
at a specified price and future date. The Fund may use forward contracts for (1)
obtaining long or short investment exposures to foreign currencies, (2) hedging
or (3) currency risk management. Currency risk management may include taking
active currency positions relative to the Fund's securities portfolio.

Other risks involved in currency investments include the dependence on
the Adviser's ability to forecast movements in exchange rates and imperfect
correlations between movements in exchange rates.

Currency investments could be adversely affected by delays in, or a refusal to
grant, repatriation of funds or conversions of certain currencies. The
currencies of emerging market countries may experience significant declines
against the U.S. dollar, and significant devaluations may occur during periods
in which the Fund holds investments in these currencies.

Certain currency investments, including those in emerging market
countries, may be highly volatile, and movement in these currencies may result
in substantial loss to the Fund.

Certain currency-related investments may be acquired in the
"over-the-counter" or "interdealer" markets, where participants typically are
not subject to credit evaluation and regulatory oversight as are members of
"exchange based" markets. In the absence of a regulated market to facilitate
settlement, the Fund is subject to the risk that a counterparty will not settle
a transaction (such as a forward currency contract) in accordance with its terms
and conditions because of a dispute over the terms of contract or because of a
credit or liquidity problem.

A portion of the Fund's currency investments may be or become illiquid.
Illiquidity may result from the small quantities in which the securities held
were issued and or from lower trading volumes in the securities markets and/or
currencies of certain countries. If illiquid currency investments need to be
liquidated quickly, the Fund could sustain significant transaction costs.

FOREIGN DEBT OBLIGATION RISK

The Fund will generally maintain substantial investments in Foreign
Obligations. Foreign governmental securities include securities issued or
guaranteed by foreign governments (including political subdivisions) and their
authorities, agencies or instrumentalities and by supra-national agencies.
Foreign governmental securities may have different levels of government support.
For example, some foreign governmental securities are supported by the full
faith and credit of a foreign national government or political subdivision and
some are not. In the case of certain countries, foreign governmental securities
may involve varying degrees of credit risk as a result of financial or political
instability in such countries and the possible inability of the Fund to enforce
its rights against the government issuer. Foreign governmental securities
denominated in currencies other than the U.S. dollar are subject to currency
risk, and such risk may be substantial. Like other fixed income securities,
foreign governmental securities are subject to market risk. Their market values
fluctuate as interest rates change, generally falling during times of rising
interest rates. Yields on foreign governmental securities tend to be lower than
those of corporate securities of comparable maturities.

Foreign corporate securities include securities issued or backed by
corporations domiciled outside the United States and securities issued or backed
by foreign subsidiaries of U.S. corporations. Foreign corporate securities
denominated in currencies other than the U.S. dollar are subject to currency
risk, and such risk may be substantial. Foreign corporate securities are exposed
to credit risks comparable to domestic issues of similar investment quality.
Like other fixed income securities, foreign corporate securities are subject to
market risk. Their market values fluctuate as interest rates change, generally
falling during times of rising interest rates.

Investment in foreign governmental and corporate issuers may involve
certain special risks due to foreign economic, political and legal developments,
including favorable or unfavorable changes in currency exchange rates, exchange
control regulations (including currency blockage), expropriation or
nationalization of assets, imposition of withholding taxes on dividend or
interest payments, and possible difficulty in obtaining and enforcing judgments
against foreign entities. Furthermore, issuers of foreign debt obligations are
subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The debt obligations of some
foreign governments and companies and foreign markets are less liquid and at
times more volatile than comparable U.S. debt obligations and markets. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The laws of some foreign countries may limit the Fund's ability
to invest in securities of certain issuers located in these foreign countries.
There are also special tax considerations which apply to securities of foreign
issuers and securities principally traded overseas. Investors should also be
aware that under certain circumstances,
41

markets which are perceived to have similar characteristics to troubled markets
may be adversely affected whether or not similarities actually exist.

The risks described above apply to an even greater extent to investments
in emerging markets. The securities markets of emerging countries are generally
smaller, less developed, less liquid, and more volatile than the securities
markets of the United States and developed foreign markets. Disclosure and
regulatory standards in many respects are less stringent than in the United
States and developed foreign markets. There also may be a lower level of
monitoring and regulation of securities markets in emerging market countries and
the activities of investors in such markets, and enforcement of existing
regulations may be extremely limited. Many emerging countries 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 very negative effects on the economies and securities markets
of certain emerging countries. Economies in emerging markets generally are
heavily dependent upon international trade and, accordingly, have been and may
continue to be affected adversely by trade barriers, exchange controls, managed
adjustments in relative currency values, and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies
also have been and may continue to be adversely affected by economic conditions
in the countries with which they trade. The economies of countries with emerging
markets may also be predominantly based on only a few industries or dependent on
revenues from particular commodities. In addition, custodial services and other
costs relating to investment in foreign markets may be more expensive in
emerging markets than in many developed foreign markets, which could reduce the
Fund's income from such securities. Furthermore, because publicly traded debt
instruments of emerging markets represent a relatively recent innovation in the
world debt markets, there is little historical data or related market experience
concerning the attributes of such instruments under all economic, market and
political conditions.

In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
issuers of emerging country debt instruments to make payments on their debt
obligations, regardless of their financial condition. In addition, there is a
heightened possibility of expropriation or confiscatory taxation, imposition of
withholding taxes on interest payments, or other similar developments that could
affect investments in those countries. There can be no assurance that adverse
political changes will not cause the Fund to suffer a loss of any or all of its
value or a disruption of income from investments in such countries.

MORTGAGE-BACKED SECURITIES RISK

The value of Fund shares may be adversely affected by fluctuations in
interest rates and the prepayment of the mortgage loans underlying the MBS held
by the Fund. Mortgage loans are most likely to be prepaid in a declining
interest rate environment and when MBS are trading at a substantial premium.
Prepayments may cause the Fund to incur capital loss and may reduce the Fund's
income distributions because the proceeds of a prepayment may be invested in
lower-yielding securities. In a rising interest rate environment, a declining
prepayment rate will extend the average life of many MBS which in turn would
lengthen the duration of the Fund's portfolio. This possibility is often
referred to as extension risk. Extending the average life of an MBS increases
the risk of depreciation due to future increases in market interest rates. The
value of Common Shares can also be adversely affected by erosion in premiums on
MBS held.

Certain government agencies or instrumentalities, such as the GNMA, FNMA
and FHLMC, provide a guarantee as to timely payment of principal and interest
for MBS each entity issues, backs or otherwise guarantees. Such guarantees may
or may not be backed by the full faith and credit of the U.S. Government.

DERIVATIVES RISK

Derivative transactions (such as forward contracts, futures contracts and
options thereon, options, swaps and short sales) may subject the Fund to
substantial loss of principal in relation to the Fund's investment amount. The
Fund also will be subject to credit risk with respect to the counterparties to
the derivatives positions held 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.

LIQUIDITY RISK

The Fund may invest without limitation in securities for which there is
no readily available trading market or which are otherwise illiquid, including
certain Senior Loans. The Fund may not be able to readily dispose of illiquid
securities at prices that approximate those at which the Fund could sell such
securities 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. In addition, the limited
liquidity could affect the market price of the securities, thereby adversely
affecting the Fund's net asset value.

REINVESTMENT RISK

Income from the Fund's portfolio will decline if and when the Fund
invests the proceeds from matured, traded or called debt obligations into lower
yielding instruments. A decline in income could affect the Common Shares'
distribution rate and their overall return.

INFLATION RISK

Inflation risk is the risk that the value of assets or income from
investment 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 periods of rising
inflation, short-term interest rates and the Fund's cost of leverage would
likely increase, reducing returns to Common Shareholders to the extent that such
increased cost is not offset by commensurately higher income.

MARKET PRICE OF SHARES

The shares of closed-end management investment companies often trade at a
discount from their net asset value, and the Common Shares may likewise trade at
a discount from net asset value. The trading price of the Common Shares may be
less than the public offering price. The risk will be greater for investors who
sell their Common Shares in a relatively short period after completion of the
public offering.

MANAGEMENT RISK

The Fund is subject to management risk because it is an actively managed
portfolio. Eaton Vance and the individual portfolio managers 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.
This includes the possibility of investment loss.

ADVISER FEE CONFLICT RISK

The fee paid to the Adviser for investment management services will be
higher when the Fund uses financial leverage whether through forward foreign
currency contacts or similar instruments or through the reinvestment of
securities lending collateral, because the fee will be paid on the basis of the
Fund's assets including this financial leverage. Consequently, the Adviser may
have a financial interest for the Fund to utilize such financial leverage, which
may create a conflict of interest between the Adviser and the Common
Shareholders of the Fund.

EFFECTS OF LEVERAGE

There can be no assurance that a leveraging strategy will be utilized by
the Fund or that, if utilized, it will be successful during any period in which
it is employed. See "Use of Leverage and Related Risks."

INTEREST RATE RISK

The value of Common Shares will usually change in response to interest
rate fluctuations. When interest rates decline, the value of fixed-rate
securities held by the Fund can be expected to rise. Conversely, when interest
rates rise, the value of fixed-rate securities held by the Fund can be expected
to decline. Because U.S. interest rates have recently been at or near their
lowest levels in many years, there is a greater than normal risk that the Fund's
portfolio will decline in value due to rising interest rates. Floating-rate
securities held by the Fund may also fluctuate in value due to changes in
interest rates because of a time lag between when interest rates rise and when
rates on the securities are reset. Fluctuations in the value of fixed-rate
securities held by the Fund will not affect interest income received on the
securities, but will be reflected in the Fund's net asset value. 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 a dollar-weighted average duration
of no more than three years (including the effects of anticipated leverage), the
Common Shares' net asset value and market price per Share will tend to fluctuate
more in response to changes in market interest rates than if the Fund invested
in shorter duration securities and less than if the Fund invested mainly in
longer duration securities. The Fund may utilize certain strategies, including
taking positions in futures or interest rate swaps, for the purpose of reducing
the interest rate sensitivity of the portfolio and decreasing the Fund's
exposure to interest rate risk, although there can be no assurance that it will
do so or that such strategies will be successful. The Fund is intended to have a
relatively low level of interest rate risk.

MARKET DISRUPTION

The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Fund cannot predict the effects
of similar events in the future on the U.S. economy. These terrorist attacks and
related events, including the war in Iraq, its aftermath, and continuing
occupation of Iraq by coalition forces, have raised short-term market risk and
may have adverse long-term effects on U.S. and world economies and markets. A
similar disruption of the financial markets could impact the value of
securities, interest rates, auctions, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares.

ANTI-TAKEOVER PROVISIONS

The Fund's Agreement and Declaration of Trust includes provisions that
could have the effect of limiting the ability of other persons or entities to
acquire control of the Fund or to change the composition of its Board. See
"Description of Capital Structure -- Anti-Takeover Provisions in the Declaration
of Trust."

MANAGEMENT OF THE FUND

BOARD OF TRUSTEES

The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement (as defined below), is the
responsibility of the Fund's Board under the laws of The Commonwealth of
Massachusetts and the 1940 Act.

THE ADVISER

Eaton Vance acts as the Fund's investment adviser under an Investment
Advisory Agreement (the "Advisory Agreement"). The Adviser's principal office is
located at The Eaton Vance Building, 255 State
44

Street, Boston, MA 02109. Eaton Vance, its affiliates and predecessor companies
have been managing assets of individuals and institutions since 1924 and of
investment companies since 1931. Eaton Vance (or its affiliates) currently
serves as the investment adviser to investment companies and various individual
and institutional clients with combined assets under management of approximately
$94.3 billion as of October 31, 2004. Eaton Vance is an indirect, wholly-owned
subsidiary of Eaton Vance Corp., a publicly-held holding company which, through
its subsidiaries and affiliates, engages primarily in investment management,
administration and marketing activities.

Under the general supervision of the Fund's Board, the Adviser will carry
out the investment and reinvestment of the assets of the Fund, will furnish
continuously an investment program with respect to the Fund, will determine
which securities should be purchased, sold or exchanged, and will implement such
determinations. The Adviser will furnish to the Fund investment advice and
office facilities, equipment and personnel for servicing the investments of the
Fund. The Adviser will compensate all Trustees and officers of the Fund who are
members of the Adviser's organization and who render investment services to the
Fund, and will also compensate all other Adviser personnel who provide research
and investment services to the Fund.

In return for these services, facilities and payments, the Fund has
agreed to pay the Adviser as compensation under the Advisory Agreement a fee in
the amount of .75% of the average daily total leveraged assets of the Fund,
subject to the expense reimbursement agreement described below. Eaton Vance has
contractually agreed to reimburse the Fund for fees and other expenses in the
amount of .20% of average daily total leveraged assets of the Fund for the first
five full years of the Fund's operations, .15% of average daily total leveraged
assets of the Fund in year six, .10% in year seven and .05% in year eight. Eaton
Vance may voluntarily reimburse additional fees and expenses but is under no
obligation to do so. Any such voluntary reimbursements may be terminated at any
time. "Total leveraged assets" means the value of all assets of the Fund
(including assets acquired with financial leverage), plus the notional value of
long and short forward foreign currency contracts and other Foreign Obligation
derivatives held by the Fund, minus all accrued expenses incurred in the normal
course of operations, but not excluding any liabilities or obligations
attributable to any investment leverage obtained through (i) indebtedness of any
type (including, without limitation, borrowing through a credit
facility/commercial paper program or the issuance debt securities), (ii) the
issuance of preferred shares or other similar preference securities, (iii) the
reinvestment of collateral received for securities loaned in accordance with the
Fund's investment objectives and policies and/or (iv) any other means. When the
Fund holds both long and short forward currency contracts in the same foreign
currency, the offsetting positions will be netted for purposes of determining
total leveraged assets. For example, if the Fund holds a long forward currency
contract with a notional value of 10.0 million Euro and a short forward currency
contract with a notional value of 3.0 million Euro, the total leveraged assets
will include only the net notional value of such offsetting positions (i.e., 7.0
million Euro). When the Fund holds other long and short positions in Foreign
Obligations in a given country denominated in the same currency, total leveraged
assets will be calculated by excluding the smaller of the long or short
position. For example, if the Fund holds both a 10.0 million Euro denominated
bond and a short forward currency contract with a notional value of 3.0 million
Euro, total leveraged assets will exclude the 3.0 million Euro short forward
currency contract and include the 10.0 million Euro denominated bond. During
periods in which the Fund is using leverage, the fees paid to Eaton Vance for
investment advisory services 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
total leveraged assets, including leverage from derivatives investments,
securities lending and the proceeds from any borrowings and from the issuance of
preferred shares.

THE METHOD OF CALCULATING THE ADVISER'S MANAGEMENT FEE IS DIFFERENT THAN
THE WAY CLOSED-END INVESTMENT COMPANIES TYPICALLY CALCULATE MANAGEMENT FEES.
Traditionally, closed-end investment companies calculate management fees based
on a measure of assets that would not include the notional value of foreign
currency forward contracts and other Foreign Obligation derivatives. The Fund's
fee is calculated differently because the Fund's leverage strategy is different
than the leverage strategy employed by many other closed-end investment
companies. Although the Fund expects in part to obtain leverage through the
reinvestment of securities lending collateral, it also expects to make
substantial use of forward
45

foreign currency commitments and other Foreign Obligation derivatives for
leverage purposes rather than relying on reinvestment of securities lending
collateral or on more traditional forms of leverage used by many closed-end
investment companies (such as borrowing money and/or issuing preferred stock.)
The Adviser's fee would be lower if its fee was calculated in the more
traditional fashion because it would not earn fees on the notional value of
forward foreign currency contracts and other Foreign Obligation derivatives. By
way of example, if the Fund has $1,500 million in total leveraged assets and
$500 million of this constitutes the notional value of long and short forward
foreign currency contracts (after taking account of any netting as described
above), the following illustrates how the investment management fee would be
different if the fee base did not include the notional value of such positions:

FUND'S CONVENTIONAL
MANAGEMENT FEE MANAGEMENT FEE
CALCULATION CALCULATION
-------------- --------------

Assets used to calculate management fee............... $1,500,000,000 $1,000,000,000
Annual management fee (before expense reimbursement)
(0.75%)............................................. $11,250,000 $7,500,000

Mark Venezia, Susan Schiff, Christine Johnston, Scott H. Page, Payson F.
Swaffield and other Eaton Vance investment professionals comprise the investment
team responsible for the overall management of the Fund's investments, as well
as allocations among the Fund's three principal investment categories. The
following individual members of this team are responsible for the day-to-day
management with either of the Fund's three main asset classes:

MBS. Ms. Schiff and Ms. Johnston are responsible for the day-to-day
management of the Fund's MBS strategy. Ms. Schiff has been an Eaton Vance
portfolio manager since 1991, and is a Vice President of Eaton Vance. Among
other portfolios, she currently manages Eaton Vance Government Obligations Fund,
a registered open-end fund, which employs an investment strategy primarily
focused on MBS. In addition, Ms. Schiff is among the portfolio managers of Eaton
Vance Limited Duration Income Fund, a multi-sector closed-end income fund, which
has MBS as one of its three principal investment categories. Ms. Johnston is a
Vice President of Eaton Vance and has been analyzing MBS for Eaton Vance mutual
funds, including Government Obligations Fund and Limited Duration Income Fund,
since 1994. She was named co-portfolio manager of Low Duration Fund in May 2003.

Senior Loans. Messrs. Page and Swaffield are responsible for the
day-to-day management of the Fund's Senior Loan strategy. Messrs. Page and
Swaffield have been Eaton Vance portfolio managers since 1996, and are Vice
Presidents of Eaton Vance. They currently co-manage Eaton Vance Prime Rate
Reserves, a registered closed-end interval fund, Eaton Vance Classic Senior
Floating-Rate Fund, a registered closed-end interval fund, Eaton Vance
Floating-Rate Fund, a registered open-end fund, Eaton Vance Floating-Rate High
Income Fund, a registered open-end fund, Eaton Vance Senior Income Trust, a
registered closed-end fund listed on the New York Stock Exchange, Eaton Vance
Senior Floating-Rate Trust, a registered closed-end fund listed on the New York
Stock Exchange, and Eaton Vance Floating-Rate Income Trust, a registered
closed-end fund listed on the New York Stock Exchange, all of which employ
investment strategies primarily focused on Senior Loans. In addition, Messrs.
Page and Swaffield are among the portfolio managers of Eaton Vance Limited
Duration Income Fund, a multi-sector closed-end income fund, which has Senior
Loans as one of its principal investment categories.

Foreign Obligations. Mr. Venezia is responsible for the day-to-day
management of the Fund's Foreign Obligations strategy. Mr. Venezia has been an
Eaton Vance portfolio manager since 1984, and is a Vice President of Eaton
Vance. He currently manages the Eaton Vance Strategic Income Fund, a registered
open-end fund, which invests in part in a strategy that utilizes currency and
foreign debt securities. In addition, Mr. Venezia is among the portfolio
managers of Eaton Vance Limited Duration Income Fund, a multi-sector closed-end
income fund. Mr. Venezia is also head of Eaton Vance's Global Bond Department,
which uses global economic and political analysis to invest in income securities
worldwide.

Code of Ethics. The Fund and the Adviser each have adopted a Code of
Ethics relating to personal securities transactions. Each Code of Ethics permits
Adviser personnel to invest in securities (including securities that may be
purchased or held by the Fund) for their own accounts, subject to certain
pre-clearance, reporting and other restrictions and procedures contained in such
Code of Ethics.

THE ADMINISTRATOR

Eaton Vance serves as administrator of the Fund but currently receives no
compensation for providing administrative services to the Fund. Under an
Administration Agreement with the Fund (the "Administration Agreement"), Eaton
Vance is responsible for managing the business affairs of the Fund, subject to
the supervision of the Fund's Board. Eaton Vance will furnish to the Fund all
office facilities, equipment and personnel for administering the affairs of the
Fund. Eaton Vance's administrative services include record keeping, preparation
and filing of documents required to comply with federal and state securities
laws, supervising the activities of the Fund's custodian and transfer agent,
providing assistance in connection with the Trustees' and shareholders'
meetings, providing service in connection with any repurchase offers and other
administrative services necessary to conduct the Fund's business.

DISTRIBUTIONS

Commencing with the Fund's first distribution, the Fund intends to make
regular monthly cash distributions to Common Shareholders. The amount of each
monthly distribution will vary depending on a number of factors, including
interest payable on debt or other costs of financial leverage. As portfolio and
market conditions change, the rate of distributions on the Common Shares and the
Fund's distribution policy could change. In its distributions, the Fund intends
to include amounts attributable to the imputed interest on foreign currency
exposures through long and short positions in forward currency exchange
contracts (represented by the difference between the foreign currency spot rate
and the foreign currency forward rate) and the imputed interest derived from
certain other derivative positions. In certain circumstances, this practice may
result in a portion of distributions to Common Shareholders being characterized
as return of capital for federal income tax purposes as discussed below. The
Board may modify its distribution policy at any time without obtaining the
approval of Common Shareholders. The initial distribution is expected to be
declared approximately 45 days and paid approximately 60 to 90 days after the
completion of this offering, depending on market conditions. See "Tax Matters."

The net investment income of the Fund will consist of all interest income
accrued on portfolio investments, short-term capital gain (including short-term
gains on terminated option positions and gains on the sale of portfolio
investments held for one year or less) in excess of long-term capital loss and
income from certain hedging transactions, less all expenses of the Fund.
Expenses of the Fund will be accrued each day. Substantially all of the Fund's
investment company taxable income will be distributed each year. In addition, at
least annually, the Fund intends to distribute any net capital gain (which is
the excess of net long-term capital gain over net short-term capital loss). To
the extent that the Fund's net investment income and net capital gain for any
year exceed the total monthly distributions paid during the year, the Fund will
make a special distribution at or near year-end of such excess amount as may be
required. If the Fund's total monthly distributions in any year exceed the
amount of its net investment income and net capital gain for the year, any such
excess would be characterized as a return of capital for federal income tax
purposes. Under the 1940 Act, for any distribution that includes amounts from
sources other than net income, the Fund is required to provide the Common
Shareholders a written statement regarding the components of such distribution.

If, for any calendar year, the total distributions made exceed the Fund's
net investment taxable income and net capital gain, the excess will, for federal
income tax purposes, be treated as a tax-free return of capital to each Common
Shareholder (up to the amount of the Common Shareholder's basis in his or her
Common Shares) and thereafter as gain from the sale of Common Shares. The amount
treated as a tax-free return of capital will reduce the Common Shareholder's
adjusted basis in his or her Common Shares, thereby increasing his or her
potential gain or reducing his or her potential loss on the subsequent

sale of his or her Common Shares. To the extent the Fund's distribution policy
results in distributions in excess of its net investment taxable income and net
capital gain, such distributions will decrease its total leveraged assets and
increase its expense ratio to a greater extent than would have been the case if
distributions were limited to these amounts. Distributions in any year may or
may not include a substantial return of capital component.

The Fund has applied for an order from the Securities and Exchange
Commission granting exemption from Section 19(b) of the 1940 Act and Rule 19b-1
thereunder to permit the Fund to include realized long-term capital gains as a
part of its regular distributions to Common Shareholders more frequently than
would otherwise be permitted by the 1940 Act. The Fund will not pursue this
distribution policy until it receives such an exemptive order. There is no
guarantee that the Securities and Exchange Commission will grant such exemptive
relief. However, if the Fund fails to receive the requested relief and the Fund
is unable to include realized capital gains in regular distributions more
frequently than would otherwise be permitted by the 1940 Act, the Adviser does
not believe that the Fund's distribution policy will be adversely affected.

Common Shareholders may elect automatically to reinvest some or all of
their distributions in additional Common Shares under the Fund's dividend
reinvestment plan. See "Dividend Reinvestment Plan."

TAX MATTERS

The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart Nicholson Graham LLP, counsel to the Fund. The
Fund intends to elect to be treated and to qualify each year as a regulated
investment company under the Code. Accordingly, the Fund intends to satisfy
certain requirements relating to sources of its income and diversification of
its assets and to distribute substantially all of its net income and net
short-term and long-term capital gains (after reduction by any available capital
loss carryforwards) in accordance with the timing requirements imposed by the
Code, so as to maintain its regulated investment company status and to avoid
paying any federal income or excise tax. To the extent it qualifies for
treatment as a regulated investment company and satisfies the above-mentioned
distribution requirements, the Fund will not be subject to federal income tax on
income paid to its shareholders in the form of dividends or capital gains
distributions.

The Fund will distribute each year all or substantially all of its net
investment income, which consists of all interest income accrued on portfolio
investments, short-term capital gain (including short-term gains on terminated
options positions and gains on the sale of portfolio investments held one year
or less) in excess of long-term capital loss and income from certain hedging
transactions, less all expenses of the Fund. Distributions of net investment
income generally are taxable to Common Shareholders as ordinary income. The Fund
will also distribute at least annually any net capital gain (which is the excess
of net long-term capital gain over net short-term capital loss). Distributions
of the Fund's net capital gain ("capital gain dividends"), if any, are taxable
to Common Shareholders as long-term capital gain, regardless of the length of
time Common Shares have been held by Common Shareholders. Distributions, if any,
in excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a holder's Common Shares and, after the adjusted tax basis has been
reduced to zero, will constitute capital gains to the Shareholder (assuming the
Common Shares are held as a capital asset). See below for a summary of the
maximum tax rates applicable to capital gains (including capital gain
dividends). The Fund's distributions generally will not qualify either for the
dividends received deduction generally available to corporate taxpayers or as
qualified dividend income subject to favorable tax treatment for individual
taxpayers.

The Fund believes that its investment strategies, including its
investments in Foreign Obligations denominated in foreign currencies, will
generate qualifying income for purposes of the Fund meeting the requirements for
treatment as a regulated investment company ("RIC") under current federal income
tax law. However, the Code expressly provides the U.S. Treasury with authority
to issue regulations that would exclude foreign currency gains from qualifying
income if such gains are not directly related to a fund's
48

business of investing in stock or securities. While to date the U.S. Treasury
has not exercised this regulatory authority, there can be no assurance that it
will not issue regulations in the future (possibly with retroactive application)
that would treat some or all of the Fund's foreign currency gains as
non-qualifying income for RIC purposes, which may affect the Fund's status as a
RIC for all years to which such regulations are applicable.

The Fund will inform Common Shareholders of the source and tax status of
all distributions promptly after the close of each calendar year.

Selling Common Shareholders will generally recognize gain or loss in an
amount equal to the difference between the Shareholder's adjusted tax basis in
the Common Shares sold and the amount received. If the Common Shares are held as
a capital asset, the gain or loss will be a capital gain or loss. The maximum
tax rate applicable to net capital gains recognized by individuals and other
non-corporate taxpayers is (i) the same as the maximum ordinary income tax rate
for gains recognized on the sale of capital assets held for one year or less, or
(ii) 15% for gains recognized on the sale of capital assets held for more than
one year (as well as certain capital gain dividends) (5% for individuals in the
10% or 15% tax brackets). Any loss on a disposition of Common Shares held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain dividends received with respect to those Common Shares. For
purposes of determining whether Common Shares have been held for six months or
less, the holding period is suspended for any periods during which the
Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of Common Shares
will be disallowed to the extent those Common Shares are replaced by other
substantially identical shares within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the Common Shares
(whether through the reinvestment of distributions, which could occur, for
example, if the Shareholder is a participant in the Plan (as defined below) or
otherwise). In that event, the basis of the replacement shares will be adjusted
to reflect the disallowed loss.

An investor should be aware that, if Common Shares are purchased shortly
before the record date for any taxable distribution (including a capital gain
dividend), the purchase price likely will reflect the value of the distribution
and the investor then would receive a taxable distribution likely to reduce the
trading value of such Common Shares, in effect resulting in a taxable return of
some of the purchase price. Taxable distributions to individuals and certain
other non-corporate Common Shareholders, including those who have not provided
their correct taxpayer identification number and other required certifications,
may be subject to "backup" federal income tax withholding at the fourth lowest
rate of tax applicable to a single individual (in 2005, 28%).

The foregoing briefly summarizes some of the important federal income tax
consequences to Common Shareholders of investing in Common Shares, reflects the
federal tax law as of the date of this prospectus, and does not address special
tax rules applicable to certain types of investors, such as corporate and
foreign investors. Unless otherwise noted, this discussion assumes that an
investor is a U.S. person and holds Common Shares as a capital asset. This
discussion is based upon present provisions of the Code, the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change or differing interpretations by the courts or the
IRS retroactively or prospectively. Investors should consult their tax advisors
regarding other federal, state or local tax considerations that may be
applicable in their particular circumstances, as well as any pending or proposed
tax law changes.

DIVIDEND REINVESTMENT PLAN

Pursuant to the Fund's dividend reinvestment plan (the "Plan"), a Common
Shareholder may elect to have all Fund distributions (including all capital gain
dividends) automatically reinvested in Common Shares. Common Shareholders may
elect to participate in the Plan by completing the dividend reinvestment plan
application form.

PFPC Inc. (the "Plan Agent") serves as agent for the Common Shareholders
in administering the Plan. Common Shareholders who elect not to participate in
the Plan will receive all Fund distributions in cash paid by check mailed
directly to the Common Shareholder of record (or if the Common Shares are held
in street or other nominee name, then to the nominee) by PFPC Inc., as
disbursing agent. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if received
by the Plan Agent prior to any distribution record date.

Common Shares will be acquired by the Plan Agent or an independent
broker-dealer for the Plan participants' accounts, depending upon the
circumstances described below, either (i) through receipt of additional
previously authorized but unissued Common Shares from the Fund ("newly issued
Common Shares") or (ii) by purchase of outstanding Common Shares on the open
market ("open-market purchases") on the New York Stock Exchange or elsewhere.
If, on the payment date for the distribution, the net asset value per Common
Share is equal to or less than the market price per Common Share plus estimated
brokerage commissions (such condition being referred to herein as "market
premium"), the Plan Agent will invest the distribution amount in newly issued
Common Shares on behalf of the participants. The number of newly issued Common
Shares to be credited to each participant's account will be determined by
dividing the dollar amount of the distribution by the net asset value per Common
Share on the date the Common Shares are issued, provided that the maximum
discount from the then current market price per Common Share on the date of
issuance may not exceed 5%. If on the distribution payment date the net asset
value per Common Share is greater than the market value plus estimated brokerage
commissions (such condition being referred to herein as "market discount"), the
Plan Agent will invest the distribution amount in Common Shares acquired on
behalf of the participants in open-market purchases.

In the event of a market discount on the distribution payment date, the
Plan Agent will have up to 30 days after the distribution payment date to invest
the distribution amount in Common Shares acquired in open-market purchases. If,
before the Plan Agent has completed its open-market purchases, the market price
of a Common Share exceeds the net asset value per Common Share, the average per
Common Share purchase price paid by the Plan Agent may exceed the net asset
value of the Common Shares, resulting in the acquisition of fewer Common Shares
than if the distribution had been paid in newly issued Common Shares on the
distribution payment date. Therefore, the Plan provides that if the Plan Agent
is unable to invest the full distribution amount in open-market purchases during
the purchase period or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will cease making open-market purchases and
will invest the uninvested portion of the distribution amount in newly issued
Common Shares.

The Plan Agent maintains all Common Shareholders' accounts in the Plan
and furnishes written confirmation of all transactions in the accounts,
including information needed by Common Shareholders for tax records. Common
Shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the Plan participant, and each Common Shareholder proxy will include
those Common Shares purchased or received pursuant to the Plan. The Plan Agent
will forward all proxy solicitation materials to participants and vote proxies
for Common Shares held pursuant to the Plan in accordance with the instructions
of the participants. In the case of Common Shareholders such as banks, brokers
or 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's name and
held for the account of beneficial owners who participate in the Plan.

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

Common Shareholders participating in the Plan may receive benefits not
available to Common Shareholders not participating in the Plan. If the market
price (plus commissions) of the Fund's Common Shares is above their net asset
value, participants in the Plan will receive Common Shares of the Fund at

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

Experience under the Plan may indicate that changes are desirable.
Accordingly, upon 30 days' notice to Plan participants, the Fund reserves the
right to amend or terminate the Plan. A Plan participant will be charged a $5.00
service charge and pay brokerage charges whenever he or she directs the Plan
Agent to sell Common Shares held in a dividend reinvestment account.

All correspondence concerning the Plan should be directed to the Plan
Agent at PFPC Inc., P.O. Box 43027, Providence, Rhode Island 02940-3027. Please
call 1-800-331-1710 between the hours of 9:00 a.m. and 5:00 p.m. Eastern Time if
you have questions regarding the Plan.

DESCRIPTION OF CAPITAL STRUCTURE

The Fund is an unincorporated business trust established under the laws
of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust
dated April 15, 2004 and filed with the Secretary of The Commonwealth on April
16, 2004 (the "Declaration of Trust"). The Declaration of Trust provides that
the Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of Common Shares. The
Fund intends to hold annual meetings of Common Shareholders in compliance with
the requirements of the New York Stock Exchange.

COMMON SHARES

The Declaration of Trust permits the Fund to issue an unlimited number of
full and fractional Common Shares of beneficial interest, $.01 par value per
Share. Each Common Share represents an equal proportionate interest in the
assets of the Fund with each other Common Share in the Fund. Holders of Common
Shares will be entitled to the payment of distribution on the Common Shares
when, as and if declared by the Board. The 1940 Act or the terms of any
borrowings or preferred shares may limit the payment of distributions to the
holders of Common Shares. Each whole Common Share shall be entitled to one vote
as to matters on which it is entitled to vote pursuant to the terms of the
Declaration of Trust on file with the Securities and Exchange Commission. Upon
liquidation of the Fund, after paying or adequately providing for the payment of
all liabilities of the Fund including all obligations under derivative
instruments, all outstanding borrowings and collateral from securities lending
that the Fund is obligated to return to securities lending counterparties, and
the liquidation preference with respect to any outstanding preferred shares, and
upon receipt of such releases, indemnities and refunding agreements as they deem
necessary for their protection, the Trustees may distribute the remaining assets
of the Fund among the holders of the Common Shares. The Declaration of Trust
provides that Common Shareholders are not liable for any liabilities of the
Fund, requires inclusion of a clause to that effect in every agreement entered
into by the Fund and indemnifies Common Shareholders against any such liability.
Although shareholders of an unincorporated business trust established under
Massachusetts law, in certain limited circumstances, may be held personally
liable for the obligations of the business trust as though they were general
partners, the provisions of the Fund's Declaration of Trust described in the
foregoing sentence make the likelihood of such personal liability for Common
Shareholders remote.

While there are any borrowings outstanding, the Fund may not be permitted
to declare any cash distribution on its Common Shares unless, at the time of
such declaration, (i) all accrued interest on borrowings have been paid and (ii)
the value of the Fund's total assets (determined after deducting the amount of
such distribution), less all liabilities and indebtedness of the Fund not
represented by senior
51

securities, is at least 200% of the aggregate amount of such securities
representing indebtedness. In addition to the requirements of the 1940 Act, the
Fund may be required to comply with other asset coverage requirements pursuant
to financial covenants associated with a borrowing/commercial paper program.
These requirements may include an asset coverage test more stringent than under
the 1940 Act. This limitation on the Fund's ability to make distributions on its
Common Shares could in certain circumstances impair the ability of the Fund to
maintain its qualification for taxation as a regulated investment company for
federal income tax purposes. The Fund intends, however, to the extent possible
to reduce borrowings from time to time to maintain compliance with such asset
coverage requirements. See "Investment Objectives and Policies" and "Tax
Matters." Depending on the timing of any such repayment, the Fund may be
required to pay a premium in addition to the liquidation preference to lenders
under a borrowing/commercial paper program.

The Fund has no present intention of offering additional Common Shares
except as described herein. Other offerings of its Common Shares, if made, will
require approval of the Board. Any additional offering will not be at a price
per Common Share below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering to
existing Common Shareholders or with the consent of a majority of the Fund's
outstanding Common Shares. The Common Shares have no preemptive rights.

The Fund generally will not issue share certificates. However, upon
written request to the Fund's transfer agent, a share certificate will be issued
for any or all of the full Common Shares credited to an investor's account.
Share certificates that have been issued to an investor may be returned at any
time.

CREDIT FACILITY/COMMERCIAL PAPER PROGRAM

In the event that the Fund in the future leverages through
borrowings/commercial paper, the Fund expects that it would enter into
definitive agreements with respect to a credit facility/commercial paper program
or other borrowing program. The Fund may negotiate with commercial banks to
arrange a credit facility/commercial paper program. Any such borrowings would
constitute financial leverage. Such a facility/commercial paper program is not
expected to be convertible into any other securities of the Fund, outstanding
amounts are expected to be prepayable by the Fund prior to final maturity
without significant penalty and there are not expected to be any sinking fund or
mandatory retirement provisions. Outstanding amounts would be payable at
maturity or such earlier times as required by the agreement. The Fund may be
required to prepay outstanding amounts under the facility/program or incur a
penalty rate of interest in the event of the occurrence of certain events of
default. The Fund would be expected to indemnify the lenders under the
facility/program against liabilities they may incur in connection with the
facility/program.

In addition, the Fund expects that any such credit facility/program would
contain covenants that, among other things, likely will limit the Fund's ability
to pay distributions in certain circumstances, incur additional debt, change its
fundamental investment policies and engage in certain transactions, including
mergers and consolidations, and may require asset coverage ratios in addition to
those required by the 1940 Act. The Fund may be required to pledge its assets
and to maintain a portion of its assets in cash or high-grade securities as a
reserve against interest or principal payments and expenses. The Fund expects
that any credit facility/program would have customary covenant, negative
covenant and default provisions. There can be no assurance that the Fund will
enter into an agreement for a credit facility/program on terms and conditions
representative of the foregoing, or that additional material terms will not
apply. In addition, if entered into, any such credit facility/program may in the
future be replaced or refinanced by one or more credit facilities having
substantially different terms or by the issuance of preferred shares or debt
securities.

REPURCHASE OF COMMON SHARES AND OTHER DISCOUNT MEASURES

Because shares of closed-end management investment companies frequently
trade at a discount to their net asset values, the Board has determined that
from time to time it may be in the interest of

Common Shareholders for the Fund to take corrective actions. The Board, in
consultation with Eaton Vance, will review at least annually the possibility of
open market repurchases and/or tender offers for the Common Shares and will
consider such factors as the market price of the Common Shares, the net asset
value of the Common Shares, the liquidity of the assets of the Fund, effect on
the Fund's expenses, whether such transactions would impair the Fund's status as
a regulated investment company or result in a failure to comply with applicable
asset coverage requirements, general economic conditions and such other events
or conditions which may have a material effect on the Fund's ability to
consummate such transactions. There are no assurances that the Board will, in
fact, decide to undertake either of these actions or if undertaken, that such
actions will result in the Fund's Common Shares trading at a price which is
equal to or approximates their net asset value. In recognition of the
possibility that the Common Shares might trade at a discount to net asset value
and that any such discount may not be in the interest of Common Shareholders,
the Board, in consultation with Eaton Vance, from time to time may review
possible actions to reduce any such discount.

PREFERRED SHARES

The Declaration of Trust authorizes the issuance of an unlimited number
of shares of beneficial interest with preference rights, including preferred
shares (the "preferred shares"), having a par value of $.01 per share, in one or
more series, with rights as determined by the Board, by action of the Board
without the approval of the Common Shareholders. The Fund has no current
intention of issuing preferred shares. However, it is possible that preferred
shares could be issued at some future time as an additional method of obtaining
financial leverage or as a replacement of other forms of financial leverage such
as derivative instruments and/or the reinvestment of securities lending
collateral.

Under the requirements of the 1940 Act, if preferred shares are issued,
the Fund must, immediately after the issuance of any such preferred shares, have
an "asset coverage" of at least 200%. Asset coverage means the ratio which the
value of the total assets of the Fund, less all liability and indebtedness not
represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of senior securities representing indebtedness of the Fund, if
any, plus the aggregate liquidation preference of the preferred shares. If the
Fund seeks a rating of the preferred shares, asset coverage requirements in
addition to those set forth in the 1940 Act, may be imposed. The liquidation
value of the preferred shares is expected to equal their aggregate original
purchase price plus redemption premium, if any, together with any accrued and
unpaid dividends thereon (on a cumulative basis), whether or not earned or
declared. The terms of the preferred shares, including their dividend rate,
voting rights, liquidation preference and redemption provisions, will be
determined by the Board (subject to applicable law and the Fund's Declaration of
Trust) if and when it authorizes the preferred shares. The Fund may issue
preferred shares that provide for the periodic redetermination of the dividend
rate at relatively short intervals through an auction or remarketing procedure,
although the terms of the preferred shares may also enable the Fund to lengthen
such intervals. At times, the dividend rate as redetermined on the Fund's
preferred shares may approach or exceed the Fund's return after expenses on the
investment of proceeds from the preferred shares and the Fund's leverage
structure would result in a lower rate of return to Common Shareholders than if
the Fund were not so structured.

In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Fund, the terms of any preferred shares may entitle the
holders of preferred shares to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus redemption
premium, if any, together with accrued and unpaid dividends, whether or not
earned or declared and on a cumulative basis) 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, the preferred shareholders
would not be entitled to any further participation in any distribution of assets
by the Fund.

Holders of any outstanding preferred shares, voting as a class, shall be
entitled to elect two of the Fund's Trustees. Under the 1940 Act, if at any time
dividends on the preferred shares are unpaid in an amount equal to two full
years' dividends thereon, the holders of all outstanding preferred shares,
voting as a class, will be entitled to elect a majority of the Fund's Trustees
until all dividends in default have been
53

paid or declared and set apart for payment. In addition, if required by a Rating
Agency rating the preferred shares or if the Board determines it to be in the
best interests of the Common Shareholders, issuance of the preferred shares may
result in more restrictive provisions than imposed by the 1940 Act. In this
regard, holders of the preferred shares may be entitled to elect a majority of
the Fund's Board in other circumstances, for example, if one payment on the
preferred shares is in arrears.

If the Fund were to issue preferred shares, it likely would need to seek
a credit rating for the preferred shares from one or more Rating Agencies. In
such event, as long as any such preferred shares are outstanding, the
composition of the Fund's portfolio will reflect guidelines established by such
Rating Agency. The Fund anticipates that the guidelines with respect to any
preferred shares will establish a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the 1940 Act. The Fund currently anticipates that
such guidelines would include asset coverage requirements which are more
restrictive than those under the 1940 Act, restrictions on certain portfolio
investments and investment practices, requirements that the Fund maintain a
portion of its assets in short-term, high-quality, fixed-income securities and
certain mandatory redemption requirements relating to the preferred shares. No
assurance can be given that the guidelines actually imposed with respect to the
preferred shares by any such Rating Agency will be more or less restrictive than
as described in this prospectus.

ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST

The Declaration of Trust 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, and 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. These provisions may have the effect of
discouraging attempts to acquire control of the Fund, which attempts could have
the effect of increasing the expenses of the Fund and interfering with the
normal operation of the Fund. The Board is divided into three classes, with the
term of one class expiring at each annual meeting of Common Shareholders. At
each annual meeting, one class of Trustees is elected to a three-year term. This
provision could delay for up to two years the replacement of a majority of the
Board. A Trustee may be removed from office only for cause by a written
instrument signed by the remaining Trustees or by a vote of the holders of at
least two-thirds of the class of shares of the Fund that elected such Trustee
and are entitled to vote on the matter.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board shall by resolution have approved a memorandum of
understanding with such holders, in which case normal voting requirements would
be in effect. For purposes of these provisions, a 5%-or-greater holder of a
class of shares (a "Principal Shareholder") refers to any person who, whether
directly or indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any class
of beneficial interest of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund
or any subsidiary thereof, in exchange for securities of the Fund, of any assets
of any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).

The Board has determined that provisions with respect to the Board and
the 75% voting requirements described above, which voting requirements are
greater than the minimum requirements
54

under Massachusetts law or the 1940 Act, are in the best interest of Common
Shareholders generally. Reference should be made to the Declaration of Trust on
file with the Securities and Exchange Commission for the full text of these
provisions.

POSSIBLE CONVERSION TO OPEN-END FUND

The Fund may be converted to an open-end management investment company at
any time if approved by the lesser of (i) two-thirds or more of the Fund's then
outstanding Common Shares and preferred shares (if any), each voting separately
as a class, or (ii) more than 50% of the then outstanding Common Shares and
preferred shares (if any), voting separately as a class if such conversion is
recommended by at least 75% of the Trustees then in office. If approved in the
foregoing manner, conversion of the Fund could not occur until 90 days after the
shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. Conversion of the
Fund to an open-end management investment company also would require the
redemption of any outstanding preferred shares and could require the repayment
of borrowings, which would eliminate the leveraged capital structure of the Fund
with respect to the Common Shares. In the event of conversion, the Common Shares
would cease to be listed on the New York Stock Exchange or other national
securities exchange or market system. The Board believes that the closed-end
structure is desirable, given the Fund's investment objectives and policies.
Investors should assume, therefore, that it is unlikely that the Board would
vote to convert the Fund to an open-end management investment company. Common
Shareholders of an open-end management 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 such
redemption charge, if any, as might be in effect at the time of a redemption. If
the Fund were to convert to an open-end investment company, the Fund expects it
would pay all such redemption requests in cash, but would likely reserve the
right to pay redemption requests in a combination of cash or securities. If such
partial payment in securities were made, investors may incur brokerage costs in
converting such securities to cash. If the Fund were converted to an open-end
fund, it is likely that new Common Shares would be sold at net asset value plus
a sales load.

UNDERWRITING

Subject to the terms and conditions stated in the purchase agreement
dated , 2005, each Underwriter named below, for which Merrill Lynch,
Pierce, Fenner & Smith Incorporated is acting as representative, 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.

NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
UBS Securities LLC..........................................
A.G. Edwards & Sons, Inc. ..................................
Advest, Inc. ...............................................
BB&T Capital Markets, a division of Scott & Stringfellow,
Inc. .....................................................
Robert W. Baird & Co. Incorporated..........................
H&R Block Financial Advisors, Inc. .........................
Ferris, Baker Watts, Incorporated...........................
Fixed Income Securities, L.P. ..............................
J.J.B. Hilliard, W.L. Lyons, Inc. ..........................
KeyBanc Capital Markets, a division of McDonald Investments
Inc. .....................................................
Oppenheimer & Co. Inc. .....................................
RBC Capital Markets Corporation.............................
SunTrust Capital Markets, Inc. .............................
Wells Fargo Securities, LLC.................................
-------------
Total..........................................
=============

The purchase agreement provides that the obligations of the Underwriters
to purchase the Common Shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to purchase all the Common Shares sold under the
purchase agreement if any of the Common Shares are purchased. In the purchase
agreement, the Fund and the Adviser have jointly agreed to indemnify the
Underwriters against certain liabilities, including liabilities arising under
the Securities Act of 1933, as amended, or to contribute payments the
underwriters may be required to make for any of those liabilities.

COMMISSIONS AND DISCOUNTS

The Underwriters propose to initially 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 certain dealers at the
public offering price less a concession not in excess of $ per Common Share.
The sales load the Fund will pay of $.90 per Common Share is equal to 4.5% of
the initial offering price. The Underwriters may allow, and the dealers may
reallow, a discount not in excess of $ per Common Share on sales to other
dealers. Notwithstanding the foregoing, certain Underwriters may pay an
additional $ per Common Share from the sales load to certain dealers
pursuant to existing arrangements with such dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
Investors must pay for any Common Shares purchased on or before ,
2005.

The following table shows the public offering price, sales load and
proceeds, after expenses, to the Fund. The information assumes either no
exercise or full exercise by the Underwriters of their overallotment option.

WITHOUT WITH
PER SHARE OVERALLOTMENT OVERALLOTMENT
--------- ------------- -------------

Public offering price...................... $20.00 $ $
Sales load................................. $.90 $ $
Estimated offering expenses................ $.04 $ $
Proceeds, after expenses, to the Fund...... $19.06 $ $

The expenses of the offering are estimated at $ and are payable by
the Fund. The Fund has agreed to pay the Underwriters $.00667 per Common Share
as a partial reimbursement of expenses incurred in connection with the offering.
The amount paid by the Fund as this partial reimbursement to the Underwriters
will not exceed .03335% of the total price to the public of the Common Shares
sold in this offering. The Adviser has agreed to reimburse all of the Fund's
organizational expenses and to pay the amount by which the aggregate offering
expenses (other than the sales load, but including the reimbursement of expenses
described above) exceed $.04 per Common Share.

OVERALLOTMENT OPTION

The Fund has granted the underwriters an option to purchase up to
additional Common Shares at the public offering price, less the sales
load, within 45 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional Common Shares proportionate to that
Underwriter's initial amount reflected in the above table.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the Common Shares is complete, Securities and
Exchange Commission rules may limit Underwriters and selling group members from
bidding for and purchasing the Fund's Common Shares. However, the representative
may engage in transactions that stabilize the price of Common Shares, such as
bids or purchases to peg, or maintain, that price.

If the Underwriters create a short position in the Common Shares in
connection with the offering (i.e., if they sell more Common Shares than are
listed on the cover of this prospectus) the representative may reduce that short
position by purchasing Common Shares in the open market. The representative may
also elect to reduce any short position by exercising all or part of the
overallotment option described above. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Shares sold in this offering for their
account may be reclaimed by the syndicate if such Common Shares are repurchased
by the syndicate in stabilizing or covering transactions. Purchases of Common
Shares to stabilize its price or to reduce a short position may cause the price
of the Fund's Common Shares to be higher than it might be in the absence of such
purchases.

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

The Fund has agreed not to offer or sell any additional Common Shares for
a period of 180 days after the date of the purchase agreement without the prior
written consent of the Underwriters, except for the sale of Common Shares to the
Underwriters pursuant to the purchase agreement and certain transactions
relating to the Plan.

The Fund anticipates that the Underwriters may from time to time act as
brokers or dealers in connection with the Fund's portfolio transactions. The
Underwriters are active underwriters of, and dealers in,

securities and act as market makers in a number of such securities and,
therefore, can be expected to engage in portfolio transactions with the Fund.

One or more of the Underwriters of the Common Shares may also act as an
underwriter of the Fund's preferred shares, if any, and as a broker-dealer in
connection with auctions of the preferred shares.

The Common Shares will be sold in such a manner as to ensure that New
York Stock Exchange distribution standards (that is, round lots, public shares
and aggregate market value) will be met.

OTHER RELATIONSHIPS

The Adviser (and not the Fund) has agreed to pay a quarterly fee to
Merrill Lynch at the annual rate of .15% of the Fund's average total leveraged
assets during the continuance of the Advisory Agreement between the Adviser and
the Fund. The total amount of these additional compensation payments to Merrill
Lynch will not exceed % of the total price to the public of the Common
Shares sold in this offering. The Adviser (and not the Fund) has also agreed to
pay to certain qualifying Underwriters who meet specified sales targets
("Qualifying Underwriters"), quarterly in arrears, an annual fee of up to .15%
of the Fund's average total leveraged assets attributable to the Common Shares
sold by such Qualifying Underwriters. Such sales targets may be waived or
lowered with respect to any Underwriter in the sole discretion of the Adviser.
These fee payments will remain in effect only so long as the Advisory Agreement
remains in effect between the Fund and the Adviser or any successor in interest
or affiliate of the Adviser, as and to the extent that such Advisory Agreement
is renewed periodically in accordance with the 1940 Act. will receive
additional compensation which will not exceed % of the aggregate initial
offering price of the Common Shares offered hereby. will receive
additional compensation which will not exceed % of the aggregate initial
offering price of the Common Shares offered hereby. Merrill Lynch and the
Qualifying Underwriters have agreed to provide, upon the request of the Adviser,
certain after-market support services to the Adviser designed to maintain the
visibility of the Fund on an ongoing basis, information, studies or reports
regarding the Fund and the closed-end investment company industry, and advice as
to strategies for addressing any discount of the market value of the Fund's
Common Shares to its net asset value.

The total amount of these additional compensation payments to Merrill
Lynch and the Qualifying Underwriters, plus the amount paid by the Fund as the
$.00667 per Common Share reimbursement to the Underwriters, will not exceed 4.5%
of the total price to the public of the Common Shares offered hereby. The sum
total of all compensation to the Underwriters in connection with this public
offering of Common Shares, including sales load and all forms of additional
compensation to the Underwriters, will be limited to not more than 9.0% of the
total price to the public of the Common Shares sold in this offering.

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

CUSTODIAN AND TRANSFER AGENT

Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116, is the custodian of the Fund and will maintain custody of
the securities and cash of the Fund. IBT maintains the Fund's general ledger and
computes net asset value per share daily. IBT also attends to details in
connection with the sale, exchange, substitution, transfer and other dealings
with the Fund's investments and receives and disburses all funds. IBT also
assists in preparation of shareholder reports and the electronic filing of such
reports with the Securities and Exchange Commission.

PFPC Inc., P.O. Box 43027, Providence, Rhode Island 02940-3027, is the
transfer agent and dividend disbursing agent of the Fund.

LEGAL OPINIONS

Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Kirkpatrick & Lockhart Nicholson Graham LLP, Boston,
Massachusetts, and for the Underwriters by Clifford Chance US LLP, New York, New
York. Clifford Chance US LLP may rely on the opinion of Kirkpatrick & Lockhart
Nicholson Graham LLP as to certain matters of Massachusetts law.

REPORTS TO SHAREHOLDERS

The Fund will send to Common Shareholders unaudited semi-annual and
audited annual reports, including a list of investments held.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP, Boston, Massachusetts is the independent
registered public accounting firm for the Fund and will audit the Fund's
financial statements.

ADDITIONAL INFORMATION

The prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by its rules and regulations. The Statement of
Additional Information can be obtained without charge by calling 1-800-225-6265.

Statements contained in this prospectus as to the contents of any
contract or other documents 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 of which this prospectus forms
a part, each such statement being qualified in all respects by such reference.

TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION

PAGE
----

Additional Investment Information and Restrictions.......... 2
Trustees and Officers....................................... 13
Investment Advisory and Other Services...................... 19
Determination of Net Asset Value............................ 21
Portfolio Trading........................................... 22
Taxes....................................................... 24
Other Information........................................... 28
Independent Registered Public Accounting Firm............... 28
Financial Statements........................................ 30
Appendix A: Ratings......................................... A-1
Appendix B: Proxy Voting Policies and Procedures............ B-1

THE FUND'S PRIVACY POLICY

The Fund is committed to ensuring your financial privacy. This notice is
being sent to comply with privacy regulations of the Securities and Exchange
Commission. The Fund has in effect the following policy with respect to
nonpublic personal information about its customers:

- Only such information received from you, through application forms
or otherwise, and information about your Fund transactions will be
collected.

- None of such information about you (or former customers) will be
disclosed to anyone, except as permitted by law (which includes
disclosure to employees necessary to service your account).

- Policies and procedures (including physical, electronic and
procedural safeguards) are in place that are designed to protect
the confidentiality of such information.

For more information about the Fund's privacy policies call
1-800-262-1122.

Through and including , 2005 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

(EATON VANCE LOGO)

EATON VANCE SHORT DURATION
DIVERSIFIED INCOME FUND

COMMON SHARES
$20.00 PER SHARE

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

MERRILL LYNCH & CO.
UBS INVESTMENT BANK
A.G. EDWARDS
ADVEST, INC.
BB&T CAPITAL MARKETS
ROBERT W. BAIRD & CO.
H&R BLOCK FINANCIAL ADVISORS, INC.
FERRIS, BAKER WATTS
INCORPORATED
FIXED INCOME SECURITIES, L.P.
J.J.B. HILLIARD, W.L. LYONS, INC.
KEYBANC CAPITAL MARKETS
OPPENHEIMER & CO.
RBC CAPITAL MARKETS
SUNTRUST ROBINSON HUMPHREY
WELLS FARGO SECURITIES

, 2005

CE-SDDIFRH

SUBJECT TO COMPLETION
JANUARY 21, 2005

STATEMENT OF ADDITIONAL INFORMATION
, 2005

EATON VANCE SHORT DURATION
DIVERSIFIED INCOME FUND
THE EATON VANCE BUILDING
255 STATE STREET
BOSTON, MASSACHUSETTS 02109
(800) 225-6265

TABLE OF CONTENTS

PAGE
----

THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS AND
IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF EATON VANCE SHORT DURATION DIVERSIFIED INCOME
FUND (THE "FUND") DATED , 2005, AS SUPPLEMENTED FROM TIME TO TIME,
WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS SAI SHOULD BE READ IN
CONJUNCTION WITH SUCH PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-225-6265.

THE INFORMATION IN THIS SAI IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC") IS EFFECTIVE. THIS SAI, WHICH IS NOT
A PROSPECTUS, IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

Capitalized terms used in this SAI and not otherwise defined have the
meanings given to them in the Fund's Prospectus.

ADDITIONAL INVESTMENT INFORMATION AND RESTRICTIONS

Primary investment strategies are described in the Prospectus. The
following is a description of the various investment policies that may be
engaged in, whether as a primary or secondary strategy, and a summary of certain
attendant risks. Eaton Vance may not buy any of the following instruments or use
any of the following techniques unless it believes that doing so will help to
achieve the Fund's investment objectives.

MORTGAGE-BACKED SECURITIES

GENERAL

The Fund's investments in mortgage-backed securities may include
conventional mortgage pass-through securities, floating rate mortgage-backed
securities and certain classes of multiple class CMOs (as described below).
Mortgage-backed securities differ from bonds in that the principal is paid back
by the borrower over the length of the loan rather than returned in a lump sum
at maturity.

Government National Mortgage Association ("GNMA") Certificates and
Federal National Mortgage Association ("FNMA") Mortgage-Backed Certificates are
mortgage-backed securities representing part ownership of a pool of mortgage
loans. GNMA loans -- issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations -- are either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A "pool" or
group of such mortgages is assembled and, after being approved by GNMA, is
offered to investors through securities dealers. Once such pool is approved by
GNMA, the timely payment of interest and principal on the GNMA Certificates
issued representing such pool is guaranteed by the full faith and credit of the
U.S. Government. FNMA, a federally chartered corporation owned entirely by
private stockholders, purchases both conventional and federally insured or
guaranteed residential mortgages from various entities, including savings and
loan associations, savings banks, commercial banks, credit unions and mortgage
bankers, and packages pools of such mortgages in the form of pass-through
securities generally called FNMA Mortgage-Backed Certificates, which 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. GNMA Certificates
and FNMA Mortgage-Backed Certificates are called "pass-through" securities
because a pro rata share of both regular interest and principal payments, as
well as unscheduled early prepayments, on the underlying mortgage pool is passed
through monthly to the holder of the Certificate (i.e., the Fund). The Fund may
purchase GNMA Certificates, FNMA Mortgage-Backed Certificates and various other
mortgage-backed securities on a when-issued basis subject to certain limitations
and requirements.

The Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the U.S. Government created by Congress for the purposes of
increasing the availability of mortgage credit for residential housing, issues
participation certificates ("PCs") representing undivided interest in FHLMC'S
mortgage portfolio. While FHLMC guarantees the timely payment of interest and
ultimate collection of the principal of its PCs, its PCs are not backed by the
full faith and credit of the U.S. Government. FHLMC PCs differ from GNMA
Certificates in that the mortgages underlying the PCs are monthly "conventional"
mortgages rather than mortgages insured or guaranteed by a federal agency or
instrumentality. However, in several other respects, such as the monthly
pass-through of interest and principal (including unscheduled prepayments) and
the unpredictability of future unscheduled prepayments on the underlying
mortgage pools, FHLMC PCs are similar to GNMA Certificates.

While it is not possible to accurately predict the life of a particular
issue of a mortgage-backed "pass-through" security held by the Fund, the actual
life of any such security is likely to be substantially less than the average
final maturities of the mortgage loans underlying the security. This is because
unscheduled early prepayments of principal on the security owned by the Fund
will result from the prepayment, refinancings or foreclosure of the underlying
mortgage loans in the mortgage pool. The Fund, when the monthly payments (which
may include unscheduled prepayments) on such a security are passed through to
it, may be able to reinvest them only at a lower rate of interest. Because of
the regular scheduled payments of principal and the early unscheduled
prepayments of principal, the mortgage-backed "pass-through" security is less
effective than other types of obligations as a means of "locking-in" attractive
long-term interest rates. As a result, this type of security may have less
potential for capital appreciation during periods of declining interest rates
than other U.S. Government securities of comparable maturities, although many
issues of mortgage-backed "pass-through"

securities may have a comparable risk of decline in market value during periods
of rising interest rates. If such a security has been purchased by the Fund at a
premium above its par value, both a scheduled payment of principal and an
unscheduled prepayment of principal, which would be made at par, will accelerate
the realization of a loss equal to that portion of the premium applicable to the
payment or prepayment. If such a security has been purchased by the Fund at a
discount from its par value, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current returns and will
accelerate the recognition of income, which, when distributed to Fund
shareholders, will be taxable as ordinary income.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")

The CMO classes in which the Fund may invest include sequential and
parallel pay CMOs, including planned amortization class and target amortization
class securities. CMOs are debt securities issued by the FHLMC and by financial
institutions and other mortgage lenders, which are generally fully
collateralized by a pool of mortgages held under an indenture. The key feature
of the CMO structure is the prioritization of the cash flows from a pool of
mortgages among the several classes of CMO holders, thereby creating a series of
obligations with varying rates and maturities appealing to a wide range of
investors. CMOs generally are secured by an assignment to a trustee under the
indenture pursuant to which the bonds are issued of collateral consisting of a
pool of mortgages. Payments with respect to the underlying mortgages generally
are made to the trustee under the indenture. Payments of principal and interest
on the underlying mortgages are not passed through to the holders of the CMOs as
such (that is, the character of payments of principal and interest is not passed
through and therefore payments to holders of CMOs attributable to interest paid
and principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
CMOs are issued in two or more classes or series with varying maturities and
stated rates of interest determined by the issuer. Senior CMO classes will
typically have priority over residual CMO classes as to the receipt of principal
and/or interest payments on the underlying mortgages. Because the interest and
principal payments on the underlying mortgages are not passed through to holders
of CMOs, CMOs of varying maturities may be secured by the same pool of
mortgages, the payments on which are used to pay interest to each class and to
retire successive maturities in sequence. CMOs are designed to be retired as the
underlying mortgages are repaid. In the event of sufficient early prepayments on
such mortgages, the class or series of CMO first to mature generally will be
retired prior to maturity. Therefore, although in most cases the issuer of CMOs
will not supply additional collateral in the event of such prepayments, there
will be sufficient collateral to secure CMOs that remain outstanding. Currently,
the Adviser will consider privately issued CMOs or other mortgage-backed
securities as possible investments for the Fund only when the mortgage
collateral is insured, guaranteed or otherwise backed by the U.S. Government or
one or more of its agencies or instrumentalities (e.g., insured by the Federal
Housing Administration or Farmers Home Administration or guaranteed by the
Administrator of Veterans Affairs or consisting in whole or in part of U.S.
Government securities).

RISKS OF CERTAIN MORTGAGE-BACKED AND INDEXED SECURITIES

Although the are not considered to be mortgage-backed securities, index
amortizing notes and other callable securities are subject to extension risk
resulting from the issuer's failure to exercise its option to call or redeem the
notes before their stated maturity date. The residual classes of CMOs are
subject to both prepayment and extension risk.

Other types of floating rate derivative debt securities present more
complex types of interest rate risks. For example, range floaters are subject to
the risk that the coupon will be reduced to below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to depreciation in the event of an
unfavorable change in the spread between two designated interest rates. The
market values of currency-linked securities may be very volatile and may decline
during periods of unstable currency exchange rates.

SENIOR LOANS

STRUCTURE OF SENIOR LOANS

A Senior Loan is typically originated, negotiated and structured by a
U.S. or foreign commercial bank, insurance company, finance company or other
financial institution (the "Agent") for a group of loan investors ("Loan
Investors"). The Agent typically administers and enforces the Senior Loan on
behalf of the other Loan

Investors in the syndicate. In addition, an institution, typically but not
always the Agent, holds any collateral on behalf of the Loan Investors.

Senior Loans primarily include senior floating rate loans to corporations
and secondarily institutionally traded senior floating rate debt obligations
issued by an asset-backed pool, and interests therein. Loan interests primarily
take the form of assignments purchased in the primary or secondary market. Loan
interests may also take the form of participation interests in a Senior Loan.
Such loan interests may be acquired from U.S. or foreign commercial banks,
insurance companies, finance companies or other financial institutions who have
made loans or are Loan Investors or from other investors in loan interests.

The Fund typically purchases "Assignments" from the Agent or other Loan
Investors. The purchaser of an Assignment typically succeeds to all the rights
and obligations under the Loan Agreement of the assigning Loan Investor and
becomes a Loan Investor under the Loan Agreement with the same rights and
obligations as the assigning Loan Investor. Assignments may, however, be
arranged through private negotiations between potential assignees and potential
assignors, and the rights and obligations acquired by the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Loan Investor.

The Fund also may invest in "Participations." Participations by the Fund
in a Loan Investor's portion of a Senior Loan typically will result in the Fund
having a contractual relationship only with such Loan Investor, not with the
Borrower. As a result, the Fund may have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Loan
Investor selling the Participation and only upon receipt by such Loan Investor
of such payments from the Borrower. In connection with purchasing
Participations, the Fund generally will have no right to enforce compliance by
the Borrower with the terms of the loan agreement, nor any rights with respect
to any funds acquired by other Loan Investors through set-off against the
Borrower and the Fund may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Fund may assume the credit risk of both the Borrower and the Loan Investor
selling the Participation. In the event of the insolvency of the Loan Investor
selling a Participation, the Fund may be treated as a general creditor of such
Loan Investor. The selling Loan Investors and other persons interpositioned
between such Loan Investors and the Fund with respect to such Participations
will likely conduct their principal business activities in the banking, finance
and financial services industries. Persons engaged in such industries may be
more susceptible to, among other things, fluctuations in interest rates, changes
in the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.

The Fund will only acquire Participations if the Loan Investor selling
the Participation, and any other persons interpositioned between the Fund and
the Loan Investor, at the time of investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or higher by Standard & Poor's
Ratings Group a division of The McGraw-Hill Companies, Inc. ("S&P") or Baa or
P-3 or higher by Moody's Investors Service, Inc. ("Moody's") or comparably rated
by another nationally recognized rating agency) or, if unrated, determined by
the Adviser to be of comparable quality. Securities rated Baa by Moody's have
speculative characteristics. Long-term debt rated BBB by S&P is regarded by S&P
as having adequate capacity to pay interest and repay principal and debt rated
Baa by Moody's is regarded by Moody's as a medium grade obligation, i.e., it is
neither highly protected nor poorly secured. Commercial paper rated A-3 by S&P
indicates that S&P believes such obligations exhibit adequate protection
parameters but that 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 and issues of commercial paper rated P-3 by Moody's
are considered by Moody's to have an acceptable ability for repayment of senior
short-term obligations. The effect of industry characteristics and market
compositions may be more pronounced. 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.

LOAN COLLATERAL

In order to borrow money pursuant to a Senior Loan, a Borrower will
frequently, for the term of the Senior Loan, pledge collateral, including, but
not limited to, (i) working capital assets, such as accounts receivable and
inventory; (ii) tangible fixed assets, such as real property, buildings and
equipment; (iii) intangible assets, such as trademarks and patent rights (but
excluding goodwill); and (iv) security interests in shares of stock of
subsidiaries or affiliates. In the case of Senior Loans made to non-public
companies, the

company's shareholders or owners may provide collateral in the form of secured
guarantees and/or security interests in assets that they own. In many instances,
a Senior Loan may be secured only by stock in the Borrower or its subsidiaries.
Collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan.

CERTAIN FEES PAID TO THE FUND

In the process of buying, selling and holding Senior Loans, the Fund may
receive and/or pay certain fees. These fees are in addition to interest payments
received and may include facility fees, commitment fees, amendment fees,
commissions and prepayment penalty fees. When the Fund buys a Senior Loan it may
receive a facility fee and when it sells a Senior Loan, it may pay a facility
fee. On an ongoing basis, the Fund may receive a commitment fee based on the
undrawn portion of the underlying line of credit portion of a Senior Loan. In
certain circumstances, the Fund may receive a prepayment penalty fee upon the
prepayment of a Senior Loan by a Borrower. Other fees received by the Fund may
include covenant waiver fees and covenant modification fees.

BORROWER COVENANTS

A Borrower must comply with various restrictive covenants contained in a
loan agreement or note purchase agreement between the Borrower and the holders
of the Senior Loan (the "Loan Agreement"). Such covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the Borrower to maintain specific minimum financial ratios
and limits on total debt. In addition, the Loan Agreement may contain a covenant
requiring the Borrower to prepay the Loan with any free cash flow. Free cash
flow is generally defined as net cash flow after scheduled debt service payments
and permitted capital expenditures, and includes the proceeds from asset
dispositions or sales of securities. A breach of a covenant which is not waived
by the Agent, or by the Loan Investors directly, as the case may be, is normally
an event of acceleration; i.e., the Agent, or the Loan Investors directly, as
the case may be, has the right to call the outstanding Senior Loan. The typical
practice of an Agent or a Loan Investor in relying exclusively or primarily on
reports from the Borrower to monitor the Borrower's compliance with covenants
may involve a risk of fraud by the Borrower. In the case of a Senior Loan in the
form of a Participation, the agreement between the buyer and seller may limit
the rights of the holder to vote on certain changes which may be made to the
Loan Agreement, such as waiving a breach of a covenant. However, the holder of
the Participation will, in almost all cases, have the right to vote on certain
fundamental issues such as changes in principal amount, payment dates and
interest rate.

ADMINISTRATION OF LOANS

In a typical Senior Loan the Agent administers the terms of the Loan
Agreement. In such cases, the Agent is normally responsible for the collection
of principal and interest payments from the Borrower and the apportionment of
these payments to the credit of all institutions which are parties to the Loan
Agreement. The Fund will generally rely upon the Agent or an intermediate
participant to receive and forward to the Fund its portion of the principal and
interest payments on the Senior Loan. Furthermore, unless under the terms of a
Participation Agreement the Fund has direct recourse against the Borrower, the
Fund will rely on the Agent and the other Loan Investors to use appropriate
credit remedies against the Borrower. The Agent is typically responsible for
monitoring compliance with covenants contained in the Loan Agreement based upon
reports prepared by the Borrower. The seller of the Senior Loan usually does,
but is often not obligated to, notify holders of Senior Loans of any failures of
compliance. The Agent may monitor the value of the collateral and, if the value
of the collateral declines, may accelerate the Senior Loan, may give the
Borrower an opportunity to provide additional collateral or may seek other
protection for the benefit of the participants in the Senior Loan. The Agent is
compensated by the Borrower for providing these services under a Loan Agreement,
and such compensation may include special fees paid upon structuring and funding
the Senior Loan and other fees paid on a continuing basis. With respect to
Senior Loans for which the Agent does not perform such administrative and
enforcement functions, the Fund will perform such tasks on its own behalf,
although a collateral bank will typically hold any collateral on behalf of the
Fund and the other Loan Investors pursuant to the applicable Loan Agreement.

A financial institution's appointment as Agent may usually be terminated
in the event that it fails to observe the requisite standard of care, becomes
insolvent, enters Federal Deposit Insurance Corporation ("FDIC") receivership
or, if not FDIC insured, enters into bankruptcy proceedings. A successor Agent
would generally be appointed to replace the terminated Agent, and assets held by
the Agent under the Loan
5

Agreement should remain available to holders of Senior Loans. However, if assets
held by the Agent for the benefit of the Fund were determined to be subject to
the claims of the Agent's general creditors, the Fund might incur certain costs
and delays in realizing payment on a Senior Loan, or suffer a loss of principal
and/or interest. In situations involving intermediate participants similar risks
may arise.

PREPAYMENTS

Senior Loans will usually require, in addition to scheduled payments of
interest and principal, the prepayment of the Senior Loan from free cash flow,
as defined above. The degree to which Borrowers prepay Senior Loans, whether as
a contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the Borrower and competitive
conditions among Loan Investors, among others. As such, prepayments cannot be
predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. However, the Fund may receive both a prepayment penalty fee from the
prepaying Borrower and a facility fee upon the purchase of a new Senior Loan
with the proceeds from the prepayment of the former. Prepayments generally will
not materially affect the Fund's performance because the Fund typically is able
to reinvest prepayments in other Senior Loans that have similar yields and
because receipt of such fees may mitigate any adverse impact on the Fund's
yield.

OTHER INFORMATION REGARDING SENIOR LOANS

From time to time, the Adviser and its affiliates may borrow money from
various banks in connection with their business activities. Such banks may also
sell interests in Senior Loans to or acquire them from the Fund or may be
intermediate participants with respect to Senior Loans in which the Fund owns
interests. Such banks may also act as Agents for Senior Loans held by the Fund.

The Fund may acquire interests in Senior Loans which are designed to
provide temporary or "bridge" financing to a Borrower pending the sale of
identified assets or the arrangement of longer-term loans or the issuance and
sale of debt obligations. The Fund may also invest in Senior Loans of Borrowers
that have obtained bridge loans from other parties. A Borrower's use of bridge
loans involves a risk that the Borrower may be unable to locate permanent
financing to replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.

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 Senior 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
Senior Loans guaranteed by, or secured by assets of, shareholders or owners,
even if the Senior 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 Senior Loan. On
occasions when such stock cannot be pledged, the Senior 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 Senior 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 Senior Loans and, indirectly, Senior 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 Senior 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 Senior 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 Senior 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 Fund may acquire warrants and other equity securities as part of a
unit combining a Senior Loan and equity securities of a Borrower or its
affiliates. The acquisition of such equity securities will only be incidental to
the Fund's purchase of a Senior Loan. The Fund may also acquire equity
securities or debt securities (including non-dollar-denominated debt securities)
issued in exchange for a Senior Loan or issued in connection with the debt
restructuring or reorganization of a Borrower, or if such acquisition, in the
judgment of the Adviser, may enhance the value of a Senior Loan or would
otherwise be consistent with the Fund's investment policies.

DEBTOR-IN-POSSESSION FINANCING

The Fund may invest in debtor-in-possession financings (commonly called
"DIP financings"). DIP financings are arranged when an entity seeks the
protections of the bankruptcy court under chapter 11 of the U.S. Bankruptcy
Code. These financings allow the entity to continue its business operations
while reorganizing under chapter 11. Such financings are senior liens on
unencumbered security (i.e., security not subject to other creditors claims).
There is a risk that the entity will not emerge from chapter 11 and be forced to
liquidate its assets under chapter 7 of the Bankruptcy Code. In such event, the
Fund's only recourse will be against the property securing the DIP financing.

LITIGATION INVOLVING EATON VANCE

On October 15, 2001, an amended consolidated complaint was filed in the
United States District Court for the District of Massachusetts against four
Eaton Vance closed-end interval funds (the "Interval Funds"); their Trustees and
certain officers of the Interval Funds; Eaton Vance, the Interval Funds'
administrator; Boston Management and Research, the Interval Funds' investment
adviser; and Eaton Vance Corp., the parent of Eaton Vance and Boston Management
and Research. The complaint, framed as a class action, alleges that for the
period between May 25, 1998 and March 5, 2001, the Interval Funds' assets were
incorrectly valued and certain matters were not properly disclosed, in violation
of the federal securities laws. The Complaint seeks unspecified damages. The
named defendants believe that the Complaint is without merit and are vigorously
contesting the lawsuit. Eaton Vance believes that the lawsuit is not likely to
have a material adverse affect on its ability to render services to the Fund.

REGULATORY CHANGES

To the extent that legislation or state or federal regulators that
regulate certain financial institutions impose additional requirements or
restrictions with respect to the ability of such institutions to make loans,
particularly in connection with highly leveraged transactions, the availability
of Senior Loans for investment may be adversely affected. Further, such
legislation or regulation could depress the market value of Senior Loans.

CREDIT QUALITY

Many Senior Loans in which the Fund may invest are of below investment
grade credit quality. Accordingly, these Senior Loans are subject to similar or
identical risks and other characteristics described below in relation to
Non-Investment Grade Securities.

NON-INVESTMENT GRADE SECURITIES

Investments in non-investment grade securities generally provide greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and principal and income risk, including the possibility of issuer
default and bankruptcy. Non-investment grade securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Debt securities in the lowest investment
grade category also may be considered to possess some speculative
characteristics by certain rating agencies. In addition, analysis of the
creditworthiness of issuers of non-investment grade securities may be more
complex than for issuers of higher quality securities.

Non-investment grade securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in non-investment grade
securities prices because the advent of recession could lessen the ability of an
issuer to make principal and interest payments on its debt obligations. If an
issuer of non-investment grade securities defaults, in addition to risking
payment of all or a portion of interest and principal, the Fund may incur
additional expenses to seek recovery. In the case of non-investment grade
securities structured as zero-coupon, step-up or payment-in-kind securities,
their market

prices will normally be affected to a greater extent by interest rate changes,
and therefore tend to be more volatile than securities which pay interest
currently and in cash. Eaton Vance seeks to reduce these risks through
diversification, credit analysis and attention to current developments in both
the economy and financial markets.

The secondary market on which non-investment grade securities are traded
may be less liquid than the market for investment grade securities. Less
liquidity in the secondary trading market could adversely affect the net asset
value of the Common Shares. Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease the values and liquidity of
non-investment grade bonds, especially in a thinly traded market. When secondary
markets for non-investment grade bonds are less liquid than the market for
investment grade securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of judgment may
play a greater role in the valuation because there is no reliable, objective
data available. During periods of thin trading in these markets, the spread
between bid and asked prices is likely to increase significantly and the Fund
may have greater difficulty selling these securities. The Fund will be more
dependent on Eaton Vance's research and analysis when investing in
non-investment grade bonds. Eaton Vance seeks to minimize the risks of investing
in all securities through in-depth credit analysis and attention to current
developments in interest rate and market conditions.

A general description of the ratings of securities by S&P, Fitch and
Moody's is set forth in Appendix A to this Statement of Additional Information.
Such ratings represent these rating organizations' opinions as to the quality of
the securities they rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. Consequently, debt
obligations with the same maturity, coupon and rating may have different yields
while obligations with the same maturity and coupon may have the same yield. For
these reasons, the use of credit ratings as the sole method of evaluating
non-investment grade securities can involve certain risks. For example, credit
ratings evaluate the safety or principal and interest payments, not the market
value risk of non-investment grade securities. Also, credit rating agencies may
fail to change credit ratings in a timely fashion to reflect events since the
security was last rated. Eaton Vance does not rely solely on credit ratings when
selecting securities for the Fund, and develops its own independent analysis of
issuer credit quality.

In the event that a rating agency or Eaton Vance downgrades its
assessment of the credit characteristics of a particular issue, the Fund is not
required to dispose of such security. In determining whether to retain or sell a
downgraded security, Eaton Vance may consider such factors as Eaton Vance's
assessment of the credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any, assigned to such
security by other rating agencies. However, analysis of the creditworthiness of
issuers of non-investment grade securities may be more complex than for issuers
of high quality debt securities.

OTHER INVESTMENTS

FIXED INCOME SECURITIES

Fixed income securities include preferred, preference and convertible
securities, equipment lease certificates, equipment trust certificates and
conditional sales contracts. Preference stocks are stocks that have many
characteristics of preferred stocks, but are typically junior to an existing
class of preferred stocks. Equipment lease certificates are debt obligations
secured by leases on equipment (such as railroad cars, airplanes or office
equipment), with the issuer of the certificate being the owner and lessor of the
equipment. Equipment trust certificates are debt obligations secured by an
interest in property (such as railroad cars or airplanes), the title of which is
held by a trustee while the property is being used by the borrower. Conditional
sales contracts are agreements under which the seller of property continues to
hold title to the property until the purchase price is fully paid or other
conditions are met by the buyer.

Fixed-rate bonds may have a demand feature allowing the holder to redeem
the bonds at specified times. These bonds are more defensive than conventional
long-term bonds (protecting to some degree against a rise in interest rates)
while providing greater opportunity than comparable intermediate term bonds,
since they may be retained if interest rates decline. Acquiring these kinds of
bonds provides the contractual right to require the issuer of the bonds to
purchase the security at an agreed upon price, which right is contained in the
obligation itself rather than in a separate agreement or instrument. Since this
right is assignable only with the bond, it will not be assigned any separate
value.

Certain securities may permit the issuer at its option to "call," or
redeem, the securities. If an issuer were to redeem securities during a time of
declining interest rates, the Fund may not be able to reinvest the proceeds in
securities providing the same investment return as the securities redeemed.

The rating assigned to a security by a rating agency does not reflect
assessment of the volatility of the security's market value or of the liquidity
of an investment in the securities. Credit ratings are based largely on the
issuer's historical financial condition and the rating agency's investment
analysis at the time of rating, and the rating assigned to any particular
security is not necessarily a reflection of the issuer's current financial
condition. Credit quality in the high yield, high risk bond market can change
from time to time, and recently issued credit ratings may not fully reflect the
actual risks posed by a particular high yield security. In addition to lower
rated securities, the Fund also may invest in higher rated securities. For a
description of corporate bond ratings, see Appendix A.

ZERO COUPON BONDS

Zero coupon bonds are debt obligations which do not require the periodic
payment of interest and are issued at a significant discount from face value.
The discount approximates the total amount of interest the bonds will accrue and
compound over the period until maturity at a rate of interest reflecting the
market rate of the security at the time of issuance. The Fund is required to
accrue income from zero coupon bonds on a current basis, even though it does not
receive that income currently in cash and the Fund is required to distribute its
income for each taxable year. Thus, the Fund may have to sell other investments
to obtain cash needed to make income distributions.

INDEXED SECURITIES AND DERIVATIVES

The Fund's investments in indexed securities and derivatives as described
in the Prospectus may include to a limited extent indexed securities or
derivatives that are based upon the value of indices of foreign fixed-
income/debt securities and/or, foreign equity securities. The investment value
of such a security or derivative may change positively or inversely in relation
to one or more these indices or other financial indicators described in the
prospectus ("reference prices"). An indexed security or derivative may be
leveraged to the extent that the magnitude of any change in the interest rate,
principal or other payment payable on an indexed security is a multiple of the
change in the reference price. Thus, indexed securities and derivatives may
decline in value due to adverse market changes in reference prices. Because
indexed securities derive their value from another instrument, security or
index, they are considered derivative debt securities, and are subject to
different combinations of prepayment, extension, interest rate and/or other
market risks.

SHORT SALES

The Fund may utilize short sales for hedging, risk management and
speculative purposes. A short sale is affected by selling a security which the
Fund does not own, or, if the Fund does own the security, is not to be delivered
upon consummation of the sale. The Fund may engage in short sales "against the
box" (i.e., short sales of securities the Fund already owns) for hedging, risk
management and speculative purposes. If the price of the security in the short
sale decreases, the Fund will realize a profit to the extent that the short sale
price for the security exceeds the market price. If the price of the security
increases, the Fund will realize a loss to the extent that the market price
exceeds the short sale price. Selling securities short runs the risk of losing
an amount greater than the initial investment therein.

Purchasing securities to close out the short position can itself cause
the price of the securities to rise further, thereby exacerbating the loss.
Short-selling exposes the Fund to unlimited risk with respect to that security
due to the lack of an upper limit on the price to which an instrument can rise.
Although the Fund reserves the right to utilize short sales, the Adviser is
under no obligation to utilize shorts at all.

FOREIGN INVESTMENTS

The Fund may have substantial exposure to foreign securities. Because
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies, there may be less publicly available information about a
foreign company than about a domestic company. Volume and liquidity in most
foreign debt markets is less than in the United States and securities of some
foreign companies are less liquid and more volatile than securities of
comparable U.S. companies. There is generally less government supervision and
regulation of securities exchanges, broker-dealers and listed companies than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. Payment for securities before delivery
may be required. In addition, with respect to certain foreign countries, there
is the possibility of

expropriation or confiscatory taxation, political or social instability, or
diplomatic developments which could affect investments in those countries.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. Foreign securities markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
U.S. companies.

American Depositary Receipts (ADRs), European Depositary Receipts (EDRs)
and Global Depositary Receipts (GDRs) may be purchased. ADRs, EDRs and GDRs are
certificates evidencing ownership of shares of a foreign issuer and are
alternatives to directly purchasing the underlying foreign securities in their
national markets and currencies. However, they continue to be subject to many of
the risks associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks of the
underlying issuer's country. ADRs, EDRs and GDRs may be sponsored or
unsponsored. Unsponsored receipts are established without the participation of
the issuer. Unsponsored receipts may involve higher expenses, they may not
pass-through voting or other shareholder rights, and they may be less liquid.

OPTIONS

Call options may be purchased to provide exposure to increases in the
market (e.g., with respect to temporary cash positions) or to hedge against an
increase in the price of securities or other investments that the Fund intends
to purchase or has sold short. Similarly, put options may be purchased for
speculative purposes or to hedge against a decrease in the market generally or
in the price of securities or other investments held by the Fund. Buying options
may reduce the Fund's returns, but by no more than the amount of the premiums
paid for the options.

The Fund may write covered and uncovered call options (i.e., where the
Fund owns the security or other investment that is subject to the call) to
enhance returns when the Adviser perceives that the option premium offered is in
excess of the premium that the Adviser would expect to be offered under existing
market conditions, or if the exercise price of the option is in excess of the
price that the Adviser expects the security or other underlying investment to
reach during the life of the option. Writing covered call options may limit the
Fund's gain on portfolio investments if the option is exercised because the Fund
will have to sell the underlying investments below the current market price.
Purchasing and writing put and call options are highly specialized activities
and entail greater than ordinary market risks.

SHORT-TERM TRADING

Securities may be sold in anticipation of market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Adviser
believes to be a temporary disparity in the normal yield relationship between
the two securities. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of various
types of fixed income securities or changes in the investment objectives of
investors.

TEMPORARY INVESTMENTS

The Fund may invest temporarily in cash or cash equivalents. Cash
equivalents are highly liquid, short-term securities such as commercial paper,
certificates of deposit, short-term notes and short-term U.S. Government
obligations.

INVESTMENT RESTRICTIONS

The following investment restrictions of the Fund are designated as
fundamental policies and as such cannot be changed without the approval of the
holders of a majority of the Fund's outstanding voting securities, which as used
in this SAI means the lesser of (a) 67% of the shares of the Fund present or
represented by proxy at a meeting if the holders of more than 50% of the
outstanding shares are present or represented at the

meeting or (b) more than 50% of outstanding shares of the Fund. As a matter of
fundamental policy the Fund may not:

(1) Borrow money, except as permitted by the Investment Company
Act of 1940 (the "1940 Act"). The 1940 Act currently requires that any
indebtedness incurred by a closed-end investment company have an asset
coverage of at least 300%;

(2) Issue senior securities, as defined in the 1940 Act, other
than (i) preferred shares which immediately after issuance will have
asset coverage of at least 200%, (ii) indebtedness which immediately
after issuance will have asset coverage of at least 300%, or (iii) the
borrowings permitted by investment restriction (1) above. The 1940 Act
currently defines "senior security" as any bond, debenture, note or
similar obligation or instrument constituting a security and evidencing
indebtedness, and any stock of a class having priority over any other
class as to distribution of assets or payment of dividends. Debt and
equity securities issued by a closed-end investment company meeting the
foregoing asset coverage provisions are excluded from the general 1940
Act prohibition on the issuance of senior securities;

(3) Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities). The purchase of investment assets with the proceeds
of a permitted borrowing or securities offering will not be deemed to be
the purchase of securities on margin;

(4) Underwrite securities issued by other persons, except
insofar as it may technically be deemed to be an underwriter under the
Securities Act of 1933 in selling or disposing of a portfolio investment;

(5) Make loans to other persons, except by (a) the acquisition
of loan interests, debt securities and other obligations in which the
Fund is authorized to invest in accordance with its investment objectives
and policies, (b) entering into repurchase agreements, and (c) lending
its portfolio securities;

(6) Purchase or sell real estate, although it may purchase and
sell securities which are secured by interests in real estate and
securities of issuers which invest or deal in real estate. The Fund
reserves the freedom of action to hold and to sell real estate acquired
as a result of the ownership of securities;

(7) Purchase or sell physical commodities or contracts for the
purchase or sale of physical commodities. Physical commodities do not
include futures contracts with respect to securities, securities indices
or other financial instruments;

(8) With respect to 75% of its total assets, invest more than 5%
of its total assets in the securities of a single issuer or purchase more
than 10% of the outstanding voting securities of a single issuer, except
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities and except securities of other investment companies;
and

(9) Invest 25% or more of its total assets in any single
industry or group of industries (other than securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities).

The Fund may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities. The 1940 Act currently requires that the Fund have 300% asset
coverage with respect to all borrowings other than temporary borrowings.

For purposes of construing restriction (8), securities of the U.S.
Government, its agencies, or instrumentalities are not considered to represent
industries. Municipal obligations backed by the credit of a governmental entity
are also not considered to represent industries.

The Fund has adopted the following nonfundamental investment policy which
may be changed by the Board without approval of the Fund's shareholders. As a
matter of nonfundamental policy, the Fund may not make short sales of securities
or maintain a short position, unless at all times when a short position is open
it either owns an equal amount of such securities or owns securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issue as, and equal in amount to, the securities sold
short.

Upon the Board's approval, the Fund may invest more than 10% of its total
assets in one or more other management investment companies (or may invest in
affiliated investment companies) to the extent permitted by the 1940 Act and
rules thereunder.

Whenever an investment policy or investment restriction set forth in the
Prospectus or this SAI states a maximum percentage of assets that may be
invested in any security or other asset or describes a policy regarding quality
standards, such percentage limitation or standard shall be determined
immediately after and as a result of the Fund's acquisition of such security or
asset. Accordingly, any later increase or decrease resulting from a change in
values, assets or other circumstances or any subsequent rating change made by a
rating service (or as determined by the Adviser if the security is not rated by
a rating agency) will not compel the Fund to dispose of such security or other
asset. Notwithstanding the foregoing, the Fund must always be in compliance with
the borrowing policies set forth above.

As described in the Prospectus, under normal market circumstances, the
Fund expects to maintain a weighted average portfolio credit quality of
investment grade. In determining the average credit quality of the Fund, Eaton
Vance intends to use a methodology, based structurally on the S&P or Moody's
rating system (or both) described in Appendix A to this SAI, which assumes a
linear relationship in the credit quality ratings for ratings between C and AAA
(Aaa). Securities with a rating below C will not be assigned any value in the
calculation of average credit quality. For the purpose of determining the Fund's
average credit quality, when a security is rated by more than one nationally
recognized statistical rating agency, the Adviser generally will use the highest
rating available. Within this general guideline, the Fund may invest in
individual securities of any credit quality. The Fund's holdings of
Non-Investment Grade Securities and Senior Loans with lower credit ratings
generally will be offset by MBS with very high credit ratings. A "barbell"
portfolio of lower rated and higher rated securities may have risk
characteristics that differ from fixed income securities with credit ratings
equivalent to the portfolio average.

TRUSTEES AND OFFICERS

The Trustees of the Fund are responsible for the overall management and
supervision of the affairs of the Fund. The Trustees and officers of the Fund
are listed below. Except as indicated, each individual has held the office shown
or other offices in the same company for the last five years. The "noninterested
Trustees" consist of those Trustees who are not "interested persons" of the
Fund, as that term is defined under the 1940 Act. The business address of each
Trustee and officer is The Eaton Vance Building, 255 State Street, Boston,
Massachusetts 02109. As used in this SAI, "EVC" refers to Eaton Vance Corp.,
"EV" refers to Eaton Vance, Inc., "BMR" refers to Boston Management and
Research, and "EVD" refers to Eaton Vance Distributors Inc. EVC and EV are the
corporate parent and trustee, respectively, of Eaton Vance and BMR.

NUMBER OF
PORTFOLIOS IN
TERM OF OFFICE FUND COMPLEX
NAME AND POSITION(S) AND PRINCIPAL OCCUPATION(S) OVERSEEN BY OTHER
DATE OF BIRTH WITH THE FUND LENGTH OF SERVICE DURING PAST FIVE YEARS TRUSTEE(1) DIRECTORSHIPS HELD
------------- ------------- ----------------- ----------------------- ------------- ------------------

INTERESTED TRUSTEES
James B. Hawkes......... Trustee(2) and Since 1/14/05 Chairman, President and Chief 194 Director of EVC
11/9/41 Vice President Three Years Executive Officer of BMR, Eaton
Vance, EVC and EV; Director of
EV; Vice President and Director
of EVD. Trustee and/or officer
of 194 registered investment
companies in the Eaton Vance
Fund Complex. Mr. Hawkes is an
interested person because of his
positions with BMR, Eaton Vance,
EVC and EV, which are affiliates
of the Fund.
NON-INTERESTED TRUSTEES
Samuel L. Hayes, III.... Trustee(2) Since 1/14/05 Jacob H. Schiff Professor of 194 Director of
2/23/35 Three Years Investment Banking Emeritus, Tiffany & Co.
Harvard University Graduate (specialty
School of Business retailer) and
Administration. Telect, Inc.
(telecommunication
services company)
William H. Park......... Trustee(3) Since 1/14/05 President and Chief Executive 194 None
9/19/47 Three Years Officer, Prizm Capital
Management, LLC (investment
management firm) (since 2002).
Executive Vice President and
Chief Financial Officer, United
Asset Management Corporation (a
holding company owning
institutional investment
management firms) (1982-2001).
Ronald A. Pearlman...... Trustee(3) Since 1/14/05 Professor of Law, Georgetown 194 None
7/10/40 Three Years University Law Center (since
1999). Tax Partner, Covington &
Burling, Washington, DC
(1991-2000).

Norton H. Reamer........ Trustee(4) Since 1/14/05 President, Chief Executive 194 None
9/21/35 Three Years Officer and a Director of Asset
Management Finance Corp. (a
specialty finance company
serving the investment
management industry) (since
October 2003). President,
Unicorn Corporation (an
investment and financial
advisory services company)
(since September 2000).
Formerly, Chairman, Hellman,
Jordan Management Co., Inc. (an
investment management company)
(2000-2003). Formerly, Advisory
Director of Berkshire Capital
Corporation (investment banking
firm) (2002-2003). Formerly,
Chairman of the Board, United
Asset Management Corporation (a
holding company owning
institutional investment
management firms) and Chairman,
President and Director, UAM
Funds (mutual funds) (1980-
2000).
Lynn A. Stout........... Trustee(4) Since 1/14/05 Professor of Law, University of 194 None
9/14/57 Three Years California at Los Angeles School
of Law (since July 2001).
Formerly, Professor of Law,
Georgetown University Law
Center.

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

(1) Includes both master and feeder funds in master-feeder structure.

(2) Class I Trustees whose term expires in 2005.

(3) Class II Trustees whose term expires in 2006.

(4) Class III Trustees whose term expires in 2007.

PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES

TERM OF OFFICE AND PRINCIPAL OCCUPATIONS DURING PAST
NAME AND DATE OF BIRTH POSITION(S) WITH THE FUND LENGTH OF SERVICE FIVE YEARS
---------------------- ------------------------- ------------------ ---------------------------------

Thomas E. Faust Jr. .... President and Chief Since 1/13/05 Executive Vice President of Eaton
5/31/58 Executive Officer Vance, BMR, EVC and EV; Chief
Investment Officer of Eaton Vance
and BMR and Director of EVC.
Chief Executive Officer of Belair
Capital Fund LLC, Belcrest
Capital Fund LLC, Belmar Capital
Fund LLC; Belport Capital Fund
LLC and Belrose Capital Fund LLC
(private investment companies
sponsored by Eaton Vance).
Officer of 57 registered
investment companies managed by
Eaton Vance or BMR.
James L. O'Connor....... Treasurer and Principal Since 4/15/04 Vice President of BMR, Eaton
4/1/45 Financial and Accounting Vance and EVD. Officer of 116
Officer registered investment companies
managed by Eaton Vance or BMR.
Alan R. Dynner.......... Secretary Since 4/15/04 Vice President, Secretary and
10/10/40 Chief Legal Officer of BMR, Eaton
Vance, EVD, EV and EVC. Officer
of 194 registered investment
companies managed by Eaton Vance
or BMR.
Mark S. Venezia......... Vice President Since 1/13/05 Vice President of Eaton Vance and
5/23/49 BMR.
Christine Johnson....... Vice President Since 4/15/04 Vice President of Eaton Vance and
11/9/72 BMR. Officer of 2 Registered
investment companies managed by
Eaton Vance or BMR.
Scott H. Page........... Vice President Since 4/15/04 Vice President of Eaton Vance and
11/30/59 BMR. Officer of 4 registered
investment companies managed by
Eaton Vance or BMR
Susan Schiff............ Vice President Since 4/15/04 Vice President of Eaton Vance and
3/13/61 BMR. Officer of 22 registered
investment companies managed by
Eaton Vance or BMR.
Payson F. Swaffield..... Vice President Since 4/15/04 Vice President of Eaton Vance and
8/13/56 BMR. Officer of 14 registered
investment companies managed by
Eaton Vance or BMR.
Michael W. Weilheimer... Vice President Since 4/15/04 Vice President of Eaton Vance and
2/11/61 BMR. Officer of 11 registered
investment companies managed by
Eaton Vance or BMR.

The Board of Trustees of the Fund has several standing Committees,
including the Governance Committee, the Audit Committee, and the Special
Committee. Each such Committee is comprised of only noninterested Trustees.

The Governance Committee of the Board of Trustees of the Fund is
comprised of the non-interested Trustees. Ms. Stout currently serves as
chairperson of the Governance Committee. The purpose of the Governance Committee
is to consider, evaluate and make recommendations to the Board of Trustees with
respect to the structure, membership and operation of the Board of Trustees and
the Committees thereof, including the nomination and selection of non-interested
Trustees and the compensation of non-interested Trustees.

The Governance Committee will, when a vacancy exists or is anticipated,
consider any nominee for noninterested Trustee recommended by a shareholder if
such recommendation is submitted to the Governance Committee, contains
sufficient background information concerning the candidate and is received in a
sufficiently timely manner.

Messrs. Reamer (Chairman), Hates, Park and Ms. Stout are members of the
Audit Committee of the Board of Trustees of the Fund. The Board of Trustees has
designated Messrs. Hayes, Park and Reamer, each a non-interested Trustee, as
audit committee financial experts. The Audit Committee's purposes are to (i)
oversee the Fund's accounting and financial reporting processes, its internal
control over financial reporting, and, as appropriate, the internal control over
financial reporting of certain service providers; (ii) oversee or, as
appropriate, assist Board oversight of the quality and integrity of the Fund's
financial statements and the independent audit thereof; (iii) oversee, or, as
appropriate, assist Board oversight of, the Fund's compliance with legal and
regulatory requirements that relate to the Fund's accounting and financial
reporting, internal control over financial reporting and independent audits;
(iv) approve prior to appointment the engagement and, when appropriate,
replacement of the independent registered public accounting firm, and, if
applicable, nominate the independent registered public accounting firm to be
proposed for shareholder ratification in any proxy statement of the Fund; (v)
evaluate the qualifications, independence and performance of the independent
registered public accounting firm and the audit partner in charge of leading the
audit; and (vi) prepare, as necessary, audit committee reports consistent with
the requirements of Rule 306 of Regulation S-K for inclusion in the proxy
statement of the Fund.

Messrs. Hayes (Chairman), Park, Pearlman, Reamer and Ms. Stout are
currently members of the Special Committee of the Board of Trustees of the Fund.
The purposes of the Special Committee are to consider, evaluate and make
recommendations to the Board of Trustees concerning the following matters: (i)
contractual arrangements with each service provider to the Fund, including
advisory, sub-advisory, transfer agency, custodial and fund accounting,
distribution services and administrative services; (ii) any and all other
matters in which any of the Fund service providers (including Eaton Vance or any
affiliated entity thereof) has an actual or potential conflict of interest with
the interests of the Fund, or investors therein; and (iii) any other matter
appropriate for review by the non-interested Trustees, unless the matter is
within the responsibilities of the Audit Committee or the Governance Committee
of the Fund.

As of the date of this SAI, the Governance Committee has met
times, the Audit Committee and Special Committee have met times.

When considering approval of the Advisory Agreement between the Fund and
the Adviser, the Special Committee considered, among other things, the
following:

- A report comparing the fees and expenses of the Fund and certain
profitability analyses prepared by Eaton Vance;

- Information on the relevant peer group(s) of funds;

- The economic outlook and the general investment outlook in the
relevant investment markets;

- Eaton Vance's results and financial condition and the overall
organization of the Adviser and the Sub-Adviser;

- Arrangements regarding the distribution of Fund shares;

- The procedures used to determine the fair value of the Fund's
assets;

- The allocation of brokerage and the benefits received by the
Adviser as the result of brokerage allocation; including
allocations to soft dollar brokerage and allocations to firms that
sell Eaton Vance fund shares;

- Eaton Vance's management of the relationship with the custodian,
subcustodians and fund accountants;

- The resources devoted to Eaton Vance's compliance efforts
undertaken on behalf of the funds it manages and the record of
compliance with the investment policies and restrictions and with
policies on personal securities transactions;

- The quality, nature, cost and character of the administrative and
other non-investment management services provided by Eaton Vance
and its affiliates;

- The terms of the Advisory Agreement, and the reasonableness and
appropriateness of the particular fee paid by the Fund for the
services described therein;

- Operating expenses (including transfer agency expenses) to be paid
to third parties; and

- Information to be provided to investors, including the Fund's
shareholders.

In evaluating the Advisory Agreement between the Fund and Eaton Vance,
the Special Committee reviewed material furnished by Eaton Vance at the initial
Board meeting held on January 14, 2005, including the above referenced
considerations and information relating to the education, experience and number
of investment professionals and other personnel who would provide services under
the Advisory Agreement. The Special Committee 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 Special Committee evaluated the level of skill required to
manage the Fund and concluded that the human resources available at Eaton Vance
were appropriate to fulfill effectively the duties of the Adviser on behalf of
the Fund. The Special Committee also considered the business reputation of the
Adviser, its financial resources and professional liability insurance coverage
and concluded that Eaton Vance would be able to meet any reasonably foreseeable
obligations under the Advisory Agreement.

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

In addition to the factors mentioned above, the Special Committee also
reviewed the level of the Adviser's profits in respect of the management of the
Eaton Vance funds, including the Fund. The Special Committee considered the
other profits realized by Eaton Vance and its affiliates in connection with the
operation of the Fund. The Special Committee also considered profit margins of
Eaton Vance in comparison with available industry data. In addition, the Special
Committee considered the fiduciary duty assumed by the Adviser in connection
with the service rendered to the Fund and the business reputation of the
Adviser, its financial resources and its professional liability insurance
coverage.

The Special Committee did not consider any single factor as controlling
in determining whether or not to approve the Advisory Agreement. Nor are the
items described herein all encompassing of the matters considered by the Special
Committee. In assessing the information provided by Eaton Vance and its
affiliates, the Special Committee also took into consideration the benefits to
shareholders of investing in a fund that is part of a large family of funds
which provides a large variety of shareholder services.

Based on its consideration of all factors that it deemed material and
assisted by the advice of its independent counsel, the Special Committee
concluded that the approval of the Advisory Agreement, including the fee
structure (described herein) is in the interests of shareholders. The Special
Committee also considered that the Adviser would enter into an Additional
Compensation Agreement with , whereby the Adviser (and not the Fund)
would pay to provide upon request certain market data and reports to
support shareholder services pursuant to the agreement.

SHARE OWNERSHIP

The following table shows the dollar range of equity securities
beneficially owned by each Trustee in the Fund and all Eaton Vance Funds
overseen by the Trustee as of December 31, 2004.

DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF EQUITY
EQUITY SECURITIES SECURITIES OWNED IN ALL REGISTERED
OWNED IN THE FUNDS OVERSEEN BY TRUSTEE IN THE
NAME OF TRUSTEE FUND EATON VANCE FUND COMPLEX
--------------- ----------------- ----------------------------------

INTERESTED TRUSTEES
James B. Hawkes....................................... None Over $100,000
NONINTERESTED TRUSTEES
Samuel L. Hayes, III.................................. None Over $100,000
William H. Park....................................... None Over $100,000
Ronald A. Pearlman.................................... None Over $100,000
Norton H. Reamer...................................... None Over $100,000
Lynn A. Stout......................................... None $50,001 - $100,000

As of December 31, 2004, no noninterested Trustee or any of their
immediate family members owned beneficially or of record any class of securities
of EVC, EVD or any person controlling, controlled by or under common control
with EVC or EVD.

During the calendar years ended December 31, 2003 and December 31, 2004,
no noninterested Trustee (or their immediate family members) had:

1. Any direct or indirect interest in Eaton Vance, EVC, EVD or
any person controlling, controlled by or under common control with EVC or
EVD;

2. Any direct or indirect material interest in any transaction
or series of similar transactions with (i) the Trust or any Fund; (ii)
another fund managed by EVC, distributed by EVD or a person controlling,
controlled by or under common control with EVC or EVD; (iii) EVC or EVD;
(iv) a person controlling, controlled by or under common control with EVC
or EVD; or (v) an officer of any of the above; or

3. Any direct or indirect relationship with (i) the Trust or any
Fund; (ii) another fund managed by EVC, distributed by EVD or a person
controlling, controlled by or under common control with EVC or EVD; (iii)
EVC or EVD; (iv) a person controlling, controlled by or under common
control with EVC or EVD; or (v) an officer of any of the above.

During the calendar years ended December 31, 2003 and December 31, 2004,
no officer of EVC, EVD or any person controlling, controlled by or under common
control with EVC or EVD served on the Board of Directors of a company where a
noninterested Trustee of the Fund or any of their immediate family members
served as an officer.

Trustees of the Fund who are not affiliated with the Adviser may elect to
defer receipt of all or a percentage of their annual fees in accordance with the
terms of a Trustees Deferred Compensation Plan (the "Trustees' Plan"). Under the
Trustees' Plan, an eligible Trustee may elect to have his deferred fees invested
by the Fund in the shares of one or more funds in the Eaton Vance Family of
Funds, and the amount paid to the Trustees under the Trustees' Plan will be
determined based upon the performance of such investments. Deferral of Trustees'
fees in accordance with the Trustees' Plan will have a negligible effect on the
Fund's assets, liabilities, and net income per share, and will not obligate the
Fund to retain the services of any Trustee or obligate the Fund to pay any
particular level of compensation to the Trustee. The Fund does not have a
retirement plan for its Trustees.

The fees and expenses of the Trustees of the Fund are paid by the Fund.
(A Trustee of the Fund who is a member of the Eaton Vance organization receives
no compensation from the Fund.) During the Fund's fiscal year ending May 31,
2005 it is anticipated that the Trustees of the Fund will earn the following
compensation in their capacities as Trustees. For the year ended December 31,
2004, the Trustees earned the

compensation set forth below in their capacities as Trustees from the funds in
the Eaton Vance fund complex(1).

SAMUEL L. WILLIAM H. RONALD A. NORTON H. LYNN A.
SOURCE OF COMPENSATION HAYES PARK PEARLMAN REAMER STOUR
---------------------- --------- ---------- --------- --------- -------

Fund*..................................... $ 0 $ 0 $ 0 $ 0 $ 0
Fund Complex.............................. 200,000 180,000(2) 180,000 180,000 180,000(3)

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

* Estimated

(1) As of January 15, 2005, the Eaton Vance fund complex consisted of [194]
registered investment companies or series thereof.

(2) Includes $106,968 of deferred compensation.

(3) Includes $45,000 of deferred compensation.

PROXY VOTING POLICY. The Fund is subject to the Eaton Vance Funds Proxy
Voting Policy and Procedures, pursuant to which the Trustees have delegated
proxy voting responsibility to the Adviser and adopted the Adviser's proxy
voting policies and procedures (the "Policies") which are attached as Appendix B
to this SAI. The Trustees will review the Fund's proxy voting records from time
to time and will annually consider approving the Policies for the upcoming year.
In the event that a conflict of interest arises between the Fund's shareholders
and the Adviser or any of its affiliates or any affiliate of the Fund, the
Adviser will generally refrain from voting the proxies related to the companies
giving rise to such conflict until it consults with the Board of the Fund,
except as contemplated under the Fund Policy. The Board's Special Committee will
instruct the Adviser on the appropriate course of action. The Fund's and the
Adviser's Proxy Voting Policies and Procedures are attached as Appendix B to
this SAI.

Information on how the Fund voted proxies relating to portfolio
securities during the 12 month period ended June 30, 2005 will be available (1)
without charge, upon request, by calling 1-800-262-1122, and (2) on the
Securities and Exchange Commission's website at http://www.sec.gov.

INVESTMENT ADVISORY AND OTHER SERVICES

Eaton Vance, its affiliates and its predecessor companies have been
managing assets of individuals and institutions since 1924 and of investment
companies since 1931. They maintain a large staff of experienced fixed-income,
senior loan and equity investment professionals to service the needs of their
clients. The fixed-income group focuses on all kinds of taxable investment-grade
and high-yield securities, tax-exempt investment-grade and high-yield
securities, and U.S. Government securities. The senior loan group focuses on
senior floating rate loans, unsecured loans and other floating rate debt
securities such as notes, bonds and asset backed securities. The equity group
covers stocks ranging from blue chip to emerging growth companies. Eaton Vance
and its affiliates act as adviser to a family of mutual funds, and individual
and various institutional accounts, including corporations, hospitals,
retirement plans, universities, foundations and trusts.

The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by Eaton Vance under the Advisory Agreement or
Administration Agreement. Such costs and expenses to be borne by the Fund
include, without limitation: custody and transfer agency fees and expenses,
including those incurred for determining net asset value and keeping accounting
books and records; expenses of pricing and valuation services; the cost of share
certificates; membership dues in investment company organizations; expenses of
acquiring, holding and disposing of securities and other investments; fees and
expenses of registering under the securities laws; stock exchange listing fees
and governmental fees; rating agency fees and preferred share remarketing
expenses; expenses of reports to shareholders, proxy statements and other
expenses of shareholders' meetings; insurance premiums; printing and mailing
expenses; interest, taxes and corporate fees; legal and accounting expenses;
compensation and expenses of Trustees not affiliated with Eaton Vance; expenses
of conducting repurchase offers for the purpose of repurchasing Fund shares; and
investment advisory and administration fees. The Fund will also bear expenses
incurred in connection with any litigation in which the Fund is a party and any
legal obligation to indemnify its officers and Trustees with respect thereto, to
the extent not covered by insurance.

The Advisory Agreement with the Adviser continues in effect to January
14, 2008 and from year to year so long as such continuance is approved at least
annually (i) by the vote of a majority of the noninterested Trustees of the Fund
or of the Adviser cast in person at a meeting specifically called for the
purpose of voting on such approval and (ii) by the Board of Trustees of the Fund
or by vote of a majority of the outstanding

interests of the Fund. The Fund's Administration Agreement continues in effect
from year to year so long as such continuance is approved at least annually by
the vote of a majority of the Fund's Trustees. Each agreement may be terminated
at any time without penalty on sixty (60) days' written notice by the Trustees
of the Fund or Eaton Vance, as applicable, or by vote of the majority of the
outstanding shares of the Fund. Each agreement will terminate automatically in
the event of its assignment. Each agreement provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties to the Fund under such agreements on the part of Eaton
Vance, Eaton Vance shall not be liable to the Fund for any loss incurred, to the
extent not covered by insurance.

Eaton Vance is a business trust organized under Massachusetts law. EV
serves as trustee of Eaton Vance. Eaton Vance and EV are subsidiaries of EVC, a
Maryland corporation and publicly-held holding company. EVC through its
subsidiaries and affiliates engages primarily in investment management,
administration and marketing activities. The Directors of EVC are James B.
Hawkes, John G. L. Cabot, Thomas E. Faust Jr., Leo I. Higdon, Jr., John M.
Nelson, Vincent M. O'Reilly and Ralph Z. Sorenson. All shares of the outstanding
Voting Common Stock of EVC are deposited in a voting trust, the voting trustees
of which are Messrs. James B. Hawkes, Jeffrey P. Beale, Alan R. Dynner, Thomas
E. Faust Jr., Thomas J. Fetter, Scott H. Page, Duncan W. Richardson, William M.
Steul, Payson F. Swaffield, Michael W. Weilheimer and Wharton P. Whitaker (all
of whom are officers of Eaton Vance). The voting trustees have unrestricted
voting rights for the election of Directors of EVC. All of the outstanding
voting trust receipts issued under said voting trust are owned by certain of the
officers of BMR and Eaton Vance who are also officers, or officers and Directors
of EVC and EV. As indicated under "Trustees and Officers", all of the officers
of the Fund (as well as Mr. Hawkes who is also a Trustee) hold positions in the
Eaton Vance organization.

EVC and its affiliates and their officers and employees from time to time
have transactions with various banks, including the custodian of the Fund, IBT.
It is Eaton Vance's opinion that the terms and conditions of such transactions
were not and will not be influenced by existing or potential custodial or other
relationships between the Fund and such banks.

CODE OF ETHICS

The Adviser and the Fund have adopted a Code of Ethics governing personal
securities transactions. Under the Code, Eaton Vance employees may purchase and
sell securities (including securities held or eligible for purchase by the Fund)
subject to certain pre-clearance and reporting requirements and other
procedures.

The Code can be reviewed and copied at the Securities and Exchange
Commission's public reference room in Washington, DC (call 1-202-942-8090 for
information on the operation of the public reference room); on the EDGAR
Database on the SEC's Internet site (http:/www.sec.gov); or, upon payment of
copying fees, by writing the SEC's public reference section, Washington, DC
20549-0102, or by electronic mail at publicinfo@sec.gov.

INVESTMENT ADVISORY SERVICES

Under the general supervision of the Fund's Board of Trustees, Eaton
Vance will carry out the investment and reinvestment of the assets of the Fund,
will furnish continuously an investment program with respect to the Fund, will
determine which securities should be purchased, sold or exchanged, and will
implement such determinations. Eaton Vance will furnish to the Fund investment
advice and provide related office facilities and personnel for servicing the
investments of the Fund. Eaton Vance will compensate all Trustees and officers
of the Fund who are members of the Eaton Vance organization and who render
investment services to the Fund, and will also compensate all other Eaton Vance
personnel who provide research and investment services to the Fund.

ADMINISTRATIVE SERVICES

Under the Administration Agreement, Eaton Vance is responsible for
managing the business affairs of the Fund, subject to the supervision of the
Fund's Board of Trustees. Eaton Vance will furnish to the Fund all office
facilities, equipment and personnel for administering the affairs of the Fund.
Eaton Vance will compensate all Trustees and officers of the Fund who are
members of the Eaton Vance organization and who render executive and
administrative services to the Fund, and will also compensate all other Eaton
Vance personnel who perform management and administrative services for the Fund.
Eaton Vance's administrative services include recordkeeping, preparation and
filing of documents required to comply with federal and state securities laws,
supervising the activities of the Fund's custodian and transfer agent, providing
assistance in connection with the Trustees and shareholders' meetings, providing
services in connection with quarterly repurchase offers and other administrative
services necessary to conduct the Fund's business.

DETERMINATION OF NET ASSET VALUE

The net asset value per Common Share of the Fund is determined no less
frequently than weekly, generally on the last day of the week that the New York
Stock Exchange (the "Exchange") is open for trading, as of the close of regular
trading on the Exchange (normally 4:00 p.m. New York time). The Fund's net asset
value per Common Share is determined by IBT, in the manner authorized by the
Trustees of the Fund. Net asset value is computed by dividing the value of the
Fund's total assets, less its liabilities by the number of shares outstanding.

The Trustees of the Fund have established the following procedures for
fair valuation of the Fund's assets under normal market conditions. Marketable
securities listed on foreign or U.S. securities exchanges generally are valued
at closing sale prices or, if there were no sales, at the mean between the
closing bid and asked prices therefor on the exchange where such securities are
principally traded (such prices may not be used, however, where an active
over-the-counter market in an exchange listed security better reflects current
market value). Marketable securities listed in the NASDAQ National Market System
are valued at the NASDAQ official closing price. Unlisted or listed securities
for which closing sale prices are not available are valued at the mean between
the latest bid and asked prices. An option is valued at the last sale price as
quoted on the principal exchange or board of trade on which such option or
contract is traded, or in the absence of a sale, at the mean between the last
bid and asked prices.

The Adviser and the Valuation Committee may implement new pricing
methodologies or expand mark-to-market valuation of debt securities whose market
prices are not readily available in the future, which may result in a change in
the Fund's net asset value per share. The Fund's net asset value per share will
also be affected by fair value pricing decisions and by changes in the market
for such debt securities. In determining the fair value of a debt security, the
Adviser will consider relevant factors, data, and information, including: (i)
the characteristics of and fundamental analytical data relating to the debt
security, including the cost, size, current interest rate, period until next
interest rate reset, maturity and base lending rate of the debt security, the
terms and conditions of the debt security and any related agreements, and the
position of the debt security in the borrower's debt structure; (ii) the nature,
adequacy and value of the collateral, including the Fund's rights, remedies and
interests with respect to the collateral; (iii) the creditworthiness of the
borrower, based on an evaluation of its financial condition, financial
statements and information about the borrower's business, cash flows, capital
structure and future prospects; (iv) information relating to the market for the
debt security, including price quotations for and trading in the debt security
and interests in similar debt securities and the market environment and investor
attitudes towards the debt security and interests in similar debt securities;
(v) the experience, reputation, stability and financial condition of the agent
and any intermediate participants in the debt security; and (vi) general
economic and market conditions affecting the fair value of the debt security.
The fair value of each debt security is reviewed and approved by the Adviser's
Valuation Committee and the Fund's Trustees.

The Adviser uses an independent pricing service to value most loans,
mortgage-backed securities (other than seasoned mortgage-backed securities) and
other debt securities at their market value. Seasoned mortgage-backed securities
are valued through the use of an independent matrix pricing system which takes
into account bond prices, yield differentials, anticipated prepayment and
interest rates provided by dealers. The Adviser may use the fair value method to
value loans or other securities if market quotations for them are not readily
available or are deemed unreliable, or if events occurring after the close of a
securities market and before the Fund values its assets would materially affect
net asset value. A security that is fair valued may be valued at a price higher
or lower than actual market quotations or the value determined by other funds
using their own fair valuation procedures.

The Trustees have approved and monitor the procedures under which Senior
Loans are valued. The Adviser and the Valuation Committee may implement new
pricing methodologies or expand mark-to-market valuation of Senior Loans in the
future, which may result in a change in the Fund's net asset value per share.
The Fund's net asset value per share will also be affected by fair value pricing
decisions and by changes in the market for Senior Loans. In determining the fair
value of a Senior Loan, the Adviser will consider relevant factors, data, and
information, including: (i) the characteristics of and fundamental analytical
data relating to the Senior Loan, including the cost, size, current interest
rate, period until next interest rate reset, maturity and base lending rate of
the Senior Loan, the terms and conditions of the Senior Loan and any related
agreements, and the position of the Senior Loan in the Borrower's debt
structure; (ii) the nature, adequacy and value of the collateral, including the
Fund's rights, remedies and interests with respect to the collateral; (iii) the
creditworthiness of the Borrower, based on an evaluation of its financial
condition, financial statements and

information about the Borrower's business, cash flows, capital structure and
future prospects; (iv) information relating to the market for the Senior Loan,
including price quotations for and trading in the Senior Loan and interests in
similar Senior Loans and the market environment and investor attitudes towards
the Senior Loan and interests in similar Senior Loans; (v) the experience,
reputation, stability and financial condition of the Agent and any intermediate
participants in the Senior Loan; and (vi) general economic and market conditions
affecting the fair value of the Senior Loan. The fair value of each Senior Loan
is reviewed and approved by the Adviser's Valuation Committee and the Fund's
Trustees.

Non-loan holdings (other than debt securities, including short term
obligations) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the average of the last quoted bid price
and asked price for those securities for which the over-the-counter market is
the primary market or for listed securities in which there were no sales during
the day. Marketable securities listed on the NASDAQ National Market System are
valued at the NASDAQ official closing price. The value of interest rate swaps
will be based upon a dealer quotation.

Debt securities for which the over-the-counter market is the primary
market are normally valued on the basis of prices furnished by one or more
pricing services at the mean between the latest available bid and asked prices.
OTC options are valued at the mean between the bid and asked prices provided by
dealers. Financial futures contracts listed on commodity exchanges and
exchange-traded options are valued at closing settlement prices. Short-term
obligations having remaining maturities of less than 60 days are valued at
amortized cost, which approximates value, unless the Trustees determine that
under particular circumstances such method does not result in fair value. As
authorized by the Trustees, debt securities (other than short-term obligations)
may be valued on the basis of valuations furnished by a pricing service which
determines valuations based upon market transactions for normal,
institutional-size trading units of such securities. Mortgage-backed "pass-
through" securities are valued through use of an independent matrix pricing
system applied by the Adviser which takes into account closing bond valuations,
yield differentials, anticipated prepayments and interest rates provided by
dealers. Securities for which there is no such quotation or valuation and all
other assets are valued at fair value as determined in good faith by or at the
direction of the Fund's Trustees.

Generally, trading in the foreign securities owned by the Fund is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Fund generally are computed as of such times. Occasionally, events
affecting the value of foreign securities may occur between such times and the
close of the New York Stock Exchange which will not be reflected in the
computation of the Fund's net asset value (unless the Fund deems that such
events would materially affect its net asset value, in which case an adjustment
would be made and reflected in such computation). The Fund may rely on an
independent fair valuation service in making any such adjustment. Foreign
securities and currency held by the Fund will be valued in U.S. dollars; such
values will be computed by the custodian based on foreign currency exchange rate
quotations supplied by an independent quotation service.

All other securities are valued at fair value as determined in good faith
by or at the direction of the Trustees.

PORTFOLIO TRADING

Decisions concerning the execution of portfolio security transactions,
including the selection of the market and the executing firm, are made by the
Adviser. The Adviser is also responsible for the execution of transactions for
all other accounts managed by it. The Adviser places the portfolio security
transactions of the Fund and of all other accounts managed by it for execution
with many firms. The Adviser uses its best efforts to obtain execution of
portfolio security transactions at prices which are advantageous to the Fund and
at reasonably competitive spreads or (when a disclosed commission is being
charged) at reasonably competitive commission rates. In seeking such execution,
the Adviser will use its best judgment in evaluating the terms of a transaction,
and will give consideration to various relevant factors, including without
limitation the full range and quality of the executing firm's services, the
value of the brokerage and research services provided, the responsiveness of the
firm to the Adviser, the size and type of the transaction, the nature and
character of the market for the security, the confidentiality, speed and
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the executing firm, the reputation,
reliability,
22

experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any.

The Fund will acquire Senior Loans from major international banks,
selected domestic regional banks, insurance companies, finance companies and
other financial institutions. In selecting financial institutions from which
Senior Loans may be acquired, the Adviser will consider, among other factors,
the financial strength, professional ability, level of service and research
capability of the institution. While these financial institutions are generally
not required to repurchase Senior Loans which they have sold, they may act as
principal or on an agency basis in connection with their sale by the Fund.

Other fixed income obligations which may be purchased and sold by the
Fund are generally traded in the over-the-counter market on a net basis (i.e.,
without commission) through broker-dealers or banks acting for their own account
rather than as brokers, or otherwise involve transactions directly with the
issuers of such obligations. The Fund may also purchase fixed income and other
securities from underwriters, the cost of which may include undisclosed fees and
concessions to the underwriters.

Transactions on stock exchanges and other agency transactions involve the
payment of negotiated brokerage commissions. Such commissions vary among
different broker-dealer firms, and a particular broker-dealer may charge
different commissions according to such factors as the difficulty and size of
the transaction and the volume of business done with such broker-dealer.
Transactions in foreign securities often involve the payment of brokerage
commissions, which may be higher than those in the United States. There is
generally no stated commission in the case of securities traded in the over-the-
counter markets, but the price paid or received usually includes an undisclosed
dealer markup or markdown. In an underwritten offering the price paid often
includes a disclosed fixed commission or discount retained by the underwriter or
dealer.

Although spreads or commissions paid on portfolio security transactions
will, in the judgment of the Adviser, be reasonable in relation to the value of
the services provided, commissions exceeding those which another firm might
charge may be paid to broker-dealers who were selected to execute transactions
on behalf of the Adviser's clients in part for providing brokerage and research
services to the Adviser.

As authorized in Section 28(e) of the Securities Exchange Act of 1934, a
broker or dealer who executes a portfolio transaction on behalf of the Fund may
receive a commission which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if the
Adviser determines in good faith that such compensation was reasonable in
relation to the value of the brokerage and research services provided. This
determination may be made on the basis of that particular transaction or on the
basis of overall responsibilities which the Adviser and its affiliates have for
accounts over which they exercise investment discretion. In making any such
determination, the Adviser will not attempt to place a specific dollar value on
the brokerage and research services provided or to determine what portion of the
commission should be related to such services. Brokerage and research services
may include advice as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts; effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement); and
the "Research Services" referred to in the next paragraph.

It is a common practice of the investment advisory industry and of the
advisers of investment companies, institutions and other investors to receive
research, analytical, statistical and quotation services, data, information and
other services, products and materials which assist such advisers in the
performance of their investment responsibilities ("Research Services") from
broker-dealer firms which execute portfolio transactions for the clients of such
advisers and from third parties with which such broker-dealers have
arrangements. Consistent with this practice, the Adviser receives Research
Services from many broker-dealer firms with which the Adviser places the Fund's
transactions and from third parties with which these broker-dealers have
arrangements. These Research Services include such matters as general economic,
political, business and market information, industry and company reviews,
evaluations of securities and portfolio strategies and transactions, proxy
voting data and analysis services, technical analysis of various aspects of the
securities market, recommendations as to the purchase and sale of securities and
other portfolio transactions, financial, industry and trade publications, news
and information services, pricing and quotation equipment and services, and
research oriented computer hardware, software, data bases and services. Any
particular Research Service obtained through a broker-dealer may be used by the
Adviser in connection with client accounts other than those accounts which pay
commissions to such broker-dealer. Any such Research Service may be broadly
useful and of value to the Adviser in rendering investment advisory services to
all or a significant portion of its clients,
23

or may be relevant and useful for the management of only one client's account or
of a few clients' accounts, or may be useful for the management of merely a
segment of certain clients' accounts, regardless of whether any such account or
accounts paid commissions to the broker-dealer through which such Research
Service was obtained. The advisory fee paid by the Fund is not reduced because
the Adviser receives such Research Services. The Adviser evaluates the nature
and quality of the various Research Services obtained through broker-dealer
firms and attempts to allocate sufficient portfolio security transactions to
such firms to ensure the continued receipt of Research Services which the
Adviser believes are useful or of value to it in rendering investment advisory
services to its clients.

The Fund and the Adviser may also receive Research Services from
underwriters and dealers in fixed-price offerings, which Research Services are
reviewed and evaluated by the Adviser in connection with its investment
responsibilities. The investment companies sponsored by the Adviser or its
affiliates may allocate trades in such offerings to acquire information relating
to the performance, fees and expenses of such companies and other mutual funds,
which information is used by the Trustees of such companies to fulfill their
responsibility to oversee the quality of the services provided by various
entities, including the Adviser, to such companies. Such companies may also pay
cash for such information.

Subject to the requirement that the Adviser shall use its best efforts to
seek and execute portfolio security transactions at advantageous prices and at
reasonably competitive spreads or commission rates, the Adviser is authorized to
consider as a factor in the selection of any broker-dealer firm with which
portfolio orders may be placed the fact that such firm has sold or is selling
shares of the Fund or of other investment companies sponsored by the Adviser.
This policy is not inconsistent with a rule of the National Association of
Securities Dealers, Inc. ("NASD"), which rule provides that no firm which is a
member of the NASD shall favor or disfavor the distribution of shares of any
particular investment company or group of investment companies on the basis of
brokerage commissions received or expected by such firm from any source.

Securities considered as investments for the Fund may also be appropriate
for other investment accounts managed by the Adviser or its affiliates. Whenever
decisions are made to buy or sell securities by the Fund and one or more of such
other accounts simultaneously, the Adviser will allocate the security
transactions (including "hot" issues) in a manner which it believes to be
equitable under the circumstances. As a result of such allocations, there may be
instances where the Fund will not participate in a transaction that is allocated
among other accounts. If an aggregated order cannot be filled completely,
allocations will generally be made on a pro rata basis. An order may not be
allocated on a pro rata basis where, for example: (i) consideration is given to
portfolio managers who have been instrumental in developing or negotiating a
particular investment; (ii) consideration is given to an account with
specialized investment policies that coincide with the particulars of a specific
investment; (iii) pro rata allocation would result in odd-lot or de minimis
amounts being allocated to a portfolio or other client; or (iv) where the
Adviser reasonably determines that departure from a pro rata allocation is
advisable. While these aggregation and allocation policies could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Trustees of the Fund that the
benefits from the Adviser's organization outweigh any disadvantage that may
arise from exposure to simultaneous transactions.

TAXES

The following discussion of federal income tax matters is based on the
advice of Kirkpatrick & Lockhart Nicholson Graham LLP, counsel to the Fund. The
Fund intends to elect to be treated and to qualify each year as a regulated
investment company ("RIC") under the Internal Revenue Code of 1986, as amended
(the "Code"). Accordingly, the Fund intends to satisfy certain requirements
relating to sources of its income and diversification of its assets and to
distribute all or substantially all of its net income and net short-term and
long-term capital gains (after reduction by any available capital loss
carryforwards) in accordance with the timing requirements imposed by the Code,
so as to maintain its RIC status and to avoid paying any federal income or
excise tax. To the extent it qualifies for treatment as a RIC and satisfies the
above-mentioned distribution requirements, the Fund will not be subject to
federal income tax on income paid to its shareholders in the form of dividends
or capital gain distributions.

In order to avoid incurring a 4% federal excise tax obligation, the Code
requires that the Fund distribute (or be deemed to have distributed) by December
31 of each calendar year an amount at least equal to the sum of (i) 98% of its
ordinary income for such year and (ii) 98% of its capital gain net income (which
is the excess of its realized net long-term capital gain over its realized net
short-term capital loss), generally computed on the basis of the one-year period
ending on October 31 of such year, after reduction by any
24

available capital loss carryforwards, plus 100% of any ordinary income and
capital gain net income from the prior year (as previously computed) that were
not paid out during such year and on which the Fund paid no federal income tax.
Under current law, provided that the Fund qualifies as a RIC for federal income
tax purposes, the Fund should not be liable for any income, corporate excise or
franchise tax in The Commonwealth of Massachusetts.

If the Fund does not qualify as a RIC for any taxable year, the Fund's
taxable income will be subject to corporate income taxes, and all distributions
from earnings and profits, including distributions of net capital gain (if any),
will be taxable to the shareholder as ordinary income. In addition, in order to
requalify for taxation as a RIC, the Fund may be required to recognize
unrealized gains, pay substantial taxes and interest, and make certain
distributions.

Under the "Jobs and Growth Tax Relief Reconciliation Act of 2003" (the
"Tax Act"), certain income distributions paid by the Fund (whether paid in cash
or reinvested in additional Fund Shares) to individual taxpayers are taxed at
rates applicable to net long-term capital gains (15%, or 5% for individuals in
the 10% or 15% tax brackets). This tax treatment applies only if certain holding
period requirements and other requirements are satisfied by the Common
Shareholder and the dividends are attributable to qualified dividend income
received by the Fund itself. For this purpose, "qualified dividend income" means
dividends received by the Fund from certain United States corporations and
"qualified foreign corporations," provided that the Fund satisfies certain
holding period and other requirements in respect of the stock of such
corporations. In the case of securities lending transactions, payments in lieu
of dividends do not constitute qualified dividend income. Any dividends received
by the Fund from REITs are qualified dividend income eligible for this lower tax
rate only in limited circumstances. These special rules relating to the taxation
of ordinary income dividends paid by RICs generally apply to taxable years
beginning before January 1, 2009. Thereafter, the Fund's dividends, other than
capital gain dividends, will be fully taxable at ordinary income tax rates
unless further Congressional action is taken. There can be no assurance that a
portion of the Fund's income distributions will not be fully taxable as ordinary
income.

Subject to certain exceptions, a "qualified foreign corporation" is any
foreign corporation that is either (i) incorporated in a possession of the
United States (the "possessions test"), or (ii) eligible for benefits of a
comprehensive income tax treaty with the United States, which the Secretary of
the Treasury determines is satisfactory for these purposes and which includes an
exchange of information program (the "treaty test"). The Secretary of the
Treasury has currently identified tax treaties between the United States and 52
other countries that satisfy the treaty test. Subject to the same exceptions, a
foreign corporation that does not satisfy either the possessions test or the
treaty test will still be considered a "qualified foreign corporation" with
respect to any dividend paid by such corporation if the stock with respect to
which such dividend is paid is readily tradable on an established securities
market in the United States. The Treasury Department has issued a notice stating
that common or ordinary stock, or an American Depositary Receipt in respect of
such stock, is considered readily tradable on an established securities market
in the Unites States if it is listed on a national securities exchange that is
registered under section 6 of the Securities Exchange Act of 1934, as amended,
or on the Nasdaq Stock Market. A qualified foreign corporation does not include
any foreign corporation which for the taxable year of the corporation in which
the dividend is paid, or the preceding taxable year, is a foreign personal
holding company, a foreign investment company or a passive foreign investment
company.

A dividend (whether paid in cash or reinvested in additional Fund shares)
will not be treated as qualified dividend income (whether received by the Fund
or paid by the Fund to a shareholder) if (1) the dividend is received with
respect to any share held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before the date on which such share
becomes exdividend with respect to such dividend, (2) to the extent that the
shareholder is under an obligation (whether pursuant to a short sale or
otherwise) to make related payments with respect to positions in substantially
similar or related property, or (3) if the shareholder elects to have the
dividend treated as investment income for purposes of the limitation on
deductibility of investment interest.

The Fund's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. Such income will be accrued daily by the Fund and, in order to
avoid a tax payable by the Fund, the Fund may be required to liquidate
securities that it might otherwise have continued to hold in order to generate
cash so that the Fund may make required distributions to its shareholders.

Investments in lower rated or unrated securities may present special tax
issues for the Fund to the extent that the issuers of these securities default
on their obligations pertaining thereto. The Code is not entirely clear
regarding the federal income tax consequences of the Fund's taking certain
positions in connection with ownership of such distressed securities.

Any recognized gain or income attributable to market discount on
long-term debt obligations (i.e., on obligations with a term of more than one
year except to the extent of a portion of the discount attributable to original
issue discount) purchased by the Fund is taxable as ordinary income. A long-term
debt obligation is generally treated as acquired at a market discount if
purchased after its original issue at a price less than (i) the stated principal
amount payable at maturity, in the case of an obligation that does not have
original issue discount or (ii) in the case of an obligation that does have
original issue discount, the sum of the issue price and any original issue
discount that accrued before the obligation was purchased, subject to a de
minimis exclusion.

The Fund's investments in options, futures contracts, hedging
transactions, forward contracts, other derivative instruments (to the extent
permitted) and certain other transactions will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale, short sale
and other rules), the effect of which may be to accelerate income to the Fund,
defer Fund losses, cause adjustments in the holding periods of securities held
by the Fund, convert capital gain into ordinary income 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 may
be required to limit its activities in options and futures contracts in order to
enable it to maintain its RIC status.

The Fund believes that its investment strategies, including its
investments in deposits of banks, bonds and other debt obligations in foreign
denominated currencies and positions in foreign currencies, will generate
qualifying income for RIC purposes under current federal income tax law.
However, the Code expressly provides the U.S. Treasury with authority to issue
regulations that would exclude foreign currency gains from qualifying income if
such gains are not directly related to a fund's business of investing in stock
or securities. While to date the U.S. Treasury has not exercised this regulatory
authority, there can be no assurance that it will not issue regulations in the
future (possibly with retroactive application) that would treat some or all of
the Fund's foreign currency gains as non-qualifying income, which may affect the
Fund's status as a RIC for all years to which such regulations are applicable.

Any loss realized upon the sale or exchange of Fund shares with a holding
period of six months or less will be treated as a long-term capital loss to the
extent of any capital gain distributions received with respect to such shares.
In addition, all or a portion of a loss realized on a redemption or other
disposition of Fund shares may be disallowed under "wash sale" rules to the
extent the shareholder acquires other substantially identical shares (whether
through the reinvestment of distributions or otherwise) within the period
beginning 30 days before the redemption of the loss shares and ending 30 days
after such date. Any disallowed loss will result in an adjustment to the
shareholder's tax basis in some or all of the other shares acquired.

Sales charges paid upon a purchase of shares cannot be taken into account
for purposes of determining gain or loss on a sale of the shares before the 91st
day after their purchase to the extent a sales charge is reduced or eliminated
in a subsequent acquisition of shares of the Fund (or of another fund) pursuant
to the reinvestment or exchange privilege. Any disregarded amounts will result
in an adjustment to the shareholder's tax basis in some or all of any other
shares acquired.

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. Certain distributions declared in October, November or December and paid
in the following January will be taxed to shareholders as if received on
December 31 of the year in which they were declared. In addition, certain other
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid by the Fund (except for purposes of the 4% excise tax)
during such taxable year. In such case, Shareholders will be treated as having
received such dividends in the taxable year in which the distributions were
actually made.

Dividends and interest received, and gains realized, by the Fund on
foreign securities may be subject to income, withholding or other taxes imposed
by foreign countries and U.S. possessions (collectively "foreign taxes") that
would reduce the return on its securities. Tax conventions between certain
countries and the United States, however, may reduce or eliminate foreign taxes,
and many foreign countries do not impose taxes on capital gains in respect of
investments by foreign investors. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consists of securities of foreign
issuers, the Fund will be eligible to, and may, file an election with the
Internal Revenue Service (the "IRS") that will enable its shareholders, in
effect, to receive the benefit of the foreign tax credit with respect to any
foreign taxes paid by it. Pursuant to the election, the Fund would treat those
taxes as dividends paid to its shareholders and each shareholder (1) would be
required to include in gross income, and treat as paid by such shareholder, a
proportionate share of those taxes, (2) would be required to treat such share of
those taxes and of any dividend paid by the Fund that represents income from
foreign or U.S. possessions sources as such shareholder's own income from those
sources, and (3) could either deduct the foreign taxes deemed paid in computing
taxable income or, alternatively, use the foregoing information in calculating
the foreign tax credit against federal income tax. The Fund will report to its
shareholders shortly after each taxable year their respective shares of foreign
taxes paid and the income from sources within, and taxes paid to, foreign
countries and persons filing jointly) of creditable foreign taxes included on
Forms 1099 and all of whose foreign source income is "qualified passive income"
may elect each year to be exempt from the complicated foreign tax credit
limitation, in which event such individual would be able to claim a foreign tax
credit without needing to file the detailed Form 1116 that otherwise is
required.

The Fund may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, the Fund will be subject to federal income tax on a portion of
any "excess distribution" received on the stock of a PFIC or of any gain from
disposition of that stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders. If the Fund invests
in a PFIC and elects to treat the PFIC as a "qualified electing fund" ("QEF"),
then in lieu of the foregoing tax and interest obligation, the Fund will be
required to include in income each year its pro rata share of the QEF's annual
ordinary earnings and net capital gain -- which it may have to distribute to
satisfy the distribution requirement and avoid imposition of the excise
tax -- even if the QEF does not distribute those earnings and gain to the Fund.
In most instances it will be very difficult, if not impossible, to make this
election because of certain of its requirements.

The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of a PFIC's stock over
the Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also would be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains (reduced by any prior deductions) with respect to that
stock included by the Fund for prior taxable years under the election. The
Fund's adjusted basis in each PFIC's stock with respect to which it has made
this election will be adjusted to reflect the amounts of income included and
deductions taken thereunder.

Amounts paid by the Fund to individuals and certain other shareholders
who have not provided the Fund with their correct taxpayer identification number
("TIN") and certain certifications required by the Internal Revenue Service (the
"IRS") as well as shareholders with respect to whom the Fund has received
certain information from the IRS or a broker may be subject to "backup"
withholding of federal income tax arising from the Fund's taxable dividends and
other distributions as well as the gross proceeds of sales of shares, at current
rate of up to 28%. An individual's TIN is generally his or her social security
number. Backup withholding is not an additional tax. Any amounts withheld under
the backup withholding rules from payments made to a Shareholder may be refunded
or credited against such Shareholder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the IRS.

The foregoing discussion does not address the special tax rules
applicable to certain classes of investors, such as tax-exempt entities, foreign
investors, insurance companies and financial institutions. Shareholders should
consult their own tax advisers with respect to special tax rules that may apply
in their particular situations, as well as the state, local, and, where
applicable, foreign tax consequences of investing in the Fund.

If the Fund issues preferred shares, the Fund will designate dividends
made to holders of shares and to holders of those preferred shares in accordance
with each class's proportionate share of each item of Fund income (such as net
capital gains and other taxable income).

The Fund will inform Shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including ordinary income and net capital gain. A class's proportionate share of
a particular type of income for a year is determined according to the percentage
of total dividends paid by the RIC during that year to the class. Accordingly,
the Fund intends to designate a portion of its distributions in capital gain
dividends in accordance with the IRS position.

Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, in the opinion of Kirkpatrick & Lockhart
Nicholson Graham LLP, counsel to the Fund, under current law the manner in which
the Fund intends to allocate items of ordinary income and net capital gain among
the Fund's Common Shares and any applicable preferred shares class will be
respected for federal income tax purposes. It is possible that the IRS could
disagree with counsel's opinion and attempt to reallocate the Fund's net capital
gain or other taxable income.

STATE AND LOCAL TAXES

Shareholders should consult their own tax advisers as the state or local
tax consequences of investing in the Fund.

OTHER INFORMATION

The Fund is an organization of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, shareholders of such a
trust may, in certain circumstances, be held personally liable as partners for
the obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability in connection with the Fund property or the
acts, obligations or affairs of the Fund. The Declaration of Trust also provides
for indemnification out of the Fund property of any shareholder held personally
liable for the claims and liabilities to which a shareholder may become subject
by reason 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 the Fund itself is unable to meet its obligations. The
Fund has been advised by its counsel that the risk of any shareholder incurring
any liability for the obligations of the Fund is remote.

The Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law; but nothing in the
Declaration of Trust protects a Trustee against any liability to the Fund or its
shareholders 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. Voting rights are not cumulative, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees and, in such event, the holders of the
remaining less than 50% of the shares voting on the matter will not be able to
elect any Trustees.

The Declaration of Trust provides that no person shall serve as a Trustee
if shareholders holding two-thirds of the outstanding shares have removed him
from that office either by a written declaration filed with the Fund's custodian
or by votes cast at a meeting called for that purpose. The Declaration of Trust
further provides that the Trustees of the Fund shall promptly call a meeting of
the shareholders for the purpose of voting upon a question of removal of any
such Trustee or Trustees when requested in writing so to do by the record
holders of not less than 10 per centum of the outstanding shares.

The Fund's Prospectus and this SAI do not contain all of the information
set forth in the Registration Statement that the Fund has filed with the SEC.
The complete Registration Statement may be obtained from the SEC upon payment of
the fee prescribed by its Rules and Regulations.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP, Boston, Massachusetts are the independent
registered public accounting firm for the Fund, providing audit services, tax
return preparation, and assistance and consultation with respect to the
preparation of filings with the SEC.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S REPORT

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT

[TO BE ADDED BY AMENDMENT]

EATON VANCE SHORT DURATION DIVERSIFIED INCOME FUND

STATEMENT OF ASSETS AND LIABILITIES
, 2005

ASSETS
Cash...................................................... $
--------
Offering costs............................................
--------
Receivable from Adviser...................................
--------
Total assets.............................................. $
========

LIABILITIES
Accrued offering costs.................................... $
--------
Accrued organizational costs..............................
--------
Total liabilities......................................... $
========
Net assets applicable to common shares of
beneficial interest issued and outstanding................ $
========
NET ASSET VALUE AND OFFERING PRICE PER SHARE................ $
========

STATEMENT OF OPERATIONS

PERIOD FROM APRIL 16, 2004 (DATE OF ORGANIZATION) THROUGH , 2005

INVESTMENT INCOME........................................... $ --
--------
EXPENSES $
--------
Organization costs........................................
Expense reimbursement.....................................
--------
Net expenses........................................... $ --
--------
NET INVESTMENT INCOME....................................... $ --
========

See notes to financial statements.
30

NOTES TO FINANCIAL STATEMENTS

NOTE 1: ORGANIZATION

The Fund was organized as a Massachusetts business trust on April 16,
2004, and has been inactive since that date except for matters relating to its
organization and registration as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended, and the Securities
Act of 1933, as amended, and the sale of [ ] common shares to Eaton
Vance Management, the Fund's Investment Adviser.

[Eaton Vance Management, or an affiliate, has agreed to reimburse all
organizational costs, estimated at approximately $[ .]]

[Eaton Vance Management, or an affiliate, has agreed to pay all offering
costs (other than sales loads) that exceed $[ ] per common share.]

NOTE 2: ACCOUNTING POLICIES

The Fund's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America which
require the use of management estimates. Actual results may differ from those
estimates.

The Fund's share of offering costs will be recorded within paid in
capital as a reduction of the proceeds from the sale of common shares upon the
commencement of Fund operations. The offering costs reflected above assume the
sale of [ ] common shares.

NOTE 3: INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an investment advisory agreement between the Adviser and the
Fund, the Fund has agreed to pay an investment advisory fee, payable on a
monthly basis, at an annual rate of [ ]% of the average daily total
leveraged assets of the Fund. Total leveraged assets of the Fund shall be
calculated by [ ].

In addition, Eaton Vance has contractually agreed to reimburse the Fund
for fees and other expenses in the amount of [ ]% of the average daily
total leveraged assets for the first 5 full years of the Fund's operations,
[ ]% assets in year 6, [ ]% in year 7 and [ ]% in
year 8.

NOTE 4: FEDERAL INCOME TAXES

The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income, including any net realized gain on investments.

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS(+)
MOODY'S INVESTORS SERVICE, INC.

LONG-TERM DEBT SECURITIES 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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risk appear somewhat larger than the 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 which 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 other 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 the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.

Caa: Bonds 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.

Absence of Rating: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.

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

+ The ratings indicated herein are believed to be the most recent ratings
available at the date of this SAI for the securities listed. Ratings are
generally given to securities at the time of issuance. While the rating agencies
may from time to time revise such ratings, they undertake no obligation to do
so, and the ratings indicated do not necessarily represent ratings which would
be given to these securities on the date of the Fund's fiscal year end.
A-1

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.

3. There is a lack of essential data pertaining to the issue or
issuer.

4. The issue was privately placed, in which case the rating is
not published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.

Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its 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.

SHORT-TERM DEBT SECURITIES 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 RATINGS GROUP

INVESTMENT GRADE

AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.

A-2

AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.

BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

SPECULATIVE GRADE

Debt rated BB, B, CCC, CC and C is 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: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.

B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.

CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.

CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.

C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

C1: The Rating C1 is reserved for income bonds on which no interest is
being paid.

D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments 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.

p: 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.
A-3

L: The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
insured by the Federal Deposit Insurance Corp. and interest is adequately
collateralized. In the case of certificates of deposit, the letter "L" indicates
that the deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity.

NR: NR indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.

COMMERCIAL PAPER

COMMERCIAL PAPER RATING DEFINITIONS

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

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

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

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

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 S&P by the issuer or obtained from other sources it
considers reliable. S&P 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.

A-4

FITCH RATINGS

INVESTMENT GRADE BOND RATINGS

AAA: Bonds 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 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+'.

l: Bonds 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 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 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.

HIGH YIELD BOND RATINGS

BB: Bonds 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 that
could assist the obligor in satisfying its debt service requirements.

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

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

DDD, DD AND D: Bonds are in default on 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 (+) OR MINUS (-): The ratings from AA to C may be modified by the
addition of a plus or minus sign to indicate the relative position of a credit
within the rating category.

NR: Indicates that Fitch does not rate the specific issue.

CONDITIONAL: A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.

INVESTMENT GRADE SHORT-TERM RATINGS

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

A-5

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 payment, but the margin of safety is
not as great as the 'F-1+' and 'F-1' categories.

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

* * * * * * *

Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative bonds. The Fund is dependent on the Adviser's judgment,
analysis and experience in the evaluation of such bonds.

Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the issuer's
ability to make interest and principal payments.

A-6

APPENDIX B

EATON VANCE FUNDS
Proxy Voting Policy and Procedures

I. OVERVIEW

The Boards of Trustees (the "Boards") of the Eaton Vance Funds (the
"Funds") recognize that it is their fiduciary responsibility to actively monitor
the Funds' operations. The Boards have always placed paramount importance on
their oversight of the implementation of the Funds' investment strategies and
the overall management of the Funds' investments. A critical aspect of the
investment management of the Funds continues to be the effective assessment and
voting of proxies relating to the Funds' portfolio securities. While the Boards
will continue to delegate the day-to-day responsibilities relating to the
management of the proxy-voting process to the relevant investment adviser or
sub-adviser, if applicable, of the Fund (or its underlying portfolio in the case
of a master-feeder arrangement), the Boards have determined that it is in the
interests of the Funds' shareholders to adopt these written proxy voting policy
and procedures (the "Policy"). For purposes of this Policy the term "Fund" shall
include a Fund's underlying portfolio in the case of a master-feeder arrangement
and the term "Adviser" shall mean the adviser to a Fund or its sub-adviser if a
sub-advisory relationship exists.

II. DELEGATION OF PROXY VOTING RESPONSIBILITIES

Pursuant to investment advisory agreements between each Fund and its
Adviser, the Adviser has long been responsible for reviewing proxy statements
relating to Fund investments and, if the Adviser deems it appropriate to do so,
to vote proxies on behalf of the Funds. The Boards hereby formally delegate this
responsibility to the Adviser, except as otherwise described in this Policy. In
so doing, the Boards hereby adopt on behalf of each Fund the proxy voting
policies and procedures of the Adviser(s) to each Fund as the proxy voting
policies and procedures of the Fund. The Boards recognize that the Advisers may
from time to time amend their policies and procedures. The Advisers will report
material changes to the Boards in the manner set forth in Section IV below. In
addition, the Boards will annually review and approve the Advisers' proxy voting
policies and procedures.

III. DELEGATION OF PROXY VOTING DISCLOSURE RESPONSIBILITIES

The Securities and Exchange Commission (the "Commission") recently
enacted certain new reporting requirements for registered investment companies.
The Commission's new regulations require that funds (other than those which
invest exclusively in non-voting securities) make certain disclosures regarding
their proxy voting activities. The most significant disclosure requirement for
the Funds is the duty pursuant to Rule 30b1-4 promulgated under the Investment
Company Act of 1940, as amended (the "1940 Act"), to file Form N-PX no later
than August 31st of each year beginning in 2004.

Under Form N-PX, each Fund will be required to disclose, among other
things, information concerning proxies relating to the Fund's portfolio
investments, whether or not the Fund (or its Adviser) voted the proxies relating
to securities held by the Fund and how it voted in the matter and whether it
voted for or against management.

The Boards hereby delegate to each Adviser the responsibility for
recording, compiling and transmitting in a timely manner all data required to be
filed on Form N-PX to Eaton Vance Management, which acts as administrator to
each of the Funds (the "Administrator"), for each Fund that such Adviser
manages. The Boards hereby delegate the responsibility to file Form N-PX on
behalf of each Fund to the Administrator.

III. CONFLICTS OF INTEREST

The Boards expect each Adviser, as a fiduciary to the Fund(s) it manages,
to put the interests of each Fund and its shareholders above those of the
Adviser. In the event that in connection with its proxy

B-1

voting responsibilities a conflict of interest arises between a Fund's
shareholders and the Fund's Adviser or the Administrator (or any of their
affiliates) or any affiliated person of the Fund, the Adviser, to the extent it
is aware or reasonably should have been aware of the conflict, will refrain from
voting any proxies related to companies giving rise to such conflict until it
notifies and consults with the appropriate Board(s) concerning the conflict.

Once the Adviser notifies the relevant Board(s) of the conflict, the
Board(s) shall convene a meeting of the Boards' Fund Special Committee (the
"Committee") to review and consider all relevant materials related to the
proxies involved. In considering such proxies, the Adviser shall make available
all materials requested by the Committee and make reasonably available
appropriate personnel to discuss the matter with the Committee upon the
Committee's request. The Committee will instruct the Adviser on the appropriate
course of action. If the Committee is unable to meet and the failure to vote a
proxy would have a material adverse impact on the Fund(s) involved, each Adviser
will have the right to vote such proxy, provided that it discloses the existence
of the conflict to the Committee at its next meeting.

IV. REPORTS

The Administrator shall make copies of each Form N-PX filed on behalf of
the Funds available for the Boards' review upon the Boards' request. The
Administrator (with input from the Adviser for the relevant Fund(s)) shall also
provide any reports reasonably requested by the Boards regarding the proxy
voting records of the Funds.

Each Adviser shall annually report any material changes to such Adviser's
proxy voting policies and procedures to the relevant Board(s) and the relevant
Board(s) will annually review and approve the Adviser's proxy voting policies
and procedures. Each Adviser shall report any changes to such Adviser's proxy
voting policies and procedures to the Administrator prior to implementing such
changes in order to enable the Administrator to effectively coordinate the
Funds' disclosure relating to such policies and procedures.

B-2

EATON VANCE MANAGEMENT
BOSTON MANAGEMENT AND RESEARCH
EATON VANCE INVESTMENT COUNSEL
Proxy Voting Policies And Procedures

I. INTRODUCTION

Eaton Vance Management, Boston Management and Research and Eaton Vance
Investment Counsel (each an "Adviser" and collectively the "Advisers") have each
adopted and implemented policies and procedures that each Adviser believes are
reasonably designed to ensure that proxies are voted in the best interest of
clients, in accordance with its fiduciary duties and Rule 206(4)-6 under the
Investment Advisers Act of 1940, as amended. The Advisers' authority to vote the
proxies of their clients is established by their advisory contracts or similar
documentation, such as the Eaton Vance Funds Proxy Voting Policies and
Procedures. These proxy policies and procedures reflect the Securities and
Exchange Commission ("SEC") requirements governing advisers and the
long-standing fiduciary standards and responsibilities for ERISA accounts set
out in the Department of Labor Bulletin 94-2 C.F.R. 2509.94-2 (July 29, 1994).

OVERVIEW

Each Adviser manages its clients' assets with the overriding goal of
seeking to provide the greatest possible return to such clients consistent with
governing laws and the investment policies of each client. In pursuing that
goal, each Adviser seeks to exercise its clients' rights as shareholders of
voting securities to support sound corporate governance of the companies issuing
those securities with the principle aim of maintaining or enhancing the
companies' economic value.

The exercise of shareholder rights is generally done by casting votes by
proxy at shareholder meetings on matters submitted to shareholders for approval
(for example, the election of directors or the approval of a company's stock
option plans for directors, officers or employees). Each Adviser is adopting the
formal written guidelines described in detail below and will utilize such
guidelines in voting proxies on behalf of its clients. These guidelines are
designed to promote accountability of a company's management and board of
directors to its shareholders and to align the interests of management with
those of shareholders.

In seeking to ensure a level of consistency and rationality in the proxy
voting process, the guidelines contained in these policies and procedures are
designed to address the manner in which certain matters that arise regularly in
proxies will generally be voted. However, each Adviser takes the view that these
guidelines should not be used as mechanical instructions for the exercise of
this important shareholder right. Except in the instance of routine matters
related to corporate administrative matters which are not expected to have a
significant economic impact on the company or its shareholders (on which the
Advisers will routinely vote with management), the Advisers will review each
matter on a case-by-case basis and reserve the right to deviate from these
guidelines when they believe the situation warrants such a deviation. In
addition, no set of guidelines can anticipate all situations that may arise. In
special cases, the Proxy Administrator (the person specifically charged with the
responsibility to review and vote proxies on behalf of each Adviser's clients)
may seek insight from the Adviser's analysts, portfolio managers and/or Chief
Equity Investment Officer on how a particular proxy proposal will impact the
financial prospects of a company, and vote accordingly. The guidelines are just
that: guidelines rather than hard and fast rules, simply because corporate
governance issues are so varied.

PROXY VOTING GUIDELINES

The following guidelines relate to the types of proposals that are most
frequently presented in proxy statements to shareholders. Absent unusual
circumstances, each Adviser will utilize these guidelines when voting proxies on
behalf of its clients.

B-3

A. ELECTION OF BOARD OF DIRECTORS

The Advisers believe that a Board of Directors should primarily be
independent, not have significant ties to management and consist of members who
are all elected annually. In addition, the Advisers believe that important Board
committees (e.g., audit, nominating and compensation committees) should be
entirely independent. In general,

- The Advisers will support the election of directors that result in
a Board made up of a majority of independent directors.

- The Advisers will support the election for independent directors to
serve on the audit, compensation, and/or nominating committees of a
Board of Directors.

- The Advisers will hold all directors accountable for the actions of
the Board's committees. For example, the Advisers will consider
withholding votes for nominees who have recently approved
compensation arrangements that the Advisers deem excessive or
propose equity-based compensation plans that unduly dilute the
ownership interests of shareholders.

- The Advisers will support efforts to declassify existing Boards,
and will vote against proposals by companies to adopt classified
Board structures.

- The Advisers will vote against proposals for cumulative voting,
confidential stockholder voting and the granting of pre-emptive
rights.

B. APPROVAL OF INDEPENDENT AUDITORS

The Advisers believe that the relationship between the company and its
auditors should be limited primarily to the audit engagement and closely allied
audit-related and tax services, although non-audit services may be provided so
long as they are consistent with the requirements of the Sarbanes-Oxley Act and,
if required, have been approved by an independent audit committee. The Advisers
will also consider the reputation of the auditor and any problems that may have
arisen in the auditor's performance of services.

C. EXECUTIVE COMPENSATION

The Advisers believe that appropriately designed equity-based
compensation plans, approved by shareholders, can be an effective way to align
the interests of shareholders and the interests of management, employees, and
directors. However, the Advisers are opposed to plans that substantially dilute
shareholders' ownership interests in the company or have objectionable
structural features.

- The Advisers will generally vote against plans where total
potential dilution (including all equity-based plans) seems likely
to exceed 15% of shares outstanding over ten years and extends
longer than ten years.

- The Advisers will generally vote against plans if annual option
grants exceed 2% of shares outstanding.

These total and annual dilution thresholds are guidelines, not ceilings,
and when assessing a plan's impact on client shareholdings the Advisers will
consider other factors such as specific industry practices, company and stock
performance and management credibility. The Proxy Administrator may consult with
the relevant analyst(s) or portfolio manager(s) or, if appropriate, the Chief
Equity Investment Officer, to determine when or if it may be appropriate to
exceed these guidelines.

- The Advisers will typically vote against plans that have any of the
following structural features:

- Ability to re-price underwater options without shareholder
approval.

B-4

- The unrestricted ability to issue options with an exercise
price below the stock's current market price.

- Automatic share replenishment ("evergreen") feature.

- The Advisers are supportive of measures intended to increase
long-term stock ownership by executives. These may include:

- Requiring senior executives to hold a minimum amount of stock
in the company (frequently expressed as a certain multiple of
the executive's salary).

- Using restricted stock grants instead of options.

- Utilizing phased vesting periods or vesting tied to company
specific milestones or stock performance.

- The Advisers will generally support the use of employee stock
purchase plans to increase company stock ownership by employees,
provided that shares purchased under the plan are acquired for no
less than 85% of their market value.

In assessing a company's executive compensation plan, the Advisers will
weigh all components of the plan. For example, the grant of stock options to
executives of a company in a particular year may appear excessive if that grant
goes above 2% of the shares outstanding of the company. However, such grants may
be appropriate if the senior management of the company has accepted
significantly reduced cash compensation for the year in lieu of receiving a
greater number of options.

D. CORPORATE STRUCTURE MATTERS/ANTI-TAKEOVER DEFENSES

As a general matter, the Advisers oppose anti-takeover measures and other
proposals designed to limit the ability of shareholders to act on possible
transactions. In general,

- Because a classified board structure prevents shareholders from
electing a full slate of directors annually, the Advisers will
typically vote against proposals to create classified boards and
vote in favor of shareholder proposals to declassify a board.

- The Advisers will vote for proposals to subject shareholder rights
plans ("poison pills") to a shareholder vote.

- The Advisers will vote for shareholder proposals that seek to
eliminate supermajority voting requirements and oppose proposals
seeking to implement supermajority voting requirements.

- The Advisers will generally vote against proposals to authorize
preferred stock whose voting, conversion, dividend and other rights
are determined at the discretion of the board of directors when the
stock is issued, when used as an anti-takeover device. However,
such "blank check" preferred stock may be issued for legitimate
financing needs and the Adviser may vote for proposals to issue
such preferred stock when it believes such circumstances exist.

- The Advisers will vote for proposals to lower barriers to
shareholder action (for example, limiting rights to call special
meetings or act by written consent).

- The Advisers will vote against proposals for a separate class of
stock with disparate voting rights.

- The Advisers will consider on a case-by-case basis on board
approved proposals regarding changes to a company's capitalization;
however, the Advisers will generally vote in favor of proposals
authorizing the issuance of additional common stock (except in the
case of a merger, restructuring or another significant corporate
event which will be handled on a case-by-case basis), provided that
such issuance does not exceed three times the number of currently
outstanding shares.

B-5

E. STATE OF INCORPORATION/OFFSHORE PRESENCE

Under ordinary circumstances, the Advisers will not interfere with a
choice to reincorporate or reorganize a company in a different jurisdiction,
provided that management's decision has been approved by the board of directors.
The Advisers recognize that there may be benefits to reincorporation (such as
tax benefits and more developed business laws in the jurisdiction of
reincorporation). Each proposal to reincorporate in offshore tax havens will be
reviewed on a case-by-case basis to determine whether such actions are in the
best interests of the shareholders of the company, including the Advisers'
clients.

F. ENVIRONMENTAL/SOCIAL POLICY ISSUES

The Advisers believe that "ordinary business matters" are primarily the
responsibility of management and should be approved solely by the company's
board of directors. The Advisers recognize that certain social and environmental
issues raised in shareholder proposals are the subject of vigorous public debate
and many are the subject of legal statutes or regulation by federal and/or state
agencies. The Advisers generally support management on these types of proposals,
although they may make exceptions where they believe a proposal has substantial
economic implications. The Advisers expect that the companies in which they
invest their clients' assets will act as responsible corporate citizens.

G. CIRCUMSTANCES UNDER WHICH THE ADVISERS WILL ABSTAIN FROM VOTING

The Advisers will seek to vote all proxies for clients who have delegated
the responsibility to vote such proxies to the Advisers. Under certain
circumstances, the costs to their clients associated with voting such proxies
would far outweigh the benefit derived from exercising the right to vote. In
those circumstances, the Advisers will make a case-by-case determination on
whether or not to vote such proxies. In the case of countries which required
so-called "share blocking," the Adviser may also abstain from voting. The
Advisers will not seek to vote proxies on behalf of their clients unless they
have agreed to take on that responsibility on behalf of a client. Finally, the
Advisers may be required to abstain from voting on a particular proxy in a
situation where a conflict exists between the Adviser and its client. The policy
for resolution of such conflicts is described below in Section V.

RECORDKEEPING

The Advisers will maintain records relating to the proxies they vote on
behalf of their clients in accordance with Section 204-2 of the Investment
Advisers Act of 1940, as amended. Those records will include:

- A copy of the Advisers' proxy voting policies and procedures;

- Proxy statements received regarding client securities (if such
proxies are available on the SEC's EDGAR system or a third party
undertakes to promptly provide a copy of such documents to the
Advisers, the Advisers do not need to retain a separate copy of the
proxy statement);

- A record of each vote cast;

- A copy of any document created by the Advisers that was material to
making a decision on how to vote a proxy for a client or that
memorializes the basis for such a decision; and

- Each written client request for proxy voting records and the
Advisers' written response to any client request (whether written
or oral) for such records.

All records described above will be maintained in an easily accessible
place for five years and will be maintained in the offices of the Advisers for
two years after they are created.

B-6

IDENTIFICATION AND RESOLUTION OF CONFLICTS WITH CLIENTS

As fiduciaries to their clients, each Adviser puts the interests of its
clients ahead of its own. In order to ensure that relevant personnel of the
Advisers are able to identify potential conflicts of interest, each Adviser will
take the following steps:

- Quarterly, the Eaton Vance Legal and Compliance Departments will
seek information from the department heads of each department of
the Advisers and of Eaton Vance Distributors, Inc. ("EVD") (an
affiliate of the Advisers and principal underwriter of the Eaton
Vance Funds). Each department head will be asked to provide a list
of significant clients or prospective clients of the Advisers or
EVD. For example, a department head would report the fact that EVD
was in discussions with a corporate client considering management
of the corporation's 401(k) plan assets.

- A representative of the Legal and Compliance Departments will
compile a list of the companies identified (the "Conflicted
Companies") and provide that list to the Proxy Administrator.

- The Proxy Administrator will compare the list of Conflicted
Companies with the names of companies for which he or she expects
to receive or has received proxy statements (the "Proxy
Companies"). If a Conflicted Company is also a Proxy Company, the
Proxy Administrator will report that fact to the Eaton Vance Chief
Legal Officer and the Chief Equity Investment Officer.

The Chief Legal Officer and Chief Equity Investment Officer will then
determine if a conflict of interest exists between the relevant Adviser and its
client. If they determine that a conflict exists, they or their designees will
take the following steps to seek to resolve such conflict prior to voting any
proxies relating to these Conflicted Companies.

- If the Proxy Administrator expects to vote the proxy of the
Conflicted Company strictly according to the guidelines contained
in these Proxy Voting Policies and Procedures (the "Policies"), she
will (i) inform the Chief Legal Officer and Chief Equity Investment
Officer (or their designees) of that fact, (ii) vote the proxies
and (iii) record the existence of the conflict and the resolution
of the matter.

- If the Proxy Administrator intends to vote in a manner inconsistent
with the guidelines contained herein or, if the issues raised by
the proxy are not contemplated by these Policies, and the matters
involved in such proxy could have a material economic impact on the
client(s) involved, the Adviser will seek instruction on how the
proxy should be voted from:

- The client, in the case of an individual or corporate client;

- In the case of a Fund its board of directors, or any committee
identified by the board; or

- The adviser, in situations where the Adviser acts as a
sub-adviser to such adviser.

The Adviser will provide all reasonable assistance to each party to
enable such party to make an informed decision.

If the client, fund board or adviser, as the case may be, fails to
instruct the Adviser on how to vote the proxy, the Adviser will generally
abstain from voting in order to avoid the appearance of impropriety. If however,
the failure of the Adviser to vote its clients' proxies would have a material
adverse economic impact on the Advisers' clients' securities holdings in the
Conflicted Company, the Adviser may vote such proxies in order to protect its
clients' interests. In either case, the Proxy Administrator will record the
existence of the conflict and the resolution of the matter.

Adopted June 6, 2003

B-7

EATON VANCE SHORT DURATION DIVERSIFIED INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION
, 2005

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

INVESTMENT ADVISER AND ADMINISTRATOR
Eaton Vance Management
255 State Street
Boston, MA 02109

CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, MA 02116

TRANSFER AGENT
PFPC INC.
P.O. Box 43027
Providence, RI 02940-3027
(800) 331-1710

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP

PART C

OTHER INFORMATION

ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS

(1) FINANCIAL STATEMENTS:

Included in Part A:
Not applicable.

Included in Part B:
Independent Registered Public Accounting Firm's Report*
Statement of Assets and Liabilities*
Notes to Financial Statement*

---------------------
*To be added by amendment.

(2) EXHIBITS:

(a) (1) Agreement and Declaration of Trust dated April 15, 2004 is
incorporated herein by reference to the Registrant's initial
Registration Statement on Form N-2 (File Nos. 333-114596 and
811-21563) as to the Registrant's common shares of beneficial
interest ("Common Shares") filed with the Securities and
Exchange Commission on April 19, 2004 (Accession No.
0000898432-04-000354) ("Initial Common Shares Registration
Statement").

(2) Amendment to Declaration of Trust dated November 29, 2004 is
incorporated herein by reference to the Pre-Effective
Amendment No. 1 to the Registrant's Initial Common Shares
Registration Statement as filed with the Commission on
December 7, 2004 (Accession No. 0000898432-04-001008)
("Pre-Effective Amendment No. 1").

(b) (1) By-Laws are incorporated herein by reference to the
Registrant's Initial Common Shares Registration Statement.

(2) Amendment to By-Laws are incorporated herein by reference to
Pre- Effective Amendment No. 1.

(d) Form of Specimen Certificate for Common Shares of Beneficial
Interest filed herein.

(e) Dividend Reinvestment Plan filed herein.

(f) Not applicable.

(g) Investment Advisory Agreement dated January 14, 2005, filed herein.

(h) (1) Form of Purchase Agreement filed herein.

(i) The Securities and Exchange Commission has granted the Registrant an
exemptive order that permits the Registrant to enter into deferred
compensation arrangements with its independent Trustees. See in the
matter of Capital Exchange Fund, Inc., Release No. IC-20671
(November 1, 1994).

(j) (1) Master Custodian Agreement with Investors Bank & Trust Company
dated January 14, 2005 filed herein.

(2) Extension Agreement dated August 31, 2000 to Master Custodian
Agreement with Investors Bank & Trust Company filed as Exhibit
(g)(4) to Post-Effective Amendment No. 85 of Eaton Vance
Municipals Trust (File Nos. 33-572, 811-4409) filed with the
Commission on January 23, 2001 (Accession No.
0000940394-01-500027) and incorporated herein by reference.

(3) Delegation Agreement dated December 11, 2000, with Investors
Bank & Trust Company filed as Exhibit (j)(e) to the Eaton
Vance Prime Rate Reserves N-2, Amendment No. 5 (File Nos.
333-32267, 811-05808) filed April 3, 2002 (Accession No.
0000940394-01-500126) and incorporated herein by reference.

(k) (1) Supplement to the Transfer Agency and Services Agreement dated
January 14, 2005 filed herein.

(2) Transfer Agency and Services Agreement as amended and restated
on June 16, 2003, filed as Exhibit (k)(2) to the Registration
Statement of Eaton Vance Tax-Advantaged Dividend Income Fund
(File Nos. 333-107050 and 811-21400) filed July 15, 2003
(Accession No. 0000898432-03-000638) and incorporated herein
by reference.

(3) Administration Agreement dated January 14, 2005 filed herein.

(4) Form of Additional Compensation Agreement filed herein.

(l) Opinion and Consent of Kirkpatrick & Lockhart Nicholson Graham LLP
as to Registrant's Common Shares to be filed by amendment.

(m) Not applicable.

(n) Consent of Independent Registered Public Accounting Firm filed
herein.

(o) Not applicable.

(p) Letter Agreement with Eaton Vance Management to be filed by
amendment.

(q) Not applicable.

(r) Code of Ethics adopted by Eaton Vance Corp., Eaton Vance Management,
Boston Management and Research, Eaton Vance Distributors, Inc. and
the Eaton Vance Funds effective September 1, 2000, as revised June
4, 2002, filed as Exhibit (p) to Post- Effective Amendment No. 45 of
Eaton Vance Investment Trust (File Nos. 33-1121, 811-4443) filed
July 24, 2002 (Accession No. 0000940394-02-000462) and incorporated
herein by reference.

(s) Power of Attorney dated January 14, 2005 filed herein.

ITEM 26. MARKETING ARRANGEMENTS

See Form of Purchase Agreement filed herein.

ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The approximate expenses in connection with the offering are as follows:

Registration and Filing Fees $
---------------
National Association of Securities Dealers, Inc. Fees
New York Stock Exchange Fees
Costs of Printing and Engraving
Accounting Fees and Expenses
Legal Fees and Expenses 250,000.00
===============
Total $
---------------

ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL

None.

ITEM 29. NUMBER OF HOLDERS OF SECURITIES

Set forth below is the number of record holders as of [ ], 2005, of
each class of securities of the Registrant:

Title of Class Number of Record Holders
-------------- ------------------------

Common Shares of Beneficial interest, par value 0
$0.01 per share

ITEM 30. INDEMNIFICATION

The Registrant's By-Laws filed in the Registrant's Initial Common Shares
Registration Statement contain and the form of Purchase Agreement filed herein
contains provisions limiting the liability, and providing for indemnification,
of the Trustees and officers under certain circumstances.

Registrant's Trustees and officers are insured under a standard investment
company errors and omissions insurance policy covering loss incurred by reason
of negligent errors and omissions committed in their official capacities as
such. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
described in this Item 30, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Reference is made to: (i) the information set forth under the caption
Investment advisory and other services" in the Statement of Additional
Information; (ii) the Eaton Vance Corp. 10-K filed under the Securities Exchange
Act of 1934 (File No. 001-8100); and (iii) the Form ADV of Eaton Vance
Management (File No. 801-15930) filed with the Commission, all of which are
incorporated herein by reference.

ITEM 32. LOCATION OF ACCOUNTS AND RECORDS

All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder are in the possession and custody of the
Registrant's custodian, Investors Bank & Trust Company, 200 Clarendon Street,
16th Floor, Boston, MA 02116, and its transfer agent, PFPC Inc., 4400 Computer
Drive, Westborough, MA 01581-5120, with the exception of certain corporate
documents and portfolio trading documents which are in the possession and
custody of Eaton Vance Management, The Eaton Vance Building, 255 State Street,
Boston, MA 02109. Registrant is informed that all applicable accounts, books and
documents required to be maintained by registered investment advisers are in the
custody and possession of Eaton Vance Management.

ITEM 33. MANAGEMENT SERVICES

Not applicable.

ITEM 34. UNDERTAKINGS

1. The Registrant undertakes to suspend offering of Common Shares until
the prospectus is amended if (1) subsequent to the effective date of this
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of this Registration Statement or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.

2. Not applicable.

3. Not applicable.

4. Not applicable.

5. The Registrant undertakes that:

a. for the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to 497(h) under the Securities Act
shall be deemed to be part of the Registration Statement as of the time it was
declared effective; and

b. for the purpose of determining any liability under the Securities
Act, each post- effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of an oral or written request, its Statement of Additional Information.

[Remainder of page left intentionally blank]

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 Pre-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Boston and
the Commonwealth of Massachusetts, on the 21st day of January 2005.

EATON VANCE SHORT DURATION
DIVERSIFIED INCOME FUND

By: /s/ Thomas E. Faust Jr.
-------------------------------------
Thomas E. Faust Jr.
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended
this Pre-Effective Amendment to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.

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

/s/ Thomas E. Faust Jr. President and Chief Executive Officer January 21, 2005
-----------------------
Thomas E. Faust Jr.

James L. O'Connor* Treasurer and Principal Financial January 21, 2005
------------------ and Accounting Officer
James L. O'Connor

/s/ James B. Hawkes Trustee January 21, 2005
-------------------
James B. Hawkes

Samuel L. Hayes III* Trustee January 21, 2005
--------------------
Samuel L. Hayes

William H. Park* Trustee January 21, 2005
----------------
William H. Park

Ronald A. Pearlman* Trustee January 21, 2005
-------------------
Ronald A. Pearlman

Norton H. Reamer* Trustee January 21, 2005
-----------------
Norton H. Reamer

Lynn A. Stout* Trustee January 21, 2005
--------------
Lynn A. Stout

*By: /s/ Alan R. Dynner.
------------------------
Alan R. Dynner
(As Attorney-in-Fact)

INDEX TO EXHIBITS

(d) Form of Specimen Certificate

(e) Dividend Reinvestment Plan

(g) Investment Advisory Agreement

(h)(1) Form of Purchase Agreement

(j)(1) Master Custodian Agreement

(k)(1) Supplement to the Transfer Agency and Services Agreement

(k)(3) Administration Agreement

(k)(4) Form of Additional Compensation Agreement

(n) Consent of Independent Registered Public Accounting Firm

(s) Power of Attorney dated January 14, 2005