COLONIAL INTERMEDIATE HIGH INCOME FUND, N-2, 1999-08-25

COLONIAL INTERMEDIATE HIGH INCOME FUND
N-2, 1999-08-25

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<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1999

SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-5567

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

FORM N-2

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. ___________ [ ]

Post-Effective Amendment No.___________ [ ]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. ___9______ [X]

COLONIAL INTERMEDIATE HIGH INCOME FUND
(Exact Name of Registrant as Specified in Charter)

One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)

(617) 426-3750
(Registrant's Telephone Number, including Area Code)

Suzan M. Barron, Esq.
Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621
(Name and Address of Agent For Service)

With a copy to:

John M. Loder, Esq. Thomas A. Hale, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher & Flom (Illinois)
One International Place 333 West Wacker Drive
Boston, Massachusetts 02110-2624 Chicago, Illinois 60606-1285

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective date of this Registration Statement.

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

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF MAXIMUM MAXIMUM
SECURITIES AMOUNT OFFERING AGGREGATE AMOUNT OF
BEING BEING PRICE PER OFFERING REGISTRATION
REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
- ---------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C>

Shares of
Beneficial
Interest 6,746,493 $6.3125 $42,587,237 $11,839

</TABLE>

(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933. Based on the
New York Stock Exchange on August 20, 1999.
<PAGE> 2
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

COLONIAL INTERMEDIATE HIGH INCOME FUND

FORM N-2

CROSS REFERENCE SHEET

Item Number and Heading Caption in Prospectus
------------------------ --------------------
Part A
------

1. Outside Front Cover Cover Page

2. Inside Front and Outside Cover Page
Back Cover Page

3. Fee Table and Synopsis Fee Table; Prospectus Summary

4. Financial Highlights Financial Highlights

5. Plan of Distribution Cover Page; Prospectus Summary;
The Offer

6. Selling Stockholders Not Applicable

7. Use of Proceeds Use of Proceeds

8. General Description of the Cover Page; Prospectus Summary;
Registrant The Fund; Investment Policies
and Limitations; Risk Factors and
Special Considerations;
Financial Highlights; Information
Regarding Senior Securities;
Description of Shares of Beneficial
Interest; Description of Term Note

9. Management Prospectus Summary; The Adviser;
Information Regarding Senior
Securities; Description of Shares of
Beneficial Interest;
Description of Term Note; Custodian,
Transfer Agent, Dividend
Disbursing Agent and Registrar

10. Capital Stock, Long-Term Description of Term Note; Information
Debt and Other Securities Regarding Senior Securities;
Description of Shares of Beneficial
Interest; Federal Taxation; Investment
Policies and Limitations;
Dividends and Distributions; Dividend
Reinvestment Plan;
Financial Highlights

11. Defaults and Arrears on Not Applicable
Senior Securities

12. Legal Proceedings Not Applicable

13. Table of Contents of the Statement of Additional Information

Caption in Statement of
Additional Information
-------------------------
Part B
-------

14. Cover Page Cover Page

15. Table of Contents Table of Contents

16. General Information and Not Applicable
History

17. Investment Objective and Investment Objective and
Policies Policies; Fundamental
Investment Policies;
Other Investment Policies

18. Management Trustees and Officers

19. Control Persons and Ownership of the Fund
Principal Holders of
Securities

20. Investment Advisory and Fund Charges and Expenses;
Other Services Management of the Fund;
Custodian;
Independent Accountants
21. Brokerage Allocation and Fund Charges and Expenses;
Other Practices Portfolio Transactions

22. Tax Status Taxes

23. Financial Highlights Financial Highlights
<PAGE> 3

COLONIAL INTERMEDIATE HIGH INCOME FUND
[ ] SHARES OF BENEFICIAL INTEREST
ISSUABLE UPON EXERCISE OF
RIGHTS TO SUBSCRIBE FOR SUCH SHARES

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

Colonial Intermediate High Income Fund (the "Fund") is issuing transferable
rights ("Rights") to its shareholders. These Rights will allow you to subscribe
for new shares of beneficial interest of the Fund. For every three Rights that
you receive, you may buy one new Fund share. You will receive one Right for each
outstanding Fund share you own on , 1999 (the "Record Date"). If you
receive less than three Rights in total, you will be entitled to buy one new
share. Also, shareholders on the Record Date may purchase shares not acquired by
other shareholders in this Rights offering (the "Offer"), subject to the
limitations discussed in this prospectus.

The Rights will be listed for trading on the New York Stock Exchange (the
"NYSE") under the symbol "CIF RT." The Fund's shares trade, and the shares
issued pursuant to this Offer will be listed for trading, on the NYSE under the
symbol "CIF." On , 1999, the last reported net asset value per
Fund share was $ and the last reported sale price of a Fund share on the
NYSE was $ . THE PURCHASE PRICE PER SHARE (THE "SUBSCRIPTION PRICE") WILL
BE $ . THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1999 UNLESS EXTENDED AS DESCRIBED IN THIS PROSPECTUS (THE
"EXPIRATION DATE").

AS A RESULT OF THE OFFER YOU MAY EXPERIENCE AN IMMEDIATE DILUTION, WHICH
COULD BE SUBSTANTIAL, OF THE AGGREGATE NET ASSET VALUE OF YOUR SHARES. THIS IS
BECAUSE THE SUBSCRIPTION PRICE PER SHARE AND/OR THE NET PROCEEDS TO THE FUND
FROM EACH NEW SHARE SOLD ARE LIKELY TO BE LESS THAN THE FUND'S NET ASSET VALUE
PER SHARE ON THE EXPIRATION DATE. THIS DILUTION WILL DISPROPORTIONATELY AFFECT
YOU IF YOU DOT NOT EXERCISE YOUR RIGHTS IN FULL. IF YOU DO NOT EXERCISE YOUR
RIGHTS YOU SHOULD EXPECT THAT YOU WILL, AT THE COMPLETION OF THE OFFER, OWN A
SMALLER PROPORTIONAL INTEREST IN THE FUND THAN WOULD BE THE CASE IF YOU
EXERCISED YOUR RIGHTS. THE FUND CANNOT STATE PRECISELY THE EXTENT OF ANY
DILUTION AT THIS TIME BECAUSE THE FUND DOES NOT KNOW WHAT THE NET ASSET VALUE
PER SHARE WILL BE WHEN THE OFFER EXPIRES OR WHAT PROPORTION OF THE RIGHTS WILL
BE EXERCISED. SEE "RISK FACTORS AND SPECIAL CONSIDERATIONS -- DILUTION."

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR ANY OTHER
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIME.

<TABLE>
=================================================================================================================
SUBSCRIPTION PRICE SALES LOAD PROCEEDS TO FUND
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................ $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total Maximum........................ $ $ $
=================================================================================================================
</TABLE>

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

THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE> 4

(continued from cover page)

IN CONNECTION WITH THIS OFFERING, (THE "DEALER MANAGER") MAY
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE RIGHTS
AND THE SHARES HIGHER THAN THEY MIGHT OTHERWISE BE. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NYSE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME. Prior to the Expiration Date, the Dealer Manager may
offer shares of the Fund acquired through its purchase and exercise of Rights,
at prices it sets from time to time. Because the Dealer Manager will determine
the price, it may realize profits or losses independent of any fees described in
this prospectus.

This prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. You should read and to
retain it for future reference. Additional information about the Fund is
contained in the , 1999 Statement of Additional Information (the
"SAI"), which has been filed with the SEC and may be obtained free of charge by
calling Colonial Management Associates, Inc. (the "Advisor") at
[1-800-426-3750]. The SAI is incorporated by reference in (which means it is
considered to be a part of) this prospectus. See page 40 of this prospectus for
a table of contents of the SAI.

All questions and inquiries relating to the Offer should be directed to
Shareholder Communications Corporation (the "Information Agent") at [(800)
733-8481, ext. 486].
------------------------

2
<PAGE> 5

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

PROSPECTUS SUMMARY

This summary highlights some information that is described more fully
elsewhere in this prospectus. It may not contain all of the information that is
important to you. To understand the Offer fully, you should read the entire
document carefully, including the risk factors.

PURPOSE OF THE OFFER

The Board of Trustees of the Fund has determined that it may be in the best
interests of the Fund and its shareholders to increase the number of outstanding
shares of the Fund and to increase the assets of the Fund available for
investment.

In reaching its decision, the Board of Trustees of the Fund was advised by
the Advisor that an increase in the assets of the Fund would permit the Fund to
pursue attractive investment opportunities without selling portfolio
investments. The Advisor believes the Offer may result in greater portfolio
diversification opportunities and enhance its ability to buy and sell larger
blocks of securities on potentially better terms.

The Fund uses leverage when it believes it can borrow money at a lower
interest rate than it can earn on its investments. The Board of Trustees
believes that increasing the Fund's assets will provide the Fund with additional
flexibility in connection with the Fund's leverage, including enhancing its
ability to increase the Fund's existing leverage[, while reducing the overall
effective cost of the leverage.] For a discussion of the anticipated impact of
the Offer on the Fund's leverage, please refer to "Investment Policies and
Limitations" and "Risk Factors and Special Considerations--Risk of Leverage."

In addition, the Board of Trustees believes that increasing the size of the
Fund may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. The Board of
Trustees also believes that a larger number of outstanding shares and a larger
number of beneficial owners of shares could increase the level of market
interest in the Fund and the liquidity of Fund shares on the NYSE. The
transferability of the Rights, which themselves may have a realizable value, may
also give nonparticipating shareholders the opportunity to sell such Rights,
which may be viewed as partial compensation for the potential dilution of their
interest in the Fund as a result of the Offer.

TERMS OF THE OFFER

The first dividend to be paid on Fund shares acquired upon exercise of
Rights will be the first monthly dividend, the record date for which occurs
after the issuance of such shares. It is the Fund's present policy to pay
dividends on the last Friday on or before the 15th day of each month to
shareholders of record on the last business day of the month prior to the
payment date. Except as described below, it is expected that the first dividend
to be paid on shares issued pursuant to the Offer will be paid on or about
, 1999. To accommodate settlement of the Offer, the
1999 record date for dividends may be accelerated so that the
issuance of shares by the Fund in connection with the Offer and the receipt of
proceeds of such issuance by the Fund, subject to certain exceptions, occurs
shortly after the 1999 record date for dividends.

Prior to the Expiration Date, the Dealer Manager may offer shares acquired
through the purchase and exercise of Rights at prices it sets from time to time.
To the extent such shares are issued prior to a dividend record date of the Fund
that precedes the Expiration Date, such shares will be paid the dividend
declared to the same extent as other shares outstanding on such dividend record
date, and thus, the issuance of such shares may have a dilutive effect on the
income per share available for such dividend.

The Advisor will benefit from the Offer because the Advisor's fee is based
on the average weekly net assets of the Fund. In addition, the Advisor may
benefit from the additional leverage the Fund intends to add after completion of
the Offer. See "The Advisor."

- --------------------------------------------------------------------------------
3
<PAGE> 6

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

OVER-SUBSCRIPTION PRIVILEGE

Shareholders on the Record Date who fully exercise all Rights issued to
them (other than those Rights which cannot be exercised because they represent
the right to acquire less than one share) are entitled to buy those shares that
were not bought by other Rights holders. If enough shares are available, all
shareholder requests to buy shares that were not bought by other Rights holders
will be honored in full. If these requests for shares exceed the shares
available, the available shares will be allocated pro rata among those Record
Date shareholders who over-subscribe based on the number of Rights originally
issued to them by the Fund.

METHOD FOR EXERCISING RIGHTS

Except as described below, Subscription Certificates evidencing the Rights
will be sent to Record Date shareholders or their nominees (the "Subscription
Certificates"). If you wish to exercise your Rights, you may do so in the
following ways:

(1) Complete and sign the Subscription Certificate. Mail it in the envelope
provided or deliver the completed and signed Subscription Certificate with
payment in full to [Boston EquiServe] at the address indicated on the
Subscription Certificate. Your completed and signed Subscription Certificate and
payment must be received by the Expiration Date.

(2) Contact your broker, banker or trust company, which can arrange, on
your behalf, to guarantee delivery of payment and delivery of a properly
completed and executed Subscription Certificate pursuant to a notice of
guaranteed delivery ("Notice of Guaranteed Delivery") by the close of business
on the third business day after the Expiration Date. A fee may be charged for
this service. The Notice of Guaranteed Delivery must be received by the
Expiration Date.

SALE OF RIGHTS

The Rights are transferable until the Expiration Date. The [Fund/Dealer
Manager] will use its best efforts to ensure that an adequate trading market for
the Rights will exist, although no assurance can be given that a market for the
Rights will develop. Trading in the Rights on the NYSE may be conducted until
the close of trading on the NYSE on the last business day prior to the
Expiration Date. Rights may be sold by individual holders through brokerage
channels or may be submitted to the Subscription Agent for sale by or to the
Dealer Manager. Any Rights to be submitted to the Subscription Agent must be
received by the Subscription Agent at or prior to 5:00 p.m., New York City time,
two Business Days prior to the Expiration Date. If the Subscription Agent
receives Rights for sale in a timely manner, it will either sell the Rights to
the Dealer Manager or the Dealer Manager will use its best efforts to sell the
Rights. Any commissions will be paid by the selling Record Date shareholder.
Neither the Fund nor the Subscription Agent for the Dealer Manager will be
responsible for Rights that cannot be sold nor will they guarantee any minimum
sale price for the Rights.

OFFERING FEES AND EXPENSES

The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for Shares issued pursuant to the Offer. The Dealer Manager
will pay part of its fee to other broker-dealers that have assisted in
soliciting the exercise of Rights, as described in this prospectus. Other
offering expenses incurred by the Fund are estimated at $500,000, which includes
up to $100,000 that may be paid to the Dealer Manager as partial reimbursement
for its expenses relating to the Offer.

FOREIGN SHAREHOLDERS

Subscription Certificates will not be mailed to shareholders whose record
addresses are outside the United States. Foreign shareholders will be sent
written notice of the Offer, and their Rights will be held or transferred as set
forth in this prospectus.

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

4
<PAGE> 7

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

USE OF PROCEEDS

The estimated net proceeds of the Offer are approximately $ .
This figure is based on the Subscription Price of $ per share and assumes
all shares offered are sold and that offering expenses estimated at
approximately $500,000 are paid. The Advisor anticipates that the Fund will take
up to thirty days to invest these proceeds in accordance with the Fund's
investment objectives and policies under current market conditions. The proceeds
of the Offer will be held in U.S. Government securities and other high-quality,
short-term money market instruments until they are invested in accordance with
the Fund's investment objective and policies.

FURTHER INFORMATION

Please direct any questions relating to the Offer to the Fund's information
agent.

Shareholder Communications Corporation
17 State Street, 27th Floor
New York, New York 10004
[(800) 733-8481, ext. 486]

You may also contact your broker or nominee for information.

IMPORTANT DATES TO REMEMBER

<TABLE>
<CAPTION>
EVENT DATE
- ----- ----
<S> <C>
Record Date........................................... , 1999
Subscription Period................................... , 1999 to
, 1999(a)
Expiration Date....................................... , 1999(a)
Subscription Certificates and Payment for Shares
Due(b).............................................. , 1999(a)
Notice of Guaranteed Delivery Due(b).................. , 1999(a)
Payment for Guarantees of Delivery Due................ , 1999(a)
Confirmation to Participants.......................... , 1999(a)
</TABLE>

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

(a) Unless the Offer is extended.

(b) A shareholder exercising Rights must deliver by , 1999 either
(i) a Subscription Certificate and payment for shares or (ii) a Notice of
Guaranteed Delivery.

INFORMATION REGARDING THE FUND

The Fund has been engaged in business as a diversified, closed-end
management investment company since 1988. The Fund's investment objective is to
seek high current income and total return by investing primarily in lower-rated
corporate debt securities. An investment in the Fund may not be appropriate for
all investors, and no assurance can be given that the Fund's investment
objective will be achieved.

Under normal conditions, the Fund invests primarily in debt securities
rated in the lower categories by established rating agencies or unrated
securities that the Advisor determines are of comparable quality. These
securities are commonly referred to as "high yield," high risk securities or
"junk bonds." They are generally regarded as significantly more speculative and
more likely to default than higher quality debt securities. The Fund may also
purchase and sell options, equity securities, higher rated debt securities,
futures contracts and related options, and foreign and restricted securities,
and may enter into repurchase agreements. See "Investment Policies and
Limitations" and the Statement of Additional Information. Lower rated and
comparable unrated securities and foreign securities may be subject to a greater
degree of risk than higher rated and domestic securities, respectively. See
"Risk Factors and Special Considerations."

Based on current market conditions, the Fund's Board of Trustees has
authorized the Fund to increase its borrowings at or following the completion of
the Offer in order that the percentage of the Fund's assets, including the
proceeds from the Offer, representing leverage may be maintained at or about
[29]% following

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

5
<PAGE> 8

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

completion of the Offer. Due to possible changes in market conditions, there are
no assurances that the Fund will borrow additional amounts or that any
additional borrowings will be obtained by the Fund at favorable interest rates.
The Fund reserves the right at any time, to increase its level of borrowings to
maintain or increase the Fund's current level of leverage to the extent
permitted under the Investment Company Act of 1940, as amended (the "1940 Act"),
and any relevant agreements between the Fund and third parties. The inability to
increase, or delays in increasing, the Fund's leverage could, depending on
market conditions, adversely affect the Fund's earnings and net asset value. See
"Risk Factors and Special Considerations--Risk of Leverage."

INFORMATION REGARDING THE ADVISOR

Colonial Management Associates, Inc., an investment adviser registered
under the Investment Advisors Act of 1940, as amended, has served as investment
adviser to the Fund since its inception. The Advisor is a wholly owned
subsidiary of Liberty Funds Group, LLC ("LFG"), and both LFG and the Advisor are
indirect subsidiaries of Liberty Mutual Insurance Company, an underwriter of
workers' compensation insurance and a property and casualty insurer in the U.S.
The Advisor has been an investment Advisor since 1931. As of the date of this
Prospectus, the Advisor serves as investment adviser for open-end and
closed-end management investment companies.

Scott B. Richards is the lead manager of the Fund. Carl C. Ericson is the
co-manager of the Fund.

Mr. Richards, a Senior Vice President of the Advisor, has managed the Fund
since [May 3, 1999]. Prior to joining the Advisor, he was employed with State
Street Research & Management Company as a Vice President and a Portfolio Manager
since 1994. Carl C. Ericson, Senior Vice President and Director of the Advisor
and Manager of the Advisor's Taxable Fixed Income Group, has managed the Fund
since [ ] and has been employed by the Advisor as a Portfolio Manager since
1985.

The Fund pays the Advisor a monthly fee at the annual rate of 0.65% of the
Fund's average weekly net assets. Since the Advisor's fee is based on the
average weekly net assets of the Fund, the Advisor will benefit from any
increase in the Fund's net assets resulting from the Offer. The Board of
Trustees of the Fund has approved, subject to shareholder approval, an amendment
to the Fund's agreement with the Advisor under which the Fund would pay the
Advisor a percentage of the earnings on the Fund's leverage in excess of the
cost of such leverage. See "The Advisor."

RISK FACTORS AND SPECIAL CONSIDERATIONS

The following summarizes some of the matters that you should consider
before investing in the Fund through the Offer.

Dilution. As a result of the Offer, you may experience an immediate
dilution, which could be substantial, of the aggregate net asset value of your
shares. This is because the Subscription Price per Share may be less than the
Fund's net asset value per share on the Expiration Date, and the number of
shares outstanding after the Offer is likely to increase in a greater percentage
than the increase in the size of the Fund's assets. This dilution will
disproportionately affect you if you do not exercise your rights in full. If you
do not fully exercise your Rights, you should expect that you will, at the
completion of the Offer, own a smaller proportional interest in the Fund than
you would otherwise. The Fund cannot state precisely the amount of any such
dilution, because it is not known at this time what the net asset value per
share will be on the Expiration Date or what proportion of the Rights will be
exercised. For example, assuming that all Rights are exercised at the
Subscription Price of $ , which is % below the Fund's net asset value of
$ per share as of , 1999, the Fund's net asset value per share
(after payment of the Dealer Manager and soliciting fees and estimated offering
expenses) would be reduced by approximately $ per share (or %). If you do
not wish to exercise your Rights, you should consider selling these Rights as
set forth in this prospectus. Any cash you receive from selling your Rights
should serve as partial compensation for any possible dilution of your interest
in the Fund. The Fund cannot give any assurance, however, that a market for the
Rights will develop or that the Rights will have any value. For a more detailed
discussion about dilution, please refer to "Risk Factors and Special
Considerations -- Dilution."

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

6
<PAGE> 9

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

Leverage. Leverage creates the opportunity for greater total returns, but
at the same time involves certain risks. Leverage increases the volatility and
exaggerates increases or decreases in the net asset value of the Fund. If the
investment performance of the proceeds of any leverage fails to cover the
interest or dividends payable on such leverage, the value of the Fund's shares
may decrease more quickly and dividends paid by the Fund could be reduced or
eliminated. This is the speculative effect of leverage.

At the date of this prospectus, the Fund intends, but is not committed, to
add incremental leverage after completion of the Offer. Inability to increase,
or delays in increasing, the Fund's leverage could, depending on market
conditions, adversely affect the Fund's earnings, distributions and net asset
value. See "Risk Factors and Special Considerations -- Leverage." The Advisor
may benefit from the intended addition of incremental leverage by the Fund. See
"The Advisor."

Discount from Net Asset Value. Shares of closed-end funds frequently trade
at a market price that is less than the value of the net assets attributable to
those shares. The possibility that shares of the Fund will trade at a discount
from net asset value is a risk separate and distinct from the risk that the
Fund's net asset value will decrease. The Fund's shares have traded in the
market above, at and below net asset value at various times since the
commencement of the Fund's operations. See "Trading and Net Asset Value
Information."

Lower-Rated Investments. Debt securities offering the high current income
sought by the Fund will ordinarily be rated in the lower rating categories of
recognized rating agencies or will be unrated. Such securities are generally
regarded by the rating agencies as predominately speculative with respect to
their capacity to pay interest and repay principal and more likely to default
than higher quality debt securities. The values of such securities tend to
reflect individual corporate developments to a greater extent than higher rated
securities, which tend to react primarily to changes in the general market level
of interest rates. Relative to other debt securities, the values of lower rated
debt securities may be more volatile because: (i) an economic downturn may more
significantly impact their potential for default, or (ii) the secondary market
for such securities may at times be less liquid or respond more adversely to
negative publicity or investor perceptions, making it more difficult to value or
dispose of the securities. In addition, the trading market for lower rated
securities is generally less liquid than the market for higher rated securities.
As of , 1999, approximately % of the market value of the
Fund's total investments was represented by debt securities regarded by the
rating agencies as below investment grade (that is, rated below BBB by Standard
& Poor's Ratings Group or below Baa by Moody's Investors Service, Inc. (the
"Rating Agencies")) or unrated securities of comparable quality.

For a more detailed discussion of the risks and special considerations with
respect to lower rated securities, see "Risk Factors and Special
Considerations--Lower-Rated Investments."

Dividends and Distributions. Based on the Advisor's assessment of current
market conditions in the lower rated debt market and available leverage
opportunities, the Board of Trustees believes the Offer will not result in a
decrease in the Fund's current level of dividends per share. However, there can
be no assurance that the Fund will be able to maintain its current level of
dividends per share, and the Board of Trustees may, in its sole discretion,
change the Fund's current level of dividends per share in response to market or
other conditions.

For a more detailed discussion of the risks and special considerations with
respect to dividends and distributions, see "Risk Factors and Special
Considerations--Dividends and Distributions."

Year 2000. Like other investment companies, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Advisor, other service providers
and the companies in which the Fund invests do not properly process and
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem." The Fund's service providers are
taking steps that they believe are reasonably designed to address the Year 2000
Problem, including communicating with vendors who furnish services, software and
systems to the Fund, to provide that date-related information and data can be
properly processed after January 1, 2000. Many mutual fund service providers and
vendors, including the Fund's service providers, are in the process of making
Year 2000 modifications to their software and systems and believe that such
modifications will be

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

7
<PAGE> 10

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

completed on a timely basis prior to January 1, 2000. In addition, Year 2000
readiness is one of the factors considered by the Advisor in its assessment of
companies in which the Fund invests to the extent that information is readily
available. However, no assurances can be given that the Fund will not be
adversely affected by these matters.

Other Matters. There are additional matters which should be considered in
connection with an investment in the Fund, including provisions of the Fund's
Agreement and Declaration of Trust, limitations on the ability of the Fund to
declare dividends or other distributions contained in the 1940 Act and in
agreements with third parties, and the possible conversion of the Fund to an
open-end investment company. See "Risk Factors and Special Considerations" and
"Share Repurchases; Conversion to Open-End Status."

You should carefully consider your ability to assume the foregoing risks
before making an investment in the Fund. An investment in shares of the Fund is
not appropriate for all investors. See "Risk Factors and Special
Considerations."

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

8
<PAGE> 11

FEE TABLE

<TABLE>
<S> <C>
Shareholder Transaction Expenses
Sales Load (as a percentage of the Subscription Price per
share)(1)................................................. 3.75%
Annual Expenses (as a percentage of average weekly net
assets attributable to shares)(2)
Management Fees(3).......................................... 0.65%
Interest and Amortization of Deferred Debt Issuance
Expense................................................... --%
Other Expenses.............................................. --%
-----
Total Annual Expenses............................. --%
=====
</TABLE>

EXAMPLE:

<TABLE>
<CAPTION>
CUMULATIVE EXPENSES PAID FOR THE PERIOD OF:
--------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming a 5% annual return
throughout the periods.......................... $-- $ -- $ -- $ --
</TABLE>

- ---------------
(1) The Fund has agreed to pay the Dealer Manager a fee for its financial
advisory, marketing and soliciting services equal to 3.75% of the aggregate
Subscription Price for shares issued pursuant to the Offer. The Dealer
Manager will reallow to broker-dealers included in the selling group to be
formed and managed by the Dealer Manager ("Selling Group Members")
solicitation fees equal to 2.50% of the Subscription Price per share for
each share issued pursuant to the Offer as a result of their soliciting
efforts. In addition, the Dealer Manager will reallow, to other
broker-dealers that have executed and delivered a soliciting dealer
agreement and have solicited the exercise of Rights, solicitation fees equal
to 0.50% of the Subscription Price per share for each share issued pursuant
to the exercise of Rights as a result of their soliciting efforts, subject
to a maximum fee based upon the number of shares held by each broker-dealer
through The Depository Trust Company ("DTC") on the Record Date. The Fund
has also agreed to reimburse the Dealer Manager for its expenses relating to
the Offer up to an aggregate of $[100,000]. In addition, the Fund has agreed
to pay fees to the First Data Investor Services Group, Inc. (the
"Subscription Agent") and the Information Agent, estimated to be $[35,000]
and $[27,000], respectively, for their services related to the Offer,
excluding reimbursement for their out-of-pocket expenses. These fees and
expenses will be borne by the Fund and indirectly by all of the Fund's
shareholders, including those shareholders who do not exercise their Rights.

(2) Amounts are based on estimated amounts for the Fund's current fiscal year
after giving effect to anticipated net proceeds of the Offer, assuming that
all of the Rights are exercised.

(3) The Fund pays the Advisor a monthly fee at an annual rate of 0.65% of the
Fund's average weekly net assets. In addition, the Board of Trustees of the
Fund has approved, subject to shareholder approval, an amendment to the
Fund's agreement with the Advisor under which the Fund would pay the Advisor
a percentage of the earnings on the Fund's leverage in excess of the cost of
such leverage. See "The Advisor."

THE FOREGOING FEE TABLE AND EXAMPLE ARE INTENDED TO ASSIST INVESTORS IN
UNDERSTANDING THE COSTS AND EXPENSES THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY OR INDIRECTLY.

The Example set forth above assumes reinvestment of all dividends and
distributions at net asset value, payment of a 3.75% sales load and an annual
expense ratio of %. The table above and the assumption in the Example of a
5% annual return are required by SEC regulations applicable to all management
investment companies. THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR ANNUAL RATES OF RETURN. ACTUAL EXPENSES OR ANNUAL
RATES OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE
EXAMPLE. In addition, while the Example assumes reinvestment of all dividends
and distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."

9
<PAGE> 12

FINANCIAL HIGHLIGHTS(A)

The table below sets forth certain specified information for a share of
beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for each period presented have been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants, whose
unqualified report is included in the Fund's October 31, 1998 Annual Report and
is incorporated by reference in the Statement of Additional Information. The
financial highlights should be read in conjunction with the financial statements
and notes thereto included in the Fund's October 31, 1998 Annual Report, which
is available upon request from the Information Agent.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning
of period................... $ 7.270 $ 6.890 $ 6.620 $ 6.280 $ 6.920 $ 6.430
-------- -------- ------- ------- ------- -------
Net investment income........ 0.699 0.699(b) 0.699 0.696 0.693 0.709
Net realized and unrealized
gain (loss)................. (1.077) 0.383 0.258 0.340 (0.587) 0.497
-------- -------- ------- ------- ------- -------
Total from investment
operations.............. (0.378) 1.082 0.957 1.036 0.106 1.206
-------- -------- ------- ------- ------- -------
Distributions:
From net investment income.. (0.692) (0.702) (0.687) (0.696) (0.746) (0.716)
From paid-in capital........ -- -- -- -- -- --
-------- -------- ------- ------- ------- -------
Total distributions....... (0.692) (0.702) (0.687) (0.696) (0.746) (0.716)
-------- -------- ------- ------- ------- -------
Net asset value -- end of
period...................... $ 6.200 $ 7.270 $ 6.890 $ 6.620 $ 6.280 $ 6.920
======== ======== ======= ======= ======= =======
Per share market value:
End of Period............... $ 6.812 $ 7.562 $ 7.125 $ 6.875 $ 5.750 $ 6.625
======== ======== ======= ======= ======= =======
Total return based on market
value(d).................... (0.74)% 16.97% 14.62% 33.00% ( 2.80)% 17.89%
======== ======== ======= ======= ======= =======
Net assets, end of
period(e)................... $124,480 $107,774 $99,925 $93,984 $87,519 $95,164
======== ======== ======= ======= ======= =======
Ratio of operating expenses
to average net assets....... 0.88%(b) 0.89%(b) 0.98%(b) 0.95%(b) 0.97% 1.00%
Ratio of interest and
amortization of deferred
debt issuance expenses to
average net assets.......... 2.11% 1.96% 2.07% 1.94% 1.91% 2.66%
Ratio of net investment
income to average net
assets...................... 9.70% 9.63%(b) 10.11%(b) 10.76%(b) 10.40% 10.62%
Portfolio turnover rate...... 69% 92% 92% 92% 160% 135%

<CAPTION>
FOR THE FISCAL YEARS ENDED OCTOBER 31,
---------------------------------------
1992 1991 1990 1989
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value -- beginning
of period................... $ 6.290 $ 4.880 $ 8.260 $ 9.220
------- ------- ------- --------
Net investment income........ 0.773 0.800 1.072 1.223
Net realized and unrealized
gain (loss)................. 0.142 1.385 (3.332) (0.983)
------- ------- ------- --------
Total from investment
operations.............. 0.915 2.185 (2.260) (0.240)
------- ------- ------- --------
Distributions:
From net investment income.. (0.775) (0.775) (1.106) (1.200)
From paid-in capital........ -- -- (0.014)(c) --
------- ------- ------- --------
Total distributions....... (0.775) (0.775) (1.120) (1.200)
------- ------- ------- --------
Net asset value -- end of
period...................... $ 6.430 $ 6.290 $ 4.880 $ 8.260
======= ======= ======= ========
Per share market value:
End of Period............... $ 6.250 $ 6.000 $ 4.500 $ 7.375
======= ======= ======= ========
Total return based on market
value(d).................... 17.39% 54.29% (27.10)% (11.20)%
======= ======= ======= ========
Net assets, end of
period(e)................... $87,149 $83,613 $64,872 $107,769
======= ======= ======= ========
Ratio of operating expenses
to average net assets....... 1.00% 1.38% 1.31% 1.24%
Ratio of interest and
amortization of deferred
debt issuance expenses to
average net assets.......... 3.24% 3.80% 4.23% 3.26%
Ratio of net investment
income to average net
assets...................... 11.98% 14.40% 15.86% 13.48%
Portfolio turnover rate...... 78% 30% 12% 23%
</TABLE>

- ---------------
(a) Per share data are calculated based on average shares outstanding during the
period.

(b) The benefits derived from custody credits and directed brokerage
arrangements had an impact of 0.01% and $0.001 per share in 1997 only. Prior
years' ratios are net of benefits received, if any.

(c) Because of differences between book and tax basis accounting, there was no
return of capital for federal income tax purposes.

(d) Total return at market value assuming all distributions reinvested and
excluding brokerage commissions.

(e) Dollars in thousands.

(f) Annualized.

10
<PAGE> 13

CAPITALIZATION
AT , 1999

<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AMOUNT HELD
EXCLUSIVE OF AMOUNT BY THE FUND
HELD BY THE FUND OR FOR ITS
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT ACCOUNT
- -------------- ----------------- ------------------- -----------
<S> <C> <C> <C>
Shares of Beneficial Interest, no par Unlimited shares -0- shares
value...................................
Term Note................................. -- $ (1) N/A
</TABLE>

INFORMATION REGARDING SENIOR SECURITIES

The following table shows certain information regarding each class of
senior security of the Fund as of the end of each fiscal year of the Fund since
its inception.

<TABLE>
<CAPTION>
AT TOTAL AMOUNT ASSET COVERAGE
OCTOBER 31 OUTSTANDING PER UNIT(2)
---------- ------------ --------------
<S> <C> <C> <C>
Senior Extendible Notes(1)............................. 1989 $37,400,000 $2,880
1990 27,400,000 2,370
1991 27,400,000 3,050
1992 27,400,000 3,180
1993 27,400,000 3,470
1994 27,400,000 3,190
1995 27,400,000 3,430
1996 0 --

Term Note(1)........................................... 1996 $27,400,000 $3,650
1997 27,400,000 3,930
1998 43,500,000 2,632

Revolving Loan(1)...................................... 1998 3,800,000 2,632
Total............................................. 1998 47,300,000 2,632
</TABLE>

- ---------------
(1) On July 15, 1996, the Fund redeemed the remaining $27,400,000 principal
amount of its Senior Extendible Notes, which carried an annual interest rate
through July 15, 1996 of 6.21%, for $28,250,770. The Fund thereafter entered
into a credit agreement dated as of June 12, 1996 with Bank of America
Illinois, pursuant to which the Fund issued a term note (the "Original Term
Note") to Bank of America Illinois in the aggregate principal amount of
$27,400,000, due in full on June 14, 1999 and bearing interest at a fixed
annual rate of 7.33%. On May 19, 1998, the Fund entered into an Amended and
Restated Credit Agreement (the "Credit Agreement") with Bank of America
National Trust and Savings Association, successor by merger to Bank of
America Illinois ("Bank of America"), pursuant to which the Fund issued a
new term note (the "Term Note") to Bank of America in the aggregate
principal amount of $44,900,000. The $27,400,000 borrowing (the "First
Loan") under the Original Term Note was refinanced under the Term Note with
the same maturity and interest rate. In addition, on May 19, 1998, the Fund
borrowed under the Term Note the aggregate principal amount of $6,900,000
(the "Second Loan") from Bank of America, which amount is due in full on May
19, 2001 and bears interest at the fixed annual rate of 6.36%. On June 14,
1999, the First Loan was refinanced under the First Amendment to Credit
Agreement with two term notes of $13,700,000 each, maturing on June 13, 2000
and June 13, 2002, respectively, with interest at the fixed annual rates of
6.17% and 6.84%, respectively (the "Third Loan" and the "Fourth Loan,"
respectively). On June 29, 1998, the Fund entered into a Second Amended and
Restated Credit Agreement with Bank of America and borrowed under the Term
Note an additional $9,200,000, which amount is due in full on June 29, 2001
and bears interest at the fixed annual rate of 6.26% (the "Fifth Loan"). On
, 199 , the Fund also borrowed under a Revolving Loan with
Bank of America in the amount of $3,800,000, that is due in full on June 29,
2001 and bears interest at a fixed annual rate of 6.29% (the "Sixth Loan").
The combined weighted average interest rate of the $47,300,000 aggregate
principal amount outstanding under the Term Note and the Revolving Loan is
6.42%. See "Description of Term Note."

(2) Amount shown is per $1,000 of Senior Extendible Note, Term Note or Revolving
Loan, as the case may be. Calculated by subtracting the Fund's total
liabilities from the Fund's total assets and dividing such amount by the
quotient of (a) the principal amount of outstanding Senior Extendible Notes,
the Term Note or the Revolving Loan, as the case may be, divided by (b)
$1,000.

11
<PAGE> 14

TRADING AND NET ASSET VALUE INFORMATION

In the past, the Fund's shares have traded at various times at either a
premium or a discount in relation to net asset value. [Although the Fund's
shares recently have been trading at a premium above net asset value,] there can
be no assurance that this premium will continue after the Offer or that the
shares will not again trade at a discount. Shares of other closed-end investment
companies frequently trade at a discount from net asset value. See "Risk Factors
and Special Considerations."

The following table shows the high and low sales prices of the Fund's
shares on the New York Stock Exchange Composite Tape, quarterly trading volume
on the NYSE, the high and low net asset value per share and the high and low
premium or discount at which the Fund's shares were trading for each fiscal
quarter during the two most recent fiscal years and for the fiscal quarters
ended January 31, 1999, April 30, 1999 and July 31, 1999.

<TABLE>
<CAPTION>
PREMIUM/
(DISCOUNT)
TO NET ASSET
MARKET PRICE QUARTERLY NET ASSET VALUE VALUE(%)
---------------- TRADING ---------------- ------------
QUARTER ENDED HIGH LOW VOLUME HIGH LOW HIGH LOW
- ------------- ---- --- --------- ---- --- ---- ---
(THOUSANDS
OF SHARES)
<S> <C> <C> <C> <C> <C> <C> <C>
January 31, 1997................ $7.375 $7.125 1,846.1 $7.09 $6.90 5.5% 0.5%
April 30, 1997.................. 7.500 7.125 1,677.2 7.20 6.85 6.7% 0.5%
July 31, 1997................... 7.750 7.375 1,618.5 7.30 6.98 7.7% 3.6%
October 31, 1997................ 7.938 7.375 1,501.4 7.44 7.25 6.8% 0.9%
January 31, 1998................ 7.938 7.340 1,424.6 7.49 7.28 7.1% 0.0%
April 30, 1998.................. 8.188 7.563 1,586.2 7.52 7.41 9.2% 0.7%
July 31, 1998...................
October 31, 1998................
January 31, 1999................
April 30, 1999..................
July 31, 1999...................
</TABLE>

The net asset values per share of the Fund at the close of business on
, 1999 (the last trading date on which the Fund publicly reported
its net asset value prior to the announcement of the Offer) and on ,
1999 (the last trading date prior to the date of this prospectus on which the
Fund publicly reported its net asset value) were $ and , respectively,
and the last reported sales prices of a share of the Fund on the NYSE on those
dates were $ and $ , respectively.

12
<PAGE> 15

THE FUND

The Fund is a diversified, closed-end management investment company with a
leveraged capital structure. The Fund's investment objective is to seek high
current income and total return by investing primarily in lower-rated corporate
debt securities. Under normal market conditions, the Fund invests primarily in a
professionally managed, diversified portfolio of debt securities rated in the
lower categories by the Rating Agencies (consisting principally of securities
rated "BBB"/"Baa" or lower by the Rating Agencies(1)) or nonrated debt
securities deemed by the Advisor to be of comparable quality. Securities rated
"BB"/"Ba" or lower are commonly referred to as "high yield," high risk
securities or "junk bonds." The Fund's investments are subject to restrictions
on investments contained in the Credit Agreement. See "Description of Term
Note--Restrictive Covenants." Such securities are generally regarded by the
Rating Agencies as significantly more speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation
and more likely to default than higher quality debt securities. In addition to
investing in lower rated securities, the Fund may engage in, among other
activities, certain options activities, investments in equity securities and
higher rated debt securities, the use of futures contracts and options thereon
and repurchase agreements. The Fund may also invest in foreign and restricted
securities. See "Investment Policies and Limitations" and the Statement of
Additional Information. Lower rated and comparable nonrated securities and
foreign securities may be subject to a greater degree of risk than higher rated
and domestic securities, respectively. See "Risk Factors and Special
Considerations."

The capital structure of the Fund has been designed to take advantage of
the historical spread in yields between lower rated securities and
representative U.S. Treasury securities, compared with the average default loss
on such lower rated securities. In addition, through investment leverage,
investors in the Fund receive increased yields to the extent that the rate of
return (i.e., the current interest yield on the Fund's portfolio reduced by the
actual default loss rate experienced on that portfolio) earned on the Fund's
assets exceeds, after expenses of Fund management, the interest rate on the Term
Note. Conversely, to the extent that the rate of return on the portfolio does
not exceed the interest rate on the Term Note, yields to investors in the shares
will be reduced.

The Fund is a closed-end investment company. Closed-end investment
companies differ from open-end investment companies (commonly referred to as
"mutual funds") in that closed-end investment companies have a fixed capital
base, whereas open-end companies issue securities redeemable at net asset value
at any time at the option of the shareholder and typically engage in a
continuous offering of their shares. Accordingly, open-end investment companies
are subject to periodic asset in-flows and out-flows that can complicate
portfolio management. Closed-end investment companies do not face the prospect
of having to liquidate portfolio holdings to satisfy redemptions at the option
of shareholders or having to maintain cash positions to meet the possibility of
such redemptions. The Fund will, however, be required to have sufficient cash or
cash equivalents to meet interest payments on the Term Note and to fund certain
redemptions of the Term Note in certain circumstances. See "Description of Term
Note" and "Description of Shares of Beneficial Interest."

The Fund was organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts on May 24, 1988 and has registered with the
Commission under the 1940 Act. The Fund's principal office is located at One
Financial Center, Boston, Massachusetts 02111. The Fund's Advisor is Colonial
Management Associates, Inc., an investment management firm registered with the
Commission under the Investment Advisors Act of 1940, as amended. See "The
Advisor."

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

1 Throughout this Prospectus, references to ratings by the Rating Agencies will
indicate the S&P rating followed by the Moody's rating in the format shown.

13
<PAGE> 16

THE OFFER

PURPOSE OF THE OFFER

In reaching its decision, the Board of Trustees of the Fund was advised by
the Fund's investment adviser, Colonial Management Associates, Inc. (the
"Advisor"), that an increase in the assets of the Fund would permit the Fund to
pursue attractive investment opportunities in the "high yield," high risk
securities market, while retaining portfolio investments that the Advisor
believes should continue to be held. The Advisor believes the Offer may result
in greater portfolio diversification opportunities and enhance its ability to
buy and sell larger blocks of securities on potentially better terms.

The Fund maintains a leveraged capital structure when it believes such a
capital structure is of potential benefit to shareholders. The Fund utilizes
leverage seeking to enhance returns to shareholders by borrowing capital at a
lower interest rate than that which the Fund earns on its investments. The Board
of Trustees believes that increasing the Fund's assets will provide the Fund
with additional flexibility in connection with the Fund's leverage, including
enhancing its ability to increase the Fund's existing leverage, [while reducing
the overall effective cost of the leverage.] For a discussion of the anticipated
impact of the Offer on the Fund's leverage, please refer to "Investment Policies
and Limitations" and "Risk Factors and Special Considerations--Risk of
Leverage."

In addition, the Board of Trustees believes that increasing the size of the
Fund may lower the Fund's expenses as a proportion of average net assets because
the Fund's fixed costs can be spread over a larger asset base. The Board of
Trustees also believes that a larger number of outstanding shares and a larger
number of beneficial owners of shares could increase the level of market
interest in the Fund and the liquidity of Fund shares on the NYSE. The
distribution to shareholders of transferable Rights which themselves may have a
realizable value will also afford nonparticipating shareholders the potential of
receiving a cash payment upon sale of such Rights, receipt of which may be
viewed as partial compensation for the dilution of their interest in the Fund
that may result from the Offer.

The Board of Trustees also considered the impact of the Offer on the Fund's
current distributions. Based on the Advisor's assessment of current market
conditions in the lower rated debt market and available leverage opportunities,
the Board of Trustees believes the Offer will not result in a decrease in the
Fund's current level of dividends per share. For a further discussion of the
anticipated impact of the Offer on the Fund's dividends, please refer to "Risk
Factors and Special Considerations--Dividends and Distributions."

The Fund may, in the future and at its discretion, choose to make
additional rights offerings from time to time for a number of shares and on
terms which may or may not be similar to the Offer. Any such future rights
offering will be made in accordance with the 1940 Act.

TERMS OF THE OFFER

The Fund is issuing to its Record Date shareholders, as of the close of
business on the Record Date, Rights entitling the holders thereof to subscribe
for up to shares of the Fund. Each such Record Date shareholder is
being issued one Right for each whole share owned on the Record Date. The Rights
entitle the holders thereof to subscribe for one share for every three Rights
held (1-for-3). Fractional shares will not be issued upon the exercise of
Rights. Record Date shareholders issued fewer than three Rights are entitled to
subscribe for one share. Rights may be exercised at any time during the
Subscription Period, which commences on , 1999 and ends at 5:00
p.m., New York City time, on , 1999, unless extended by the Fund.
The Rights are evidenced by Subscription Certificates that will be mailed to

14
<PAGE> 17

Record Date shareholders promptly following the Record Date, except as discussed
below under "Foreign Shareholders."

Shares attributable to Rights that are not exercised will be offered, by
means of the over subscription privilege (the "Over-Subscription Privilege"), to
those Record Date shareholders who have exercised all Rights issued to them and
who wish to acquire more than the number of shares they are entitled to purchase
pursuant to the exercise of their Rights (other than those Rights which cannot
be exercised because they represent the right to acquire less than one share).
Shares acquired pursuant to the Over-Subscription Privilege are subject to
allotment, as more fully discussed below under "Over-Subscription Privilege."
For purposes of determining the maximum number of shares a shareholder may
acquire pursuant to the Offer, shareholders whose shares are held of record by
Cede & Co. ("Cede"), as nominee for DTC, or by any other depository or nominee
will be deemed to be the holders of the Rights that are issued to Cede or such
other depository or nominee on their behalf.

There is no minimum number of Rights which must be exercised in order for
the Offer to close.

The first dividend to be paid on shares acquired upon exercise of Rights
will be the first monthly dividend, the record date for which occurs after the
issuance of such shares. It is the Fund's present policy to pay dividends on the
last Friday on or before the 15th day of each month to shareholders of record on
the last business day of the month prior to the payment date. Except as
described below, it is expected that the first dividend to be paid on shares
issued pursuant to the Offer will be paid on or about , 1999. To
accommodate settlement of the Offer, the 1999 record date for
dividends may be accelerated so that the issuance of shares by the Fund in
connection with the Offer and the receipt of proceeds of such issuance by the
Fund, subject to certain exceptions, occurs shortly after the 1999
record date for dividends.

OVER-SUBSCRIPTION PRIVILEGE

Shares attributable to Rights that are not exercised (the "Excess Shares")
will be offered, by means of the Over-Subscription Privilege, to the Record Date
shareholders who have exercised all exercisable Rights issued to them (other
than those Rights which cannot be exercised because they represent the right to
acquire less than one Share) and who wish to acquire more than the number of
shares for which the Rights issued to them are exercisable. Record Date
shareholders should indicate, on the Subscription Certificate which they submit
with respect to the exercise of the Rights issued to them, how many Excess
Shares they are willing to acquire pursuant to the Over-Subscription Privilege.
If sufficient Excess Shares remain, all Record Date shareholder
over-subscription requests will be honored in full. If Record Date shareholder
requests for shares pursuant to the Over-Subscription Privilege exceed the
Excess Shares available, the available Excess Shares will be allocated pro rata
among Record Date shareholders who over-subscribe based on the number of Rights
originally issued to such Record Date shareholders.

Banks, brokers, trustees and other nominee holders of Rights will be
required to certify to the Subscription Agent, before any Over-Subscription
Privilege may be exercised with respect to any particular beneficial owner, as
to the aggregate number of Rights exercised pursuant to the Offer other than
through the Over-Subscription Privilege (in the "Primary Subscription") and the
number of shares subscribed for pursuant to the Over-Subscription Privilege by
such beneficial owner and that such beneficial owner's Primary Subscription was
exercised in full. Nominee Holder Over-Subscription Forms and Beneficial Owner
Certification Forms will be distributed to banks, brokers, trustees and other
nominee holders with the Subscription Certificates.

The Fund will not offer or sell in connection with the Offer any shares
that are not subscribed for pursuant to the Primary Subscription or the
Over-Subscription Privilege.

15
<PAGE> 18

SUBSCRIPTION PRICE

The Subscription Price per share for the shares to be issued pursuant to
the Offer will be $ .

The Fund announced the Offer after the close of trading on the NYSE on
, 1999. The net asset values per share at the close of business
on , 1999 (the last trading date on which the Fund publicly
reported its net asset value prior to the announcement) and on ,
1999 (the last trading date prior to the date of this prospectus on which the
Fund publicly reported its net asset value) were $
and $ , respectively, and the last reported sales prices of a share of the
Fund on the NYSE on those dates were $ and $ , respectively.

EXPIRATION OF THE OFFER

The Offer will expire at 5:00 p.m., New York City time, on ,
1999, unless extended by the Fund. The Rights will expire on the Expiration Date
and thereafter may not be exercised. Any extension of the Offer will be followed
as promptly as practicable by announcement thereof. Such announcement will be
issued no later than 9:00 a.m., New York City time, on the next business day
following the previously scheduled Expiration Date. Without limiting the manner
in which the Fund may choose to make such announcement, the Fund will not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such announcement other than by making a release to
the Dow Jones News Service or such other means of announcement as the Fund deems
appropriate.

SUBSCRIPTION AGENT

The subscription agent is First Data Investor Services Group, Inc. (the
"Subscription Agent"). The Subscription Agent will receive for its
administrative, processing, invoicing and other services as subscription agent a
fee estimated to be approximately $[35,000], excluding reimbursement for its
out-of-pocket expenses related to the Offer. The Subscription Agent is also the
Fund's transfer agent, dividend-paying agent and registrar for the shares.
Questions regarding the Subscription Certificates should be directed to
Shareholder Communications Corporation at [(800) 733-8481, ext. 486] (toll
free); shareholders may also consult their brokers or nominees. Completed
Subscription Certificates must be sent together with proper payment of the
Subscription Price for all shares subscribed for in the Primary Subscription and
the Over-Subscription Privilege (for Record Date shareholders) to the
Subscription Agent by one of the methods described below. Alternatively, Notices
of Guaranteed Delivery may be sent by facsimile to (781) 794-6333 to be received
by the Subscription Agent prior to 5:00 p.m., New York City time, on the
Expiration Date. Facsimiles should be confirmed by telephone at (781) 794-6388.
The Fund will accept only properly completed and executed Subscription
Certificates actually received at any of the addresses listed below, prior to
5:00 p.m., New York City time, on the Expiration Date or by the close of
business on the third Business Day after the Expiration Date following timely
receipt of a Notice of Guaranteed Delivery. See "Payment for Shares" below.

<TABLE>
<S> <C>
(1) BY FIRST CLASS MAIL: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Corporate Reorganization
P.O. Box 9049
Boston, Massachusetts 02205-9838

(2) BY OVERNIGHT COURIER: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Corporate Reorganization
70 Campanelli Drive
Braintree, Massachusetts 02184

(3) BY HAND: First Data Investor Services Group, Inc.
c/o BankBoston N.A.
Securities Transfer & Reporting Services, Inc.
55 Broadway, Third Floor
New York, NY 10006
</TABLE>

DELIVERY TO AN ADDRESS OTHER THAN ONE OF THE ADDRESSES LISTED ABOVE WILL NOT
CONSTITUTE VALID DELIVERY.

16
<PAGE> 19

METHOD FOR EXERCISING RIGHTS

Rights are evidenced by Subscription Certificates that, except as described
below under "Foreign Shareholders," will be mailed promptly following the Record
Date to Record Date shareholders or, if a shareholder's shares are held by Cede
or any other depository or nominee on their behalf, to Cede or such depository
or nominee. Rights may be exercised by completing and signing the Subscription
Certificate that accompanies this prospectus and mailing it in the envelope
provided, or otherwise delivering the completed and signed Subscription
Certificate to the Subscription Agent, together with payment in full for the
shares to be purchased at the Subscription Price by the Expiration Date. Rights
may also be exercised by contacting your broker, bank or trust company, which
can arrange, on your behalf, to guarantee delivery of payment and delivery of a
properly completed and executed Subscription Certificate pursuant to a Notice of
Guaranteed Delivery by the close of business on , 1999, the third
business day after the Expiration Date. A fee may be charged for this service.
Fractional shares will not be issued upon the exercise of Rights. Record Date
Shareholders issued fewer than three Rights are entitled to subscribe for one
share pursuant to the Primary Subscription. Completed Subscription Certificates
must be received by the Subscription Agent prior to 5:00 p.m., New York City
time, on the Expiration Date at one of the addresses set forth above (unless the
guaranteed delivery procedures are complied with as described below under
"Payment for Shares").

Shareholders Who Are Record Owners. Shareholders who are record owners can
choose between either option to exercise their Rights as described below under
"Payment for Shares." If time is of the essence, option (2) under "Payment for
Shares" below will permit delivery of the Subscription Certificate and payment
after the Expiration Date.

Shareholders Whose Shares Are Held by a Nominee. Shareholders whose shares
are held by a nominee, such as a bank, broker or trustee, must contact that
nominee to exercise their Rights. In such case, the nominee will complete the
Subscription Certificate on behalf of the shareholder and arrange for proper
payment by one of the methods described below under "Payment for Shares."

Nominees. Nominees who hold shares for the account of others should notify
the beneficial owners of such shares as soon as possible to ascertain such
beneficial owners' intentions and to obtain instructions with respect to the
Rights. If the beneficial owner so instructs, the nominee should complete the
Subscription Certificate and submit it to the Subscription Agent with the proper
payment as described below under "Payment for Shares."

INFORMATION AGENT

Any questions or requests for assistance concerning the method of
subscribing for shares or for additional copies of this Prospectus or
Subscription Certificates or Notices of Guaranteed Delivery may be directed to
the Information Agent at its telephone number and address listed below:

Information Agent for the Offer is:

Shareholder Communications Corporation
17 State Street, 27th Floor
New York, New York 10004
800-733-8481, ext. 486

Shareholders may also contact their brokers or nominees for information
with respect to the Offer. The Information Agent will receive a fee estimated to
be $[27,000], excluding reimbursement for its out-of-pocket expenses related to
the Offer.

PAYMENT FOR SHARES

If you wish to acquire shares pursuant to the Offer may choose between the
following methods of payment:

(1) You may send the Subscription Certificate together with payment
for the shares acquired in the Primary Subscription and any additional
shares subscribed for pursuant to the Over-Subscription

17
<PAGE> 20

Privilege (for Record Date shareholders) to the Subscription Agent based on
the Subscription Price of $ per share. A subscription will be accepted
when payment, together with a properly completed and executed Subscription
Certificate, is received by the Subscription Agent's office at one of the
addresses set forth above no later than 5:00 p.m., New York City time, on
the Expiration Date. The Subscription Agent will deposit all checks and
money orders received by it for the purchase of shares into a segregated
interest-bearing account (the interest from which will accrue to the
benefit of the Fund) pending proration and distribution of shares. A
PAYMENT PURSUANT TO THIS METHOD MUST BE IN U.S. DOLLARS BY MONEY ORDER OR
CHECK DRAWN ON A BANK OR BRANCH LOCATED IN THE UNITED STATES, MUST BE
PAYABLE TO COLONIAL INTERMEDIATE HIGH INCOME FUND AND MUST ACCOMPANY A
PROPERLY COMPLETED AND EXECUTED SUBSCRIPTION CERTIFICATE FOR SUCH
SUBSCRIPTION CERTIFICATE TO BE ACCEPTED. EXERCISE BY THIS METHOD IS SUBJECT
TO ACTUAL COLLECTION OF CHECKS BY 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR, SHAREHOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE
FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.

(2) Alternatively, you may acquire shares, and your subscription will
be accepted by the Subscription Agent if, prior to 5:00 p.m., New York City
time, on the Expiration Date, the Subscription Agent has received a Notice
of Guaranteed Delivery by facsimile (telecopy) or otherwise from a
financial institution that is a member of the Securities Transfer Agents
Medallion Program, the Stock Exchange Medallion Program or the New York
Stock NYSE Medallion Signature Program guaranteeing delivery of (i) payment
of the Subscription Price of $ per share for the shares subscribed for
in the Primary Subscription and any additional shares subscribed for
pursuant to the Over-Subscription Privilege (for Record Date shareholders),
and (ii) a properly completed and executed Subscription Certificate. The
Subscription Agent will not honor a Notice of Guaranteed Delivery unless a
properly completed and executed Subscription Certificate and full payment
for the shares is received by the Subscription Agent by the close of
business on , 1999, the third Business Day after the Expiration
Date.

On a date within eight business days following the Expiration Date (the
"Confirmation Date"), the Subscription Agent will send to each person exercising
Rights (or, if shares are held by Cede or any other depository or nominee, to
Cede or such other depository or nominee) a confirmation showing (i) the number
of shares purchased pursuant to the Primary Subscription and (ii) the number of
shares, if any, acquired pursuant to the Over-Subscription Privilege (for Record
Date shareholders). All payments must be in U.S. dollars by money order or check
drawn on a bank or branch located in the United States and payable to COLONIAL
INTERMEDIATE HIGH INCOME FUND.

The Subscription Agent will deposit all checks received by it prior to the
final payment date into a segregated interest-bearing account (which interest
will accrue to the benefit of the Fund) pending proration and distribution of
the shares.

WHICHEVER OF THE TWO METHODS DESCRIBED ABOVE IS USED, ISSUANCE OF THE
SHARES PURCHASED IS SUBJECT TO COLLECTION OF CHECKS AND ACTUAL PAYMENT. IF A
HOLDER OF RIGHTS WHO SUBSCRIBES FOR SHARES PURSUANT TO THE PRIMARY SUBSCRIPTION
OR OVER-SUBSCRIPTION PRIVILEGE (FOR RECORD DATE SHAREHOLDERS) DOES NOT MAKE
PAYMENT OF ANY AMOUNTS DUE BY THE TENTH BUSINESS DAY AFTER THE CONFIRMATION
DATE, THE SUBSCRIPTION AGENT RESERVES THE RIGHT TO TAKE ANY OR ALL OF THE
FOLLOWING ACTIONS: (I) FIND OTHER RECORD DATE SHAREHOLDERS TO PURCHASE SUCH
SUBSCRIBED AND UNPAID FOR SHARES; (II) APPLY ANY PAYMENT ACTUALLY RECEIVED BY IT
TOWARD THE PURCHASE OF THE GREATEST WHOLE NUMBER OF SHARES WHICH COULD BE
ACQUIRED BY SUCH HOLDER UPON EXERCISE OF THE PRIMARY SUBSCRIPTION AND/OR
OVER-SUBSCRIPTION PRIVILEGE, AND/OR (III) EXERCISE ANY AND ALL OTHER RIGHTS OR
REMEDIES TO WHICH IT MAY BE ENTITLED, INCLUDING, WITHOUT LIMITATION, THE RIGHT
TO SET OFF AGAINST PAYMENTS ACTUALLY RECEIVED BY IT WITH RESPECT TO SUCH
SUBSCRIBED SHARES.

THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE FUND WILL BE AT THE ELECTION AND RISK OF THE
EXERCISING RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT

18
<PAGE> 21

SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED
TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK
OR MONEY ORDER.

All questions concerning the timeliness, validity, form and eligibility of
any exercise of Rights will be determined by the Fund, whose determinations will
be final and binding. The Fund in its sole discretion may waive any defect or
irregularity, or permit a defect or irregularity to be corrected within such
time as it may determine, or reject the purported exercise of any Right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as the Subscription
Agent determines in its sole discretion.

The Subscription Agent will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.

EXERCISING RIGHTS HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION
AFTER RECEIPT OF THEIR PAYMENT FOR SHARES BY THE SUBSCRIPTION AGENT, EXCEPT AS
PROVIDED BELOW UNDER "NOTICE OF NET ASSET VALUE DECLINE."

SALE OF RIGHTS

The Rights are transferable until the Expiration Date. The Rights will be
listed for trading on the NYSE, subject to notice of issuance. The Fund will use
its best efforts to ensure that an adequate trading market for the Rights will
exist, although no assurance can be given that a market for the Rights will
develop. It is anticipated that the Rights will trade on the NYSE on a
when-issued basis commencing on or about , 1999 until
approximately , 1999 and on a regular way basis thereafter until
and including , 1999, the last business day prior to the
Expiration Date.

Sales through Subscription Agent and Dealer Manager. Record Date
shareholders who do not wish to exercise any or all of their Rights may instruct
the Subscription Agent to sell any unexercised Rights through or to the Dealer
Manager. Subscription Certificates representing the Rights to be sold by or to
the Dealer Manager must be received by the Subscription Agent on or before
, 1999 (or if the Offer is extended, until two business days
prior to the Expiration Date). Upon the timely receipt by the Subscription Agent
of appropriate instructions to sell Rights, the Subscription Agent will request
the Dealer Manager either to purchase or to use its best efforts to complete the
sale and the Subscription Agent will remit the proceeds of sale, net of
commissions, to the selling Record Date shareholder. Any commissions on sales of
Rights will be paid by the selling Record Date shareholder. If the Rights can be
sold, sales of such Rights will be deemed to have been effected at the
weighted-average price received by the Dealer Manager on the day such Rights are
sold. The sale price of any Rights sold to the Dealer Manager will be based upon
the then current market price for the Rights, less amounts comparable to the
usual and customary brokerage fees. The Dealer Manager will also attempt to sell
all Rights which remain unclaimed as a result of Subscription Certificates being
returned by the postal authorities to the Subscription Agent as undeliverable as
of the fourth business day prior to the Expiration Date. Such sales will be made
net of commissions on behalf of the nonclaiming Record Date shareholders. The
Subscription Agent will hold the proceeds from those sales for the benefit of
such nonclaiming Record Date shareholders until such proceeds are either claimed
or escheat. There can be no assurance that the Dealer Manager will purchase or
be able to complete the sale of any such Rights, and neither the Fund nor the
Dealer Manager has guaranteed any minimum sales price for the Rights.

Other Transfers. The Rights evidenced by a Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the accompanying instructions. A portion of the Rights evidenced
by a single Subscription Certificate (but not fractional Rights) may be
transferred by delivering to the Subscription Agent a Subscription Certificate
properly endorsed for transfer, with instructions to register such portion of
the Rights evidenced thereby in the name of the transferee and to

19
<PAGE> 22

issue a new Subscription Certificate to the transferee evidencing such
transferred Rights. In such event, a new Subscription Certificate evidencing the
balance of the Rights, if any, will be issued to the Record Date shareholder or,
if the Record Date shareholder so instructs, to an additional transferee. The
signature on the Subscription Certificate must correspond with the name as
written upon the face of the Subscription Certificate in every particular,
without alteration or enlargement, or any change whatever. A signature guarantee
must be provided by an eligible financial institution as defined in Rule 17Ad-15
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), subject to
the standards and procedures adopted by the Fund.

Record Date shareholders wishing to transfer all or a portion of their
Rights should allow at least five business days prior to the Expiration Date for
(i) the transfer instructions to be received and processed by the Subscription
Agent; (ii) a new Subscription Certificate to be issued and transmitted to the
transferee or transferees with respect to transferred Rights, and to the
transferor with respect to retained Rights, if any; and (iii) the Rights
evidenced by such new Subscription Certificate to be exercised or sold by the
recipients thereof. Neither the Fund nor the Subscription Agent nor the Dealer
Manager shall have any liability to a transferee or transferor of Rights if
Subscription Certificates are not received in time for exercise or sale prior to
the Expiration Date.

Except for the fees charged by the Subscription Agent and Dealer Manager
(which will be paid by the Fund), all commissions, fees and other expenses
(including brokerage commissions and transfer taxes) incurred or charged in
connection with the purchase, sale or exercise of Rights will be for the account
of the transferor of the Rights, and none of such commissions, fees or expenses
will be paid by the Fund, the Subscription Agent or the Dealer Manager.

The Fund anticipates that the Rights will be eligible for transfer through,
and that the exercise of the Primary Subscription (but not the Over-Subscription
Privilege) may be effected through, the facilities of The Depository Trust
Company ("DTC"; Rights exercised through DTC are referred to as "DTC Exercised
Rights"). Record Date shareholders of DTC Exercised Rights may exercise the
Over-Subscription Privilege in respect of such DTC Exercised Rights by properly
executing and delivering to the Subscription Agent, at or prior to 5:00 p.m.,
New York City time, on the Expiration Date, a Nominee Holder Over-Subscription
Exercise Form or a substantially similar form satisfactory to the Subscription
Agent, together with payment of the Subscription Price for the number of shares
for which the Over-Subscription Privilege is to be exercised.

DISTRIBUTION ARRANGEMENTS

, which is a broker-dealer and member of the National
Association of Securities Dealers, Inc., will act as the Dealer Manager for the
Offer. Under the terms and subject to the conditions contained in the Dealer
Manager Agreement dated on or about the date hereof (the "Dealer Manager
Agreement"), the Dealer Manager will provide financial advisory and marketing
services in connection with the Offer and will solicit the exercise of Rights
and participation in the Over-Subscription Privilege. The Offer is not
contingent upon any number of Rights being exercised. The Fund has agreed to pay
the Dealer Manager a fee for its financial advisory, marketing and soliciting
services equal to 3.75% of the aggregate Subscription Price for shares issued
pursuant to the Offer. The Dealer Manager will reallow to Selling Group Members
solicitation fees equal to 2.50% of the Subscription Price per share for each
share issued pursuant to the Offer as a result of their soliciting efforts. In
addition, the Dealer Manager will reallow to other broker-dealers that have
executed and delivered a soliciting dealer agreement and have solicited the
exercise of Rights, solicitation fees equal to 0.50% of the Subscription Price
per share for each share issued pursuant to the exercise of Rights as a result
of their soliciting efforts, subject to a maximum fee based upon the number of
shares held by each broker-dealer through DTC on the Record Date. Fees will be
paid to the broker-dealer designated on the applicable portion of the
Subscription Certificates or, in the absence of such designation, to the Dealer
Manager.

In addition, the Fund may reimburse the Dealer Manager up to an aggregate
of $100,000 for its reasonable expenses incurred in connection with the Offer.
The Fund and the Advisor have each agreed to indemnify the Dealer Manager or
contribute to losses arising out of certain liabilities including liabilities
under

20
<PAGE> 23

the Securities Act of 1933, as amended (the "Securities Act"). The Dealer
Manager Agreement also provides that the Dealer Manager will not be subject to
any liability to the Fund in rendering the services contemplated by such
Agreement except for any act of bad faith, willful misconduct or gross
negligence of the Dealer Manager or reckless disregard by the Dealer Manager of
its obligations and duties under such Agreement.

The Fund has agreed not to offer or sell, or enter into any agreement to
sell, any equity or equity related securities of the Fund or securities
convertible into such securities for a period of 180 days after the date of the
Dealer Manager Agreement, except for the shares to be issued upon exercise of
the rights offered hereby and shares issued in reinvestment of dividends or
distributions.

DELIVERY OF SHARE CERTIFICATES

Except as described herein, certificates representing shares acquired in
the Primary Subscription and representing shares acquired pursuant to the
Over-Subscription Privilege will be mailed promptly after the expiration of the
Offer once full payment for such shares has been received and cleared.
Participants in the Fund's dividend reinvestment plan (the "Plan") will have any
shares acquired in the Primary Subscription and pursuant to the
Over-Subscription Privilege credited to their shareholder dividend reinvestment
accounts in the Plan. Participants in the Plan wishing to exercise Rights for
the shares held in their accounts in the Plan must exercise such Rights in
accordance with the procedures set forth above. Shareholders whose shares are
held of record by Cede or by any other depository or nominee on their behalf or
their broker-dealer's behalf will have any shares acquired in the Primary
Subscription credited to the account of Cede or such other depository or
nominee. Shares acquired pursuant to the Over-Subscription Privilege will be
certificated and certificates representing such shares will be sent directly to
Cede or such other depository or nominee. Stock certificates will not be issued
for shares credited to Plan accounts.

FOREIGN SHAREHOLDERS

Subscription Certificates will not be mailed to Record Date shareholders
whose record addresses are outside the United States (the term "United States"
includes the states, the District of Columbia, and the territories and
possessions of the United States) ("Foreign Record Date Shareholders"). Foreign
Record Date Shareholders will be sent written notice of the Offer. The Rights to
which such Subscription Certificates relate will be held by the Subscription
Agent for such Foreign Record Date Shareholders' accounts until instructions are
received to exercise the Rights. If no instructions have been received by 5:00
p.m., New York City time, on , 1999, which is three business days
prior to the Expiration Date, the Rights of those Foreign Record Date
Shareholders will be transferred by the Subscription Agent to the Dealer
Manager, who will either purchase the rights or use its best efforts to sell the
Rights. The net proceeds, if any, from the sale of those Rights by or to the
Dealer Manager will be remitted to Foreign Record Date Shareholders.

FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER

The U.S. federal income tax consequences to holders of shares with respect
to the Offer will be as follows:

1. The distribution of Rights to Record Date shareholders will not
result in taxable income to such holders nor will such holders realize
taxable income as a result of the exercise of the Rights. No loss will be
realized if the Rights expire without exercise.

2. The basis of a Right will be (a) to a holder of shares to whom the
Right is issued and who exercises or sells the Right (i) if the fair market
value of the Right immediately after issuance is less than 15% of the fair
market value of the shares with regard to which it is issued, zero (unless
the holder elects with respect to all Rights so received, by filing a
statement with his timely filed federal income tax return for the year in
which the Rights are received, to allocate the basis of the shares between
the Right and the shares based on their respective fair market values
immediately after the Right is issued), and (ii) if the fair market value
of the Right immediately after issuance is 15% or more of the fair market
value of the shares with regard to which it is issued, a portion of the
basis in the shares based upon their respective fair market values
immediately after the Right is issued, and (b) to a holder of shares to
whom the Right is issued and who allows the Right to expire, zero.

21
<PAGE> 24

3. The holding period of a Right received by a Record Date
shareholder includes the holding period of the share with regard to which
the Right is issued. If the Right is exercised, the holding period of the
share acquired begins on the date the Right is exercised.

4. A Record Date shareholder's basis for determining gain or loss
upon the sale of a share acquired upon the exercise of a Right will be
equal to the sum of the Record Date shareholder's basis in the Right, if
any, and the Subscription Price per share. A Record Date shareholder's gain
or loss recognized upon a sale of a share acquired upon the exercise of a
Right will be capital gain or loss if the share was held at the time of
sale as a capital asset and will be long-term capital gain or loss if the
share is held for more than one year. See "Taxes--Federal Income Tax
Treatment of Holders of Shares" in the Statement of Additional Information
for more information regarding the capital gains tax rates applicable to
capital gains or losses recognized upon the sale of shares.

The Fund is required to withhold and remit to the U.S. Treasury 31% of
reportable payments paid on an account if the holder of the account provides the
Fund with either an incorrect taxpayer identification number or no number at
all, or fails to certify that he or she is not subject to such withholding.

The foregoing is a general summary of the material U.S. federal income tax
consequences of the Offer under the provisions of the U.S. Internal Revenue Code
of 1986, as amended (the "Code"), and Treasury regulations presently in effect
that are generally applicable to Record Date shareholders that are United States
persons within the meaning of the Code and any other Record Date shareholder who
would be subject to U.S. federal income tax upon the sale or exchange of the
shares acquired upon the exercise of the Rights, and does not cover foreign,
state or local taxes. The Code and such regulations are subject to change by
legislative or administrative action, which may be retroactive. You should
consult your tax adviser regarding specific questions as to foreign, federal,
state or local taxes. See "Federal Taxation."

NOTICE OF NET ASSET VALUE DECLINE

The Fund has, as required by the SEC's registration form, undertaken to
suspend the Offer until it amends this prospectus if, subsequent to the
effective date of the Fund's Registration Statement, the Fund's net asset value
declines more than 10% from its net asset value as of that date. Accordingly,
the Expiration Date would be extended and the Fund would notify Record Date
shareholders of any such decline and permit exercising Rights holders to cancel
their exercise of Rights.

EMPLOYEE PLAN CONSIDERATIONS

Shareholders that are tax-deferral arrangements, such as plans qualified
under Code section 401(a) (including corporate savings plans, 401(k) plans, and
Keogh plans of self-employed individuals), individual retirement accounts under
Code section 408 ("IRAs"), Roth IRAs under Code section 408A, and custodial
accounts under Code section 403(b) (collectively, "Retirement Plans"), should be
aware that additional contributions of cash to the Retirement Plan (other than
rollover contributions or trustee-to-trustee transfers from another Retirement
Plan) in order to exercise Rights would be treated as contributions to the
Retirement Plan and, when taken together with contributions previously made, may
result in, among other things, excise taxes for excess or nondeductible
contributions. In the case of Retirement Plans qualified under Code section
401(a) and certain other Retirement Plans, additional cash contributions could
cause the maximum contribution limitations of Code section 415 or other
qualification rules to be violated.

Retirement Plans and other tax exempt entities, including governmental
plans, should also be aware that if they borrow in order to finance their
exercise of Rights, they may become subject to the tax on unrelated business
taxable income ("UBTI") under Code section 511. If any portion of an IRA or a
Roth IRA is used as security for a loan, the portion so used is also treated as
distributed to the IRA or Roth IRA depositor, which may result in current income
taxation and penalty taxes.

The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may apply to the exercise of Rights by
Retirement Plans. Retirement Plans that are not subject to ERISA (such as
governmental plans) may be subject to state law restrictions that could affect
the decision to exercise or

22
<PAGE> 25

transfer Rights. Due to the complexity of these rules and the penalties for
noncompliance, shareholders that are Retirement Plans should consult with their
counsel and other advisers regarding the consequences of their exercise of
Rights under ERISA, the Code, and, where applicable, state law.

IMPORTANT DATES TO REMEMBER

<TABLE>
<CAPTION>
EVENT DATE
- ----- ----
<S> <C>
Record Date................................................. , 1999
Subscription Period......................................... , 1999 to
, 1999
Expiration Date............................................. , 1999(a)
Subscription Certificates and Payment for Shares Due(b)..... , 1999(a)
Notice of Guaranteed Delivery Due(b)........................ , 1999(a)
Payment for Guarantees of Delivery Due...................... , 1999(a)
Confirmation to Participants................................ , 1999(a)
</TABLE>

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

(a) Unless the Offer is extended.

(b) A shareholder exercising Rights must deliver by , 1999 either
(i) a Subscription Certificate and payment for shares or (ii) a Notice of
Guaranteed Delivery.

USE OF PROCEEDS

Based on the Subscription Price of $ per share, the net proceeds of the
Offer to the Fund, assuming all shares offered hereby are sold,
are estimated to be approximately $ , after deducting offering
expenses payable by the Fund estimated at approximately $500,000. The Advisor
anticipates that investment of such proceeds in accordance with the Fund's
investment objective and policies will take up to thirty days from their receipt
by the Fund, depending on market conditions and the availability of appropriate
securities for purchase, but in no event will such investment take longer than
six months. Pending such investment in accordance with the Fund's investment
objective and policies, the proceeds will be held in U.S. Government securities
(which term includes obligations of the United States Government, its agencies
or instrumentalities) and other high-quality short-term money market
instruments.

INVESTMENT POLICIES AND LIMITATIONS

The investment objective of the Fund is to seek high current income and
total return by investing primarily in lower-rated corporate debt securities.

INVESTMENT STRATEGY

It is the Fund's policy that, under normal market conditions, up to 80% of
its total assets will be invested in debt securities rated in the lower
categories by recognized rating agencies or nonrated debt securities deemed by
the Advisor to be of comparable quality. The Fund's portfolio investments have
consisted and generally will continue to consist principally of debt securities,
including fixed-income securities, rated "BBB"/"Baa" or lower by the Rating
Agencies.

The Fund may invest up to 100% of its assets in higher rated securities,
if, in the opinion of the Advisor, such investments are in the best interests of
the Fund because of narrow yield spreads between lower and higher rated
securities. The Fund may invest in debt securities of any maturity, but under
normal conditions, the average maturity of the Fund's investments is expected to
be between 3 and 10 years. The Fund will not invest more than 25% of its total
assets in a single industry and not more than 25% of its total assets in
securities issued or guaranteed by foreign governments or foreign companies.

Debt Securities. The Fund may invest in debt securities of any maturity
that pay fixed, floating or adjustable interest rates. The values of debt
securities generally fluctuate inversely with changes in interest rates. This is
less likely to be true for adjustable or floating rate securities, since
interest rate changes are more likely to be reflected in changes in the rates
paid on the securities. However, reductions in interest rates also may translate
into lower distributions paid by the Fund.

23
<PAGE> 26

The Fund also may invest in debt securities (i) that do not pay interest
but instead are issued at a significant discount to their maturity values
(referred to as zero coupon securities), (ii) that pay interest, at the issuer's
option, in additional securities instead of cash (referred to as pay-in-kind
securities) or (iii) that pay interest at predetermined rates that increase over
time (referred to as step coupon bonds). Because zero coupon securities,
pay-in-kind securities and step coupon bonds may not pay cash interest on a
current basis, but the Fund nevertheless must accrue and distribute to investors
the income deemed to be earned on a current basis, the Fund may have to sell
other investments to raise the cash needed to make income distributions.

Common Stocks. The Fund may invest up to 20% of its total assets in common
stocks, usually as a result of warrants associated with debt instruments
purchased by the Fund, but also under certain circumstances to seek capital
appreciation.

Lower Rated Debt Securities. Lower rated debt securities are debt
securities which are not considered to be investment grade (that is, they are
rated below "BBB" by S&P or below "Baa" by Moody's, or are unrated but
considered by the Advisor to be of comparable credit quality). Securities rated
"BB" or lower by S&P or "Ba" or lower by Moody's are commonly referred to as
"high yield," high risk securities or "junk bonds." For a description of S&P's
and Moody's rating systems, see Appendix A to this Prospectus. Lower rated debt
securities are generally considered significantly more speculative and likely to
default than higher quality debt securities. Because of the increased risk of
default, lower rated debt securities generally have higher interest rates than
higher quality securities.

The Fund may purchase bonds in the lowest rating categories (C for Moody's
and D for S&P) and comparable unrated securities. However, the Fund will only
purchase securities rated Ca or lower by Moody's or CC or lower by S&P if the
Advisor believes the quality of such securities is higher than indicated by the
rating.

The values of lower rated securities are less likely than those of higher
quality debt securities to fluctuate inversely with changes in interest rates.
This is because increases in interest rates often are associated with an
improving economy, which may translate into an improved ability of the issuers
of lower-rated securities to pay off their bonds (lowering the risk of default).
Relative to other debt securities, the values of lower rated debt securities may
be more volatile because: (i) an economic downturn may more significantly impact
their potential for default, or (ii) the secondary market for such securities
may at times be less liquid or respond more adversely to negative publicity or
investor perceptions, making it more difficult to value or dispose of the
securities. The likelihood that these securities will help the Fund achieve its
investment objective is more dependent on the Advisor's own credit analysis.

The credit ratings of all bonds held by the Fund at October 31, 1998 are
set forth below. This information reflects the composition of the Fund's assets
at October 31, 1998 and is not necessarily representative of the Fund holdings
currently or at any time in the future.

<TABLE>
<CAPTION>
RATED BY
S&P
--------
<S> <C>
Investment Grade............................................ %
BB.......................................................... %
B........................................................... %
CCC......................................................... %
CC.......................................................... %
C........................................................... %
D........................................................... %
Nonrated.................................................... %
-----
Subtotal............................................... %
U.S. Governments, equities and others....................... %
-----
Total.................................................. %
=====
</TABLE>

Foreign Investments. Investments in foreign securities have special risks
related to political, economic and legal conditions outside the United States.
As a result, the prices of foreign securities may fluctuate substantially more
than the prices of securities of issuers based in the United States. Special
risks associated with foreign securities include the possibility of unfavorable
movements in currency exchange rates, the

24
<PAGE> 27

existence of less liquid markets, the unavailability of reliable information
about issuers, the existence (or potential imposition) of exchange control
regulations (including currency blockage), and political and economic
instability, among others. In addition, transactions in foreign securities may
be more costly because of currency conversion costs and higher brokerage and
custodial costs. See "Miscellaneous Investment Practices--Foreign Investments"
and "Miscellaneous Investment Practices--Foreign Currency Transactions" in the
Statement of Additional Information for more information about foreign
investments.

Emerging Markets. The Fund may invest in foreign securities issued or
guaranteed by companies or governments located in countries whose economies or
securities markets are not yet highly developed. Special risks associated with
these investments (in addition to those of foreign investments generally) may
include, among others, greater political uncertainties, an economy's dependence
on revenues from particular commodities or on international aid or development
assistance, extreme or volatile debt burdens or inflation rates, highly limited
numbers of potential buyers for such securities, heightened volatility of
security prices, restrictions on repatriation of capital invested abroad and
delays and disruptions in securities settlement procedures.

Foreign Currency Transactions. In connection with its investments in
foreign securities, the Fund may purchase and sell (i) foreign currencies on a
spot or forward basis, (ii) foreign currency futures contracts and (iii) options
on foreign currencies and foreign currency futures. Such transactions will be
entered into (a) to lock in a particular foreign exchange rate pending
settlement of a purchase or sale of a foreign security or pending the receipt of
interest, principal or dividend payments on a foreign security held by the Fund,
or (b) to hedge against a decline in the value, in U.S. dollars or in another
currency, of a foreign currency in which securities held by the Fund are
denominated. The Fund will not attempt, nor would it be able, to eliminate all
foreign currency risk. Further, although hedging may lessen the risk of loss if
the hedged currency's value declines, it limits the potential gain from currency
value increases. See "Miscellaneous Investment Practices--Foreign Currency
Transactions" in the Statement of Additional Information for more information
relating to the Fund's obligations in entering into foreign currency
transactions.

Temporary/Defensive Investments. Temporarily available cash may be
invested in certificates of deposit, bankers' acceptances, high quality
commercial paper, Treasury bills, repurchase agreements and U.S. government
securities. Some or all of the Fund's assets also may be invested in such
investments during periods of unusual market conditions. Under a repurchase
agreement, the Fund buys a security from a bank or dealer, which is obligated to
buy it back at a fixed price and time. The security is held in a separate
account at the Fund's custodian and constitutes the Fund's collateral for the
bank's or dealer's repurchase obligation. Additional collateral will be added so
that the obligation will at all times be fully collateralized. However, if the
bank or dealer defaults or enters bankruptcy, the Fund may experience costs and
delays in liquidating the collateral, and may experience a loss if it is unable
to demonstrate its rights to the collateral in a bankruptcy proceeding.

Interest Rate Futures and Options. For hedging purposes, the Fund may (1)
buy or sell interest rate futures and (2) buy put and call options on such
futures. The total market value of securities to be delivered or acquired
pursuant to such contracts will not exceed 5% of the Fund's net assets. A
futures contract creates an obligation by the seller to deliver and the buyer to
take a delivery of the type of instrument at the time and in the amount
specified in the contract. Although futures contracts call for the delivery (or
acceptance) of the specified instrument, the contracts are usually closed out
before the settlement date through the purchase (or sale) of an offsetting
contract. If the price of the initial sale of the futures contract exceeds (or
is less than) the price of the offsetting purchase, the Fund realizes a gain (or
loss).

"When-Issued" and "Delayed Delivery" Securities. The Fund may acquire
securities on a "when-issued" or "delayed delivery" basis by contracting to
purchase securities for a fixed price on a date beyond the customary settlement
time with no interest accruing until settlement. If made through a dealer, the
contract is dependent on the dealer completing the sale. The dealer's failure
could deprive the Fund of an advantageous yield or price. These contracts
involve the risk that the value of the underlying security may change prior to
settlement. The Fund may realize short-term gains or losses if the contracts are
sold.

25
<PAGE> 28

Other. The Fund may not achieve its investment objective. The Fund may
trade portfolio securities for short-term profits to take advantage of price
differentials. High portfolio turnover may result in higher transaction costs
and higher levels of realized capital gains. The Fund's investment objective and
nonfundamental investment policies may be changed without shareholder approval.
Additional information concerning certain of the securities and investment
techniques and strategies described above or in which the Fund also engages is
contained in the Statement of Additional Information.

Additional Leverage. The Fund has reserved the right to borrow money to
the extent such borrowing would not result in a violation of the Asset Coverage
Requirements (as defined under "Risk Factors and Special Considerations--Risk of
Leverage") and would not otherwise violate Section 18 of the 1940 Act. The Fund
may borrow to the extent then permitted by the Credit Agreement and the 1940 Act
through the public or private issuance of debt securities and/or from lenders of
all types, such as banks, savings and loan associations, insurance companies and
similar financial institutions. To the extent permitted by the Credit Agreement
and the 1940 Act, the Fund may also borrow additional amounts as it redeems the
Term Note or the Revolving Loan. See "Description of Term Note--Restrictive
Covenants."

As a result of the Second Loan, the Fund increased the percentage of its
assets representing leverage from approximately 20% to approximately 24%. Based
on current market conditions, the Fund's Board of Trustees has authorized the
Fund to increase its borrowings at or following the completion of the Offer in
order that the percentage of the Fund's assets, including the proceeds from the
Offer, representing leverage may be maintained at or about [29]% following
completion of the Offer. Due to possible changes in market conditions, there are
no assurances that the Fund will borrow additional amounts or that any
additional borrowings will be obtained by the Fund at favorable interest rates.
The Fund reserves the right at any time, if it believes that market conditions
are appropriate, further to increase its level of debt or other senior
securities to maintain or increase the Fund's current level of leverage to the
extent permitted under the 1940 Act and any relevant agreements between the Fund
and third parties, including the Credit Agreement. The inability to increase, or
delays in increasing the Fund's leverage could, depending on market conditions,
adversely affect the Fund's earnings and net asset value. See "Risk Factors and
Special Considerations" for a discussion of certain risks associated with
borrowings by the Fund.

26
<PAGE> 29

RISK FACTORS AND SPECIAL CONSIDERATIONS

An investment in the Fund is subject to a number of risks and special
considerations, including the following:

DILUTION

As a result of the Offer, you may experience an immediate dilution, which
could be substantial, of the aggregate net asset value of your shares. This is
because the Subscription Price per share may be less than the Fund's net asset
value per share on the Expiration Date, and the number of shares outstanding
after the Offer is likely to increase in a greater percentage than the increase
in the size of the Fund's assets. This dilution will disproportionately affect
you if you do not exercise your rights in full. If you do not fully exercise
your Rights, you should expect that you will, at the completion of the Offer,
own a smaller proportional interest in the Fund than you would otherwise. The
Fund cannot state precisely the amount of any such dilution, because it is not
known at this time what the net asset value per share will be on the Expiration
Date or what proportion of the Rights will be exercised. For example, assuming
that all Rights are exercised at the Subscription Price of $ , which is %
below the Fund's net asset value of $ per share as of , 1999,
the Fund's net asset value per share (after payment of the Dealer Manager and
soliciting fees and estimated offering expenses) would be reduced by
approximately $ per share (or %). If you do not wish to exercise your
Rights, you should consider selling these Rights as set forth in this
prospectus. Any cash you receive from selling your Rights should serve as
partial compensation for any possible dilution of your interest in the Fund. The
Fund cannot give any assurance, however, that a market for the Rights will
develop or that the Rights will have any value. For a more detailed discussion
about dilution, please refer to "Risk Factors and Special
Considerations -- Dilution."

LEVERAGE

The Fund's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies,
including a higher volatility of the net asset value of the shares and
potentially more volatility in the market value of the shares. For a description
of the Term Note, see "Description of Term Note." Any investment income or gains
earned by the Fund on amounts borrowed under the Term Note or other forms of
leverage that is in excess of interest and dividends due thereon will cause the
value of and dividends, if any, on the Fund's shares to rise more quickly than
would otherwise be the case. Conversely, if the investment performance by the
Fund on amounts borrowed under the Term Note or other forms of leverage fails to
cover the interest and dividends on such leverage, the value of the shares may
decrease more quickly than would otherwise be the case and dividends thereon
will be reduced or eliminated. This is the speculative effect of "leverage."

Since any decline in the net asset value of the Fund's investments will be
borne entirely by holders of the shares, the effect of leverage in a declining
market would result in a greater decrease in net asset value of the shares,
which would likely be reflected in a greater decline in the market price for the
shares. In an extreme case, if the Fund's current investment income were not
sufficient to meet interest payments on its leverage, the Fund might have to
sell some of its investments, thereby reducing the net asset value of the
shares. In addition, a decline in the value of the Fund's investments may affect
the ability of the Fund to make dividend payments on its shares and such failure
to pay dividends or make distributions may result in the Fund ceasing to qualify
as a regulated investment company under the Code. The Fund's leverage may
constitute a substantial lien and burden on the shares by reason of their prior
claim against the income of the Fund and against the net assets of the Fund in
liquidation.

Based on current market conditions, the Fund's Board of Trustees has
authorized the Fund to increase its borrowings in order that the percentage of
the Fund's assets, including the proceeds from the Offer, representing leverage
may be maintained at or about [29]% following completion of the Offer. Due to
possible changes in market conditions, there are no assurances that the Fund
will borrow additional amounts or that any additional borrowings will be
obtained by the Fund at favorable interest rates. The Fund reserves the right at
any time, if it believes that market conditions are appropriate, to increase its
level of debt or other senior securities to maintain or increase the Fund's
current level of leverage to the extent permitted by the 1940 Act

27
<PAGE> 30

and any relevant agreements between the Fund and third parties. The inability to
increase, or delays in increasing the Fund's leverage could, depending on market
conditions, adversely affect the Fund's earnings and net asset value.

The 1940 Act generally imposes on registered closed-end investment
companies, such as the Fund, a 300% "asset coverage" test for "senior securities
representing indebtedness" and a 200% "asset coverage" test for "senior
securities representing stock" (the "Asset Coverage Requirements"). The 1940 Act
generally restricts distributions to holders of common stock and preferred stock
of a registered closed-end investment company while any senior security
representing indebtedness is outstanding and restricts distributions to the
holders of common stock while any senior security representing stock is
outstanding, unless such coverage requirements are satisfied. The Fund's shares
of beneficial interest constitute common stock for this purpose. Furthermore,
the 1940 Act generally limits registered closed-end investment companies from
issuing more than one class of senior securities representing indebtedness and
more than one class of senior securities representing stock, subject to various
exceptions.

The following table illustrates the effect of leverage (using senior
securities--i.e., $[47.3] million borrowed in [four] loans under the Term Note
and one loan under the Revolving Loan) on the return of a holder of the shares,
assuming net assets of approximately $ million, the assumed return on the
portfolio set forth in such table and fixed annual rates of 6.37%, 6.17%, 6.84%,
6.26% and 6.29%, respectively, payable on the $6.9 million aggregate principal
amount of the Second Loan, the $13.7 million aggregate principal amount of the
Third Loan, the $13.7 million aggregate principal amount of the Fourth Loan, the
$9.2 million aggregate principal amount of the Fifth Loan, and the $3.8 million
aggregate principal amount of the Sixth Loan:

<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on Portfolio
(Net of Expenses Except
Interest)........................ -10% -5% 0% 5% 10%
Corresponding Return to
Shareholder...................... % % % % %
</TABLE>

The purpose of the foregoing table is to assist the investor in
understanding the effects of leverage. The figures in the table are hypothetical
and the actual returns to a holder of the shares may be greater or less than
those appearing in the table.

DISCOUNT FROM NET ASSET VALUE

Shares of closed-end funds frequently trade at a market price which is less
than the value of the net assets attributable to those shares. The possibility
that shares of the Fund will trade at a discount from net asset value is a risk
separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases, shares of closed-end
funds may trade at a premium to net asset value. The Fund's shares have traded
at various times in the market above, at and below net asset value since the
commencement of the Fund's operations. See "Trading and Net Asset Value
Information." In addition, the net asset value of the Fund will change with
changes in the value of its portfolio securities. Because the Fund invests
primarily in fixed-income securities, the net asset value of the shares of the
Fund can be expected to change as general levels of interest rates fluctuate.
When interest rates decline, the value of a fixed-income portfolio can be
expected to rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. In addition, in a period of
rising interest rates, increasing defaults by issuers of lower rated debt
obligations could worsen such decline in the Fund's net asset value, although in
some circumstances an interest rate increase may be associated with an improving
economy, which may translate into an improved ability of the issuers of lower
rated debt securities to make their payment obligations. The Fund cannot predict
whether its shares will trade at, below or above net asset value.

LOWER-RATED INVESTMENTS

The Fund is designed for long-term investors who can accept the risks
entailed in seeking a high level of current income available from investments in
long-term, high yielding, lower quality debt securities. Consistent with a
long-term investment approach, investors in the Fund should not rely on the Fund
for their short-term financial needs. The principal value of the lower quality
securities in which the Fund invests will be affected by interest rate levels,
general economic conditions, specific industry conditions and the creditworthi-

28
<PAGE> 31

ness of the individual issuer. Although the Fund seeks to reduce risk by
portfolio diversification, extensive credit analysis, and attention to trends in
the economy, industries and financial markets, such efforts will not eliminate
risk.

Debt securities offering the high current income sought by the Fund will
ordinarily be in the lower rating categories of recognized rating agencies or
will be unrated. The values of such securities tend to reflect individual
corporate developments or adverse economic changes to a greater extent than
higher rated securities, which tend to react more to fluctuations in the general
market level of interest rates. Periods of economic uncertainty and changes
generally result in increased volatility in the market prices and yields of
lower rated securities and thus in the Fund's net asset value. Further, these
securities are generally regarded by the Rating Agencies as significantly more
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation and more likely to default than
securities in the higher rating categories; the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal of or interest on its portfolio holdings. The lower rated
securities held by the Fund are frequently subordinated to the prior payment of
senior indebtedness and are traded in markets that may be relatively less liquid
than the market for higher rated securities. Changes by recognized rating
services in their ratings of any debt security and in the ability of an issuer
to make payments of interest and principal may also affect the value of the
Fund's investments. Changes in the value of portfolio securities will not
necessarily affect cash income derived from such securities, but will affect the
Fund's net asset value. The Fund will rely on the Advisor's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Advisor will take into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.

The values of lower rated securities are less likely than higher quality
debt securities to fluctuate inversely with changes in interest rates. This is
because increases in interest rates may be associated with an improving economy,
which may translate into an improved ability of the issuers of lower rated
securities to pay off their bonds (lowering the risk of default). Relative to
other debt securities, the values of lower rated debt securities may be more
volatile because: (i) an economic downturn may more significantly impact their
potential for default, or (ii) the secondary market for such securities may at
times be less liquid or respond more adversely to negative publicity or investor
perceptions, making it more difficult to value or dispose of the securities. In
addition, the trading market for lower rated securities is generally less liquid
than the market for higher rated securities. As of , 1999,
approximately % of the market value of the Fund's total investments was
represented by debt securities regarded by the Rating Agencies as below
investment grade (that is, rated below BBB by S&P or below Baa by Moody's) or
unrated securities deemed by the Advisor to be below investment grade. In
addition, in a period of rising interest rates, increasing defaults by issuers
of such debt obligations could exacerbate any decline in the Fund's net asset
value. If an issuer of a security containing a redemption or call provision
exercises either provision in a declining interest rate market, the Fund would
be likely to replace the security with a lower-yielding investment, which could
result in a decreased return for shareholders.

The market for lower rated securities has expanded rapidly in recent years.
This expanded market has not yet completely weathered an economic downturn. A
further economic downturn or an increase in interest rates could have a negative
effect on the lower rated debt market and on the market value of such securities
held by the Fund, as well as on the ability of the issuers of such securities to
repay principal and interest on their borrowings.

The credit ratings issued by credit rating services may not fully reflect
the true risks of an investment. For example, credit ratings typically evaluate
the safety of principal and interest payments, not market value risk, of lower
rated securities. Also, credit rating agencies may fail to change on a timely
basis a credit rating to reflect changes in economic or company conditions that
affect a security's market value. Although the Advisor considers ratings of
recognized rating services such as Moody's and S&P, the Advisor primarily relies
on its own credit analysis, which includes a study of the issuer's existing
debt, capital structure, ability to service debt and to pay dividends, the
issuer's sensitivity to economic conditions, its operating history and the
current trend

29
<PAGE> 32

of earnings. The Advisor continually monitors the investments in the Fund's
portfolio and carefully evaluates whether to dispose of or retain lower rated
securities whose credit ratings have changed.

DIVIDENDS AND DISTRIBUTIONS

It is the Fund's present policy, which may be changed by the Board of
Trustees, to pay dividends on a monthly basis to holders of the shares of
investment company taxable income and to distribute any net short-term capital
gains and net capital gains annually. See "Dividends and Distributions; Dividend
Reinvestment Plan." However, there can be no assurance that the Fund will be
able to maintain its current level of dividends per share, and the Fund may
change the Fund's current level of dividends per share in response to market or
other conditions. [The Fund currently has accumulated undistributed net
investment income upon which it has paid taxes.] Based on the Advisor's
assessment of current market conditions in the lower rated debt market and
available leverage opportunities, the Board of Trustees believes the Offer will
not result in a decrease in the Fund's current level of dividends per share. See
"Financial Highlights" and "The Offer--Purpose of the Offer."

The Fund will not be permitted to declare dividends or other distributions
with respect to the shares or purchase shares unless at the time thereof the
Fund meets certain asset coverage requirements, including those imposed by the
1940 Act. Failure to pay dividends or other distributions could result in the
Fund ceasing to qualify as a regulated investment company under the Code. See
"Federal Taxation" and "Description of Shares of Beneficial Interest--Dividends
and Distributions." In the event the Fund fails to satisfy certain asset
coverage requirements, the Fund may be required to effect mandatory partial or
complete redemption of the Term Note. Redemption of the Term Note would reduce
the Fund's leverage and could negatively affect potential returns with respect
to the Shares.

Given the above-described investment risks inherent in the Fund, investment
in shares of the Fund should not be considered a complete investment program and
is not appropriate for all investors. Investors should carefully consider their
ability to assume these risks before making an investment in the Fund.

THE ADVISOR

The Advisor is Colonial Management Associates, Inc., a Massachusetts
corporation having its principal offices at One Financial Center, Boston,
Massachusetts 02111. The Advisor is a wholly owned subsidiary of The Colonial
Group, Inc. ("LFG"), and both LFG and the Advisor are indirect subsidiaries of
Liberty Mutual Insurance Company, an underwriter of workers' compensation
insurance and a property and casualty insurer in the U.S. The Advisor has been
an investment adviser since 1931. As of the date of this Prospectus, the Advisor
serves as investment adviser for [39] open-end and [5] closed-end management
investment companies.

Scott B. Richards is the lead manager of the Fund. Carl C. Ericson is the
co-manager of the Fund.

MANAGEMENT AGREEMENT

The Management Agreement between the Advisor and the Fund (the "Management
Agreement") provides that, subject to the direction of the Board of Trustees of
the Fund and the applicable provisions of the 1940 Act, the Advisor is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular investment
rests with the Advisor, subject to review by the Board of Trustees of the Fund
and compliance with the applicable provisions of the 1940 Act.

30
<PAGE> 33

The Advisor provides the Fund with accounting, bookkeeping and pricing
services and other services and office facilities (the expenses of which are
borne by the Fund as specified below), except to the extent these services are
provided by an administrator or an accounting firm hired by the Fund.

Under the Management Agreement with the Fund, the Advisor receives a
monthly advisory fee at the annual rate of 0.65% of the average weekly net
assets of the Fund. Since the Advisor's fee is based on the average weekly net
assets of the Fund, the Advisor will benefit from any increase in the Fund's net
assets resulting from the Offer. It is not possible to state precisely the
amount of additional compensation the Advisor will receive as a result of the
Offer because it is not known how many Shares will be subscribed for and because
the proceeds of the Offer will be invested in additional portfolio securities
which will fluctuate in value. However, based on the estimated proceeds from the
Offer, assuming all the Rights are exercised in full for the Subscription Price
of $ per share, the Advisor would receive additional annual advisory fees of
approximately $ as a result of the increase in average weekly net
assets under management over the Fund's current net assets under management,
assuming no fluctuations in the value of Fund portfolio securities. In addition,
the Board of Trustees of the Fund has approved, subject to shareholder approval,
an amendment to the Fund's agreement with the Advisor under which the Fund would
pay the Advisor a percentage of the earnings on the Fund's leverage in excess of
the cost of such leverage. As a result, the Advisor may benefit from the
intended addition of incremental leverage by the Fund after completion of the
Offer.

The Advisor places all orders for the purchase and sale of portfolio
securities. In selecting broker-dealers, the Advisor may consider research and
brokerage services furnished by such broker-dealers to the Advisor and its
affiliates. In recognition of the research and brokerage services provided, the
Advisor may cause the Fund to pay the selected broker-dealer a higher commission
than would have been charged by another broker-dealer not providing such
services. Subject to seeking best execution, the Advisor may consider sales of
shares of certain other Colonial funds in selecting broker-dealers for portfolio
security transactions.

YEAR 2000 COMPLIANCE

The Advisor is actively coordinating, managing and monitoring Year 2000
readiness for the Fund. A central program office at the Advisor is working
within the Advisor and with vendors who provide services, software and systems
to the Fund to help ensure that date-related information and data can be
properly processed and calculated on and after January 1, 2000. Many Fund
service providers and vendors, including the Advisor, are in the process of
making Year 2000 modifications to their services, software and systems and
believe that such modifications will be completed on a timely basis prior to
January 1, 2000. The cost of these modifications will not affect the Fund.
However, no assurances can be given that all modifications required to ensure
proper data processing and calculation on and after January 1, 2000 will be
timely made or that services to the Fund will not be adversely affected.

DETERMINATION OF NET ASSET VALUE

Net asset value of the shares will be determined as of the close of regular
trading on the NYSE (generally 4:00 p.m. New York City time) on the last
business day of each week (generally Friday), and at such other times as the
Fund may authorize. Net asset value is determined by dividing the value of the
net assets of the Fund (for the purpose of determining the net asset value per
share, the value of the Fund's net assets shall be deemed to equal the value of
the Fund's assets less the Fund's liabilities (including the outstanding
principal amount of the Term Note and accrued but unpaid interest on the Term
Note)) by the total number of shares outstanding. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short term investments maturing in 60 days or less are valued at amortized cost
when the Advisor determines, pursuant to procedures adopted by the Board of
Trustees, that such cost approximates current market value. All other securities
and assets are valued at their fair value following procedures adopted by the
Board of Trustees.

31
<PAGE> 34

SHARE REPURCHASES; CONVERSION TO OPEN-END STATUS

REPURCHASE OF SHARES

Shares of closed-end investment companies frequently trade at a discount
from net asset value. The Board of Trustees regularly monitors the relationship
between the Fund's market price and net asset value. If shares of the Fund were
to trade at a substantial discount to net asset value for an extended period of
time, the Board may consider the repurchase of its shares on the open market or
the making of tender offers for such shares. Since commencement of the Fund's
operations, no such open market purchases or tender offers have been made, and
no assurances can be given that such actions will be taken in the future. The
Fund may borrow money to finance the repurchase of shares, subject to compliance
with the Asset Coverage Requirements, Section 18 of the 1940 Act and the other
limitations described under "Investment Policies and Limitations--Investment
Strategy--Additional Leverage." Shares may not be repurchased, however, (i) if
applicable asset coverage requirements under the 1940 Act (i.e., 300% with
respect to the Term Note and 200% with respect to preferred stock, if any) are
not met or would not be met following such repurchase, (ii) when payments of
principal of or interest on the Term Note are in default or (iii) if otherwise
prohibited by applicable law.

There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their net
asset value. The Fund anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Fund's investment performance, the Fund's dividends
and yield and investor perception of the Fund's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Fund and therefore have the effect of increasing the Fund's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Fund's net income.

CONVERSION TO OPEN-END STATUS

The Fund's Board of Trustees may from time to time consider submitting to
the holders of the shares at any time a proposal to convert the Fund to an
open-end investment company and in connection therewith to redeem or otherwise
retire the Term Note, as would be required upon such conversion by the 1940 Act.
In determining whether to exercise its discretion to submit this issue to
shareholders, the Board of Trustees would consider all factors then relevant,
including the relationship of the market price of the shares to net asset value,
the extent to which the Fund's capital structure is leveraged and the
possibility of re-leveraging, the spread, if any, between yields on lower rated
securities in the Fund's portfolio and interest and dividend charges on senior
securities and general market and economic conditions. In addition to any vote
required by Massachusetts law, conversion of the Fund to an open-end investment
company would require the affirmative vote of two-thirds of the shares entitled
to be voted on the matter. This two-thirds vote requirement is higher than the
vote required under the 1940 Act. Shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charges, if any, as might be in effect at the time of
redemption. If the Fund converted to an open-end investment company, it could be
required to liquidate portfolio securities to meet requests for redemption, and
the shares would no longer be listed on the NYSE. In the event the Fund converts
to open-end status, the Fund would only be able to borrow through bank
borrowings within certain limits and would not be allowed to have preferred
stock. No assurance can be given that the Board will, at any time in the future,
decide to submit a proposal to convert to open-end status to the shareholders of
the Fund.

DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN

It is the Fund's present policy, which may be changed by the Board of
Trustees, to pay dividends of investment company taxable income (but not
including short-term capital gains or "net capital gains," defined as the excess
of net long-term capital gains over net short-term capital losses) on a monthly
basis to holders of

32
<PAGE> 35

shares, and to distribute any net short-term capital gains and net capital gains
annually. Under present law, if the Fund were to retain ordinary income or net
capital gains, taxes would be imposed with respect to those amounts. There can
be no assurance that the Fund will be able to maintain its current level of
dividends, and the Fund may change the Fund's current level of dividends in
response to market or other conditions. See "Risk Factors and Special
Considerations--Dividends and Distributions." See also "Federal Taxation,"
"Description of Term Note--Restrictive Covenants" and "Description of Shares of
Beneficial Interest--Dividends and Distributions" for a discussion of certain
possible restrictions on the Fund's ability to declare dividends on the shares.

Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
shareholders whose shares are registered in their own names will have all
distributions reinvested automatically in additional shares of the Fund by First
Data Investor Services Group, Inc., as agent under the Plan (acting in such
capacity, the "Plan Agent"), unless a shareholder elects to receive cash. An
election to receive cash may be revoked or reinstated at the option of the
shareholder. Shareholders whose shares are held in the name of a broker or
nominee will have distributions reinvested automatically by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee, or unless the shareholder elects to receive
distributions in cash. If the service is not available, such distributions will
be paid in cash. Shareholders whose shares are held in the name of a broker or
nominee should contact the broker or nominee for details. All distributions to
investors who elect not to participate (or whose brokers or nominees elect not
to participate) in the Plan will be paid by check mailed directly to the record
holder by the Plan Agent, as dividend paying agent.

The Plan Agent will furnish each person who buys shares in the Offer with
written information relating to the Plan. Included in such information will be
procedures for electing to receive distributions in cash (or, in the case of
shares held in the name of a broker or nominee who does not participate in the
Plan, procedures for having such shares registered in the name of the
shareholder so that such shareholder may participate in the Plan).

If the Trustees of the Fund declare a dividend or capital gains
distribution payable either in shares or in cash, as holders of shares may have
elected, then nonparticipants in the Plan will receive cash and participants in
the Plan will receive the equivalent in shares valued as set forth below.
Whenever a market price is equal to or exceeds net asset value at the time
shares are valued for the purpose of determining the number of shares equivalent
to the cash dividend or capital gains distribution, participants will be issued
shares at the net asset value most recently determined as provided under
"Determination of Net Asset Value" in this prospectus and in the Statement of
Additional Information, or, if higher, at 95% of the market price. If the net
asset value of the shares at such time exceeds the market price of shares at
such time, or if the Fund should declare a dividend or capital gains
distribution payable only in cash, the Plan Agent will, as agent for the
participants, buy shares in the open market, on the NYSE or elsewhere, for the
participants' accounts. If, before the Plan Agent has completed its purchases,
the market price exceeds the net asset value of the shares, the average per
share purchase price paid by the Plan Agent may exceed the net asset value of
the shares, resulting in the acquisition of fewer shares than if the dividend or
capital gains distribution had been paid in shares issued by the Fund. The Plan
Agent will apply all cash received as a dividend or capital gains distribution
to purchase shares in the open market as soon as practicable after the payment
date of such dividend or capital gains distribution, but in no event later than
30 days after such date, except where necessary to comply with applicable
provisions of the federal securities laws.

The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in such accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.

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

33
<PAGE> 36

The automatic reinvestment of dividends and capital gains distributions
pursuant to the Plan will not relieve participants of any income tax which may
be payable on such dividends or distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid after written notice
of the change sent to participants in the Plan at least 30 days before the
record date for such dividend or capital gains distribution. All correspondence
concerning the Plan should be directed to the Plan Agent at P.O. Box 1376,
Boston, Massachusetts 02104.

FEDERAL TAXATION

The following discussion offers only a brief outline of certain material
federal income tax consequences of investing in shares of the Fund and is based
on the federal income tax laws in effect on the date hereof. Such tax laws are
subject to change by legislative, judicial or administrative action, possibly
with retroactive effect. Investors should consult their own tax advisers for
more detailed information and for information regarding the impact of state,
local and foreign taxes upon such an investment. See the Statement of Additional
Information for further discussion of federal income tax aspects of an
investment in the Fund.

The Fund has qualified and intends to continue to qualify as a "regulated
investment company" for federal income tax purposes and to meet all other
requirements necessary for it to be relieved of federal taxes on income and
gains it distributes to shareholders. In order to maintain its status as a
regulated investment company, the Fund will distribute substantially all of its
ordinary income and capital gain net income on a current basis.

Fund distributions will be taxable to shareholders as ordinary income to
the extent derived from the Fund's investment income and net short-term capital
gains (that is, net capital gains from securities held for not more than a
year). Distributions designated by the Fund as deriving from net capital gains
on securities held for more than one year will be taxable to shareholders as
such, regardless of how long such shareholder has held the shares. Distributions
will be taxable as described above whether received in cash or in shares through
the reinvestment of distributions.

Generally, gain recognized by a shareholder on the sale of Fund shares held
for more than one year will be taxable as long-term capital gain subject to a
maximum tax rate of 20%. See "Taxes--Federal Income Tax Treatment of Holders of
Shares" in the Statement of Additional Information for more information
regarding the capital gains tax rates applicable to capital gains or losses
recognized upon the sale of shares. If a shareholder holds shares primarily for
sale to customers in the ordinary course of business rather than for investment,
any gain recognized on the sale of those shares would be taxable as ordinary
income.

Early in each calendar year the Plan Agent will notify each shareholder of
the amount and tax status of distributions paid to such shareholder for the
preceding year.

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

GENERAL

The Fund has an unlimited number of authorized shares of beneficial
interest, no par value. As of , 1999, shares were
outstanding. The Board of Trustees has the authority under the Agreement and
Declaration of Trust to, and reserves the right to, issue shares from time to
time. See "Description of Term Note--Restrictive Covenants" for certain
restrictions. The shares issued are, or upon issuance will be, fully paid and
nonassessable (although shareholders could, in certain circumstances, be liable
for the obligations of the Fund to the extent set forth under "Shareholder
Liability" in the Statement of Additional Information) and will have no
preemptive rights or conversion rights. The Fund's shares are listed on the NYSE
under the symbol "CIF."

34
<PAGE> 37

DIVIDENDS AND DISTRIBUTIONS

The Fund may not declare dividends or distributions or purchase or redeem
any shares if, at the time of the declaration, purchase or redemption, as
applicable (and after giving effect thereto), asset coverage with respect to the
Fund's senior securities representing indebtedness, including the Term Note,
would be less than 300% (or such higher percentage as may in the future be
required by law) or asset coverage with respect to any senior securities of a
class which is stock would be less than 200% (or such higher percentage as may
in the future be required by law). See "Description of Term Note--Restrictive
Covenants" for certain definitions relating to the foregoing restrictions. Under
the Credit Agreement, the declaration of dividends or other distributions on or
the purchase or the redemption of shares will be prohibited at any time payments
of principal of or interest on the Term Note are in default.

LIQUIDATION RIGHTS

Upon a liquidation, dissolution or winding up of the Fund (whether
voluntary or involuntary), the holders of the shares will be entitled to
participate equally in the remaining assets of the Fund. Neither a sale, lease
or exchange of all or substantially all of the property and assets of the Fund
nor a consolidation or merger of the Fund with or into any other corporation or
business trust will be deemed to be a liquidation, dissolution or winding up of
the Fund.

VOTING

Holders of shares have voting rights of one vote per share. The Fund is
required by the rules of the NYSE to hold annual meetings of shareholders. The
most recent annual meeting of shareholders was held on [April 28, 1999]. The
next annual meeting of shareholders is expected to be scheduled for
, 2000.

CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST

The Board of Trustees is divided into three classes, each having a term of
three years. Each year the term of one class expires. This may make more
difficult a change in the Fund's management, and could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In addition, the
Agreement and Declaration of Trust provides that the affirmative vote or consent
of two-thirds of the outstanding shares of the Fund is required to authorize the
conversion of the Fund from a closed-end to an open-end investment company. This
two-thirds vote requirement is higher than the vote required under the 1940 Act.

DESCRIPTION OF TERM NOTE

GENERAL

The Fund entered into a credit agreement dated as of June 12, 1996 with
Bank of America Illinois pursuant to which the Fund issued a term note (the
"Original Term Note") to Bank of America Illinois in the aggregate principal
amount of $27,400,000, due in full on June 14, 1999 and bearing interest at the
fixed annual rate of 7.33%. On May 19, 1998, the Fund entered into an Amended
and Restated Credit Agreement (the "Credit Agreement") with Bank of America
National Trust and Savings Association, successor by merger to Bank of America
Illinois ("Bank of America"), pursuant to which the Fund issued a new term note
(the "Term Note") to Bank of America in the aggregate principal amount of
$44,900,000. The $27,400,000 borrowing (the "First Loan") under the Original
Term Note was refinanced under the Term Note with the same maturity and interest
rate. In addition, on May 19, 1998, the Fund borrowed under the Term Note the
aggregate principal amount of $6,900,000 (the "Second Loan") from Bank of
America, which amount is due in full on May 19, 2001 and bears interest at the
fixed annual rate of 6.37%. On June 14, 1999, the First Loan was refinanced
under the First Amendment to Credit Agreement with two term notes of $13,700,000
each, maturing on June 13, 2000 and June 13, 2002, respectively, with interest
at the fixed annual rates of 6.17% and 6.84%, respectively (the "Third Loan" and
the "Fourth Loan," respectively). On June 29, 1998, the Fund entered into a
Second Amended and Restated Credit Agreement with Bank of America and borrowed
under the Term Note an additional $9,200,000, which amount is due in full on
June 29, 2001 and bears interest at

35
<PAGE> 38

the fixed annual rate of 6.26% (the "Fifth Loan"). On , 199 , the
Fund also borrowed under a Revolving Loan with Bank of America in the amount of
$3,800,000, that is due in full on June 29, 2001 and bears interest at a fixed
annual rate of 6.29% (the "Sixth Loan"). The combined weighted average interest
rate of the $47,300,000 aggregate principal amount outstanding under the Term
Note is 6.42%. The issuance of any subsequent senior securities will be subject
to compliance with the 1940 Act, including Section 18 thereof. Any such
subsequent senior securities may have certain terms, including, but not limited
to, those relating to interest rate, redemptions, repurchases and maturity which
differ from the credit terms of the Term Note. The following summary of the
principal terms of the Term Note and certain terms of the Credit Agreement is
qualified in its entirety by reference to all provisions of the Credit
Agreement, including the definitions therein of certain terms. A copy of the
Credit Agreement has been incorporated by reference as an exhibit to the Fund's
Registration Statement on Form N-2, of which this Prospectus forms a part.

INTEREST

The Second Loan bears interest at the rate of 6.36% per annum from May 19,
1998 through and including May 19, 2001. Interest on the Second Loan is payable
on May 19 and November 19 of each year, commencing November 19, 1998. The Second
Loan will mature on May 19, 2001 if not repaid or redeemed prior to that date.
The Third and Fourth Loans bear interest at the rates of 6.17% and 6.84% per
annum, respectively, from June 14, 1999 through and including June 13, 2000 and
June 13, 2002, respectively. Interest on the Third and Fourth Loans is payable
on [June 13] and [December 13] of each year, commencing [December 13, 1999]. The
Third and Fourth Loans will mature on June 13, 2000 and June 13, 2002 if not
repaid or redeemed prior to that date. The Fifth Loan bears interest at the rate
of 6.26% per annum from June 29, 1998 through and including June 29, 2001.
Interest on the Fifth Loan is payable on [June 29] and [December 29] of each
year, commencing [December 28, 1998]. The Fifth Loan will mature on June 29,
2001 if not repaid or redeemed prior to that date. The Sixth Loan bears interest
at the rate of 6.29% per annum from [June 30, 1999] through and including June
29, 2001. Interest on the Sixth Loan is payable on [June 29] and [December 29]
of each year, commencing on [December 29, 1999]. The Sixth Loan will mature on
June 29, 2001 if not repaid or redeemed prior to that date.

REDEMPTION

Each Loan is redeemable by the Fund prior to maturity upon the payment of
certain prepayment penalties, as set forth in the Credit Agreement. The Term
Note, the Revolving Loan or any loan under either may also be declared
immediately due and payable by Bank of America or, in certain circumstances, may
become immediately due and payable without such declaration. All redemptions of
the Term Note, the Revolving Loan or any loan under either by the Fund will be
at a price of 100% of the principal amount thereof, plus accrued interest to the
date of redemption, plus applicable prepayment penalties, if any.

RANKING OF TERM NOTE

The Term Note and the Revolving Loan will rank pari passu with all other
existing and future senior indebtedness of the Fund and is senior to the shares.
"Senior indebtedness" means the principal of and interest on and other amounts
due on or in connection with any existing or future unsecured indebtedness of
the Fund.

RESTRICTIVE COVENANTS

Under the 1940 Act and the Credit Agreement, the Fund may not declare
dividends or other distributions on the shares or purchase any shares if, at the
time of the declaration or purchase, as applicable (and after giving effect
thereto), asset coverage with respect to the Fund's senior securities
representing indebtedness, including the Term Note, would be less than 300% (or
such higher percentage as may in the future be required by law). Under the Code,
the Fund must, among other things, distribute at least 90% of its investment
company taxable income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases may under certain circumstances impair
the Fund's ability to maintain such qualification. See "Federal Taxation" and
the

36
<PAGE> 39

Statement of Additional Information. The Credit Agreement also restricts the
Fund from investing more than 5% of the total assets of the Fund in a single
issuer and requires the Fund to retain certain levels of cash and "cash
equivalents" in its portfolio at all times.

The asset coverage of a class of senior securities representing
indebtedness, such as the Term Note or the Revolving Loan, is defined as the
ratio of (i) the total assets of the Fund, less all liabilities and indebtedness
not represented by senior securities, to (ii) the aggregate amount of senior
securities representing indebtedness of the Fund. The asset coverage of a class
of senior securities representing stock (see "Description of Shares of
Beneficial Interest -- Dividends and Distributions") is defined as the ratio of
(i) the total assets of the Fund, less all liabilities and indebtedness not
represented by senior securities, to (ii) the aggregate amount of senior
securities representing indebtedness of the Fund, plus the aggregate of the
liquidation preference of the senior securities representing stock. "Senior
securities representing indebtedness" generally means any bond, debenture, note
or similar obligation or instrument constituting a security (other than stock)
and evidencing indebtedness. For purposes of determining asset coverage for
senior securities representing indebtedness in connection with the payment of
dividends or other distributions on or purchases or redemptions of stock, the
term "senior security" does not include any promissory note or other evidence of
indebtedness issued in consideration of any loan, extension or renewal thereof,
made by a bank or other person and privately arranged, and not intended to be
publicly distributed. The term "senior security" also does not include any such
promissory note or other evidence in any case where such a loan is for temporary
purposes only and in an amount not exceeding 5% of the value of the total assets
of the Fund at the time when the loan is made; a loan is presumed under the 1940
Act to be for temporary purposes if it is repaid within 60 days and is not
extended or renewed; otherwise it is presumed not to be for temporary purposes.
For purposes of determining whether the 300% and 200% asset coverage
requirements described above apply in connection with dividends or distributions
on or purchases or redemptions of the shares and for purposes of determining
conformance with Asset Coverage Requirements, such asset coverages may be
calculated on the basis of values calculated as of a time within 48 hours (not
including Sundays or holidays) next preceding the time of the applicable
determination. The foregoing definitions reflect the provisions of the 1940 Act
as in effect on the date hereof and are subject to change to the extent
necessary to reflect changes in the 1940 Act, if any.

The Credit Agreement contains a covenant limiting the Fund's ability to
incur, assume, guarantee or otherwise become liable with respect to any
indebtedness for money borrowed or issue preferred stock other than the Term
Note [and the Revolving Loan], a limited amount of unsecured indebtedness to the
Fund's Custodian and reverse repurchase agreements permitted by the Fund's
investment restrictions. See the Statement of Additional Information.

CUSTODIAN, TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND REGISTRAR

The Fund's securities and cash are held by The Chase Manhattan Bank, whose
principal business address is 4 Chase MetroTech Center, Brooklyn, New York
11245, as custodian (the "Custodian") under a custodian contract.

First Data Investor Services Group, Inc. serves as dividend disbursing
agent, as agent under the Plan and as transfer agent and registrar for the
shares.

LEGAL OPINIONS

The validity of the shares offered hereby will be passed upon for the Fund
by Ropes & Gray, Boston, Massachusetts, which serves as counsel to the Fund.
Certain matters will be passed on for the Dealer Manager by Skadden, Arps,
Slate, Meagher & Flom (Illinois), Chicago, Illinois.

REPORTS TO SHAREHOLDERS

The Fund will send unaudited semiannual and audited annual reports to its
shareholders, including a list of investments held.

37
<PAGE> 40

EXPERTS

The Financial Statements incorporated by reference in the Statement of
Additional Information have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting. The address of Price Waterhouse LLP
is 160 Federal Street, Boston, Massachusetts 02110.

FURTHER INFORMATION

The Fund has filed with the Commission, Washington, D.C. 20549, a
Registration Statement under the Securities Act with respect to the shares
offered hereby. Further information concerning these securities and the Fund may
be found in the Registration Statement, of which this prospectus constitutes a
part, on file with the Commission. The Registration Statement may be inspected
without charge at the Commission's office in Washington, D.C., and copies of all
or any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.

The Fund is subject to the informational requirements of the 1934 Act and
the 1940 Act, and in accordance therewith files reports and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, Washington, D.C. 20549 and the
Commission's regional offices, including offices at Seven World Trade Center,
New York, New York 10048. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such reports and other information
concerning the Fund may also be inspected at the offices of the NYSE. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference into this
prospectus and the Statement of Additional Information, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.

TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 2
Investment Objective and Policies........................... 2
Fundamental Investment Policies............................. 2
Other Investment Policies................................... 3
Fund Charges and Expenses................................... 3
Management of the Fund...................................... 7
Custodian................................................... 7
Independent Accountants..................................... 8
Incorporation of Financial Statements by Reference.......... 8
Determination of Net Asset Value............................ 8
Portfolio Transactions...................................... 9
Miscellaneous Investment Practices.......................... 10
Taxes....................................................... 23
Shareholder Liability....................................... 27
</TABLE>

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<PAGE> 41

APPENDIX A

BOND RATINGS

THE FOLLOWING RATING SERVICES DESCRIBE RATED SECURITIES AS FOLLOWS:

MOODY'S INVESTORS SERVICE, INC.

BONDS

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 both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.

B -- Bonds which are rated 'B' generally lack characteristics of 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.

STANDARD & POOR'S

BONDS

AAA -- Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.

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

39
<PAGE> 42

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 exhibits 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.

BB-B-CCC-CC-C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 'BB'
indicates the lowest 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' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.

C -- The rating 'C' typically is 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.

D -- Bonds rated 'D' are 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 on the filing of a bankruptcy petition if debt service payments are
jeopardized.

40
<PAGE> 43

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

NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFER, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF OTHER INFORMATION IS GIVEN OR OTHER REPRESENTATIONS ARE MADE,
THEY MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISOR
OR THE DEALER MANAGER. AT ANY TIME AFTER THE DATE OF THIS PROSPECTUS, THE
INFORMATION IT CONTAINS MAY NO LONGER BE ACCURATE OR COMPLETE. HOWEVER, IF ANY
MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED,
THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE FUND'S SHARES, AS DESCRIBED IN THIS PROSPECTUS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------

TABLE OF CONTENTS

PROSPECTUS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Fee Table............................. 9
Financial Highlights.................. 10
Capitalization at ,
1999................................ 11
Information Regarding Senior
Securities.......................... 11
Trading and Net Asset Value
Information......................... 12
The Fund.............................. 13
The Offer............................. 14
Use of Proceeds....................... 23
Investment Policies and Limitations... 23
Risk Factors and Special
Considerations...................... 27
The Advisor........................... 30
Determination of Net Asset Value...... 31
Share Repurchases; Conversion to Open-
End Status.......................... 32
Dividends and Distributions; Dividend
Reinvestment Plan................... 32
Federal Taxation...................... 34
Description of Shares of Beneficial
Interest............................ 34
Description of Term Note.............. 35
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar...... 37
Legal Opinions........................ 37
Reports to Shareholders............... 37
Experts............................... 38
Further Information................... 38
Table of Contents of Statement of
Additional Information.............. 38
Appendix A............................ 39
</TABLE>

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

SHARES OF BENEFICIAL
INTEREST ISSUABLE UPON
EXERCISE OF RIGHTS TO
SUBSCRIBE FOR SUCH SHARES

COLONIAL INTERMEDIATE
HIGH INCOME FUND

SHARES OF BENEFICIAL INTEREST

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

[ ]
------------------------

, 1999

================================================================================
IH-01/326F-0598
<PAGE> 44

COLONIAL INTERMEDIATE HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information ("SAI") contains information which
may be useful to investors but which is not included in the Prospectus of
Colonial Intermediate High Income Fund (the "Fund"). This SAI is not a
prospectus and is only authorized for distribution when accompanied or preceded
by the Prospectus of the Fund dated , 1999. This SAI should be read
together with the Prospectus. Investors may obtain a free copy of the Prospectus
dated , 1999 and the Annual Report dated October 31, 1998 from the
Information Agent for the Offer, Shareholder Communications Corporation, 17
State Street, 27th Floor, New York, New York 10004, Telephone (800) 733-8481,
ext. 486.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions................................................. 2
Investment Objective and Policies........................... 2
Fundamental Investment Policies............................. 2
Other Investment Policies................................... 3
Fund Charges and Expenses................................... 3
Management of the Fund...................................... 9
Custodian................................................... 10
Independent Accountants..................................... 10
Incorporation of Financial Statements by Reference.......... 10
Determination of Net Asset Value............................ 10
Portfolio Transactions...................................... 11
Miscellaneous Investment Practices.......................... 12
Taxes....................................................... 25
Shareholder Liability....................................... 30
</TABLE>

IH-16/
<PAGE> 45

COLONIAL INTERMEDIATE HIGH INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION

DEFINITIONS

<TABLE>
<S> <C>
"Fund" Colonial Intermediate High Income Fund
"Advisor" Colonial Management Associates, Inc., the Fund's investment
adviser
"First Data" First Data Investor Services Group, Inc., the Fund's
transfer agent, dividend disbursing agent, plan agent and
registrar
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

The Fund's Prospectus describes its investment objective and investment
policies. This SAI includes additional information concerning, among other
things, the investment policies of the Fund and information about certain
securities and investment techniques that are described or referred to in the
Prospectus or in which the Fund expects to engage. Except as indicated under
"Fundamental Investment Policies," the Fund's investment policies are not
fundamental and the Trustees may change the policies without shareholder
approval.

FUNDAMENTAL INVESTMENT POLICIES

The Investment Company Act of 1940, as amended (the "Act"), provides that a
"vote of a majority of the outstanding voting securities" means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of the Fund,
or (2) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy. The
following fundamental investment policies cannot be changed without such a vote.

Total assets and net assets are determined at current value for purposes of
compliance with investment restrictions and policies. All percentage limitations
will apply at the time of investment and are not violated unless an excess or
deficiency occurs as a result of such investment. For the purpose of the Act's
diversification requirement, an issuer is the entity whose revenues support the
security.

The Fund may:

1. Issue senior securities or borrow money to the extent permitted by
the Act;

2. Only own real estate acquired as a result of owning securities;

3. Purchase and sell interest rate futures contracts, foreign
currency forward or futures contracts, futures contracts on
indexes of securities, and options relating to any of the
foregoing;

4. Underwrite securities issued by others only when disposing of
portfolio securities;

5. Make loans through lending of securities, through the purchase of
debt instruments or similar evidences of indebtedness typically
sold to financial institutions and through repurchase agreements;
and

6. Not concentrate more than 25% of its total assets in any one
industry, or with respect to 75% of total assets purchase any
security (other than obligations of the U.S. Government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer or purchase the voting securities of an issuer if, as a
result of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.

2
<PAGE> 46

OTHER INVESTMENT POLICIES

The following non-fundamental policies may be changed without shareholder
approval:

The Fund may not:

1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;

2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities;

3. Own securities of any company if the Fund knows that officers and
Trustees of the Fund or officers or directors of the Advisor who
individually own more than 0.5% of such securities together own
more than 5% of such securities; and

4. Invest in interests in oil, gas or other mineral exploration or
development programs, including leases.

FUND CHARGES AND EXPENSES

Under the Fund's management agreement, the Fund pays the Advisor a monthly
fee based on the average weekly net assets of the Fund at the annual rate of
0.65%. In addition, the Board of Trustees of the Fund has approved, subject to
shareholder approval, an amendment to the Fund's management agreement under
which the Fund would pay the Advisor an amount equal to 20% of any excess of the
earnings on the Fund's leverage over the interest payable on such leverage, and
the Advisor's fee under the Fund's management agreement would be decreased by an
amount equal to 20% of any excess of the interest payable on the Fund's leverage
over the earnings on the Fund's leverage.

RECENT FEES PAID TO THE ADVISOR AND FIRST DATA (dollars in thousands)

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Management fee................................. $775 $680 $631
Bookkeeping fee................................ 50 46 43
Transfer agent fee............................. 53 51 53
</TABLE>

BROKERAGE COMMISSIONS

The Fund did not pay any brokerage commissions for the fiscal years ended
October 31, 1998, 1997 and 1996.

TRUSTEES AND OFFICERS

The Trustees and officers of the Fund, their addresses, their ages and
their principal occupations for at least the past five years are set forth
below.

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
---------------- --- ------------------ --------------------
<S> <C> <C> <C>
Robert J. Birnbaum................... 71 Trustee Consultant (formerly Special Counsel,
313 Bedford Road Dechert Price & Rhoads from
Ridgewood, NJ 07450 September, 1988 to December, 1993).
Tom Bleasdale........................ 68 Trustee Retired (formerly Chairman of the
102 Clubhouse Drive #275 Board and Chief Executive Officer,
Naples, FL 34105 Shore Bank & Trust Company from
1992-1993), is a Director of Empire
Company Limited since June, 1995.
</TABLE>

3
<PAGE> 47

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
- ---------------- --- ------------------ --------------------
<S> <C> <C> <C>
John V. Carberry*.................... 51 Trustee Senior Vice President of Liberty
56 Woodcliff Road Financial (formerly Managing
Wellesley Hills, MA 02481 Director, Salomon Brothers
(investment banking) from January,
1988 to January, 1998).

Lora S. Collins...................... 63 Trustee Attorney (formerly Attorney, Kramer,
1175 Hill Road Levin, Naftalis & Frankel from
Southold, NY 11971 September, 1986 to November, 1996).

James E. Grinnell.................... 69 Trustee Private Investor since November,
22 Harbor Avenue 1988.
Marblehead, MA 01945

Richard W. Lowry..................... 62 Trustee Private Investor since August, 1987.
10701 Charleston Drive
Vero Beach, FL 32963

Salvatore Macera..................... 67 Trustee Private Investor (formerly Executive
26 Little Neck Lane Vice President and Director of Itek
New Seabury, MA 02649 Corporation (electronics) from 1975
to 1981).

William E. Mayer*.................... 58 Trustee Partner, Development Capital, LLC
500 Park Avenue, 5th Floor (formerly Dean, College of Business
New York, NY 10022 and Management, University of
Maryland from October, 1992 to
November, 1996, Dean, Simon Graduate
School of Business, University of
Rochester from October, 1991 to July,
1992).

James L. Moody, Jr................... 67 Trustee Retired (formerly Chairman of the
16 Running Tide Road Board, Hannaford Bros. Co. from May,
Cape Elizabeth, ME 04107 1984 to May, 1997, and Chief
Executive Officer, Hannaford Bros.
Co. from May, 1973 to May, 1992).

John J. Neuhauser.................... 55 Trustee Dean, Boston College School of
84 College Road Management since 1977.
Chestnut Hill, MA 02467-3838

Thomas E. Stitzel.................... 63 Trustee Professor of Finance, College of
2208 Tawny Woods Place Business, Boise State University
Boise, ID 83706 (higher education); Business
consultant and author.

Robert L. Sullivan................... 70 Trustee Retired Partner, KPMG Peat Marwick
45 San Katy Avenue LLP.
Siasconset, MA 02564

Anne-Lee Verville.................... 53 Trustee Consultant (formerly General Manager,
359 Stickney Hill Road Global Education Industry from 1994
Hopkinton, NH 03229 to 1997, and President, Applications
Solutions Division from 1991 to 1994,
IBM Corporation (global education and
global applications)).
</TABLE>

4
<PAGE> 48

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
- ---------------- --- ------------------ --------------------
<S> <C> <C> <C>
Stephen E. Gibson.................... 45 President President of the Liberty Funds since
June, 1998, Chairman of the Board
since July, 1998, Chief Executive
Officer and President since December
1996 and Director, since July 1996 of
the Advisor (formerly Executive Vice
President from July, 1996 to
December, 1996); Director, Chief
Executive Officer and President of
LFG since December, 1998 (formerly
Director, Chief Executive Officer and
President of The Colonial Group, Inc.
(TCG) from December, 1996 to
December, 1998); Assistant Chairman
of Stein Roe & Farnham Incorporated
(SR&F) since August, 1998 (formerly
Managing Director of Marketing of
Putnam Investments, June 1992 to
July, 1996.)

J. Kevin Connaughton................. 34 Controller and Chief Controller and Chief Accounting
Accounting Officer Officer of Liberty Funds since
February, 1998; Vice President of the
Advisor since February, 1998
(formerly Senior Tax Manager, Coopers
& Lybrand, LLP from April, 1996 to
January, 1998; Vice President, 440
Financial Group/First Data Investor
Services Group from March, 1994 to
April, 1996).

Timothy J. Jacoby.................... 46 Treasurer and Chief Treasurer and Chief Financial Officer
Financial Officer of Liberty Funds since October, 1996
(formerly Controller and Chief
Accounting Officer from October, 1997
to February, 1998); Senior Vice
President of the Advisor since
September, 1996, Vice President,
Chief Financial Officer and Treasurer
since December, 1998 of LFG (formerly
Vice President, Chief Financial
Officer and Treasurer from July, 1997
to December, 1998 of TCG); Senior
Vice President of SR&F since August,
1998 (formerly Senior Vice President,
Fidelity Accounting and Custody
Services from September, 1993 to
September, 1996).
</TABLE>

5
<PAGE> 49

<TABLE>
<CAPTION>
NAME AND ADDRESS AGE POSITION WITH FUND PRINCIPAL OCCUPATION
---------------- --- ------------------ --------------------
<S> <C> <C> <C>
Nancy L. Conlin...................... 45 Secretary Secretary of Liberty Funds since
April, 1998 (formerly Assistant
Secretary from July, 1994 to April,
1998); Director, Senior Vice
President, General Counsel, Clerk and
Secretary of the Advisor since April,
1998 (formerly Vice President,
Counsel, Assistant Secretary and
Assistant Clerk from July, 1994 to
April, 1998), Vice President, General
Counsel and Clerk of LFG since
December, 1998 (formerly Vice
President, General Counsel and Clerk
of TCG from April, 1998 to December
1998 (formerly Assistant Clerk from
July, 1994 to April, 1998).
Joseph R. Palombo.................... 46 Vice President Vice President of the Funds since
April, 1999; Executive Vice President
and Director of the Advisor since
April, 1999; Executive Vice President
and Chief Administrative Officer of
LFG since April, 1999; (formerly
Chief Operating Officer, Putnam
Mutual Funds from 1994 to 1998).
</TABLE>

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

* A Trustee who is an "interested person" (as defined in the Act) of the Fund or
the Advisor.

The business address of the officers of the Fund is One Financial Center,
Boston, Massachusetts 02111.

The Trustees serve as trustees of all Liberty Funds, for which each Trustee
will receive an annual retainer of $45,000 and attendance fees of $7,500 for
each regular joint meeting and $1,000 for each special joint meeting. Committee
chairs receive an annual retainer of $5,000. Committee members receive an annual
retainer of $1,000 and $1,000 for each special meeting attended. Two-thirds of
the Trustee fees are allocated among the Liberty Funds based on each Fund's
relative net assets, and one-third of the fees are divided equally among the
Liberty Funds.

TRUSTEES' FEES

For the fiscal year ended October 31, 1998, and the calendar year ended
December 31, 1998, the Trustees received the following compensation for serving
as Trustees(a):

<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM FUND AND
AGGREGATE COMPENSATION FROM FUND COMPLEX PAID TO THE TRUSTEES FOR
FUND FOR THE YEAR ENDED THE CALENDAR YEAR ENDED
TRUSTEE OCTOBER 31, 1998 DECEMBER 31, 1998(B)
------- --------------------------- -------------------------------------
<S> <C> <C>
Robert J. Birnbaum(c).................. $1,211 $ 99,429
Tom Bleasdale(c)....................... 1,236(d) 115,000(e)
John V. Carberry....................... N/A N/A(f)(g)
Lora S. Collins(c)..................... 1,188 97,429
James E. Grinnell(c)................... 1,256(h) 103,071
Richard W. Lowry(c).................... 1,195 98,214
Salvatore Macera(i).................... -- 25,250
William E. Mayer(c).................... 1,242 99,286
James L. Moody, Jr.(c)................. 1,289(j) 105,857(k)
John J. Neuhauser(c)................... 1,285 105,323
</TABLE>

6
<PAGE> 50

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

<TABLE>
<S> <C>
(a) The Fund does not currently provide pension or retirement
plan benefits to the Trustees.

(b) At December 31, 1998, the Fund Complex consisted of 56
open-end and 5 closed-end management investment company
portfolios (together, the "Liberty Funds").

(d) Includes $635 payable in later years as deferred
compensation.

(e) Includes $52,000 payable in later years as deferred
compensation.

(f) Elected by the trustees of the closed-end Liberty Funds on
June 18, 1998 and by the shareholders of the open-end
Liberty Funds on October 30, 1998.

(g) Does not receive compensation because he is an "interested
person" of the Advisor and an employee of Liberty Financial.

(h) Includes $10 payable in later years as deferred
compensation.

(i) Elected by the shareholders of the open-end Liberty funds on
October 30, 1998, and by the trustees of the closed-end
Liberty Funds on December 17, 1998.

(j) Total compensation of $1,289 payable in later years as
deferred compensation.

(k) Total compensation of $105,857 for the calendar year ended
December 31, 1998 will be payable in later years as deferred
compensation.

(l) Total compensation of $897 payable in later years as
deferred compensation.

(m) Total compensation of $23,445 for the calendar year ended
December 31, 1998 will be payable in later years as deferred
compensation.
</TABLE>

For the calendar year ended December 31, 1998, certain of the Trustees
received the following compensation in their capacities as Trustees or Directors
of the Liberty All-Star Equity Fund and of the Liberty All-Star Growth Fund,
Inc. (together, Liberty All-Star Funds)(n).

<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM THE
LIBERTY ALL-STAR FUNDS FOR THE CALENDAR YEAR
TRUSTEE ENDED DECEMBER 31, 1998(O)
- ------- --------------------------------------------
<S> <C>
Robert J. Birnbaum.......................... $25,000
John V. Carberry(p)(q)...................... N/A
James E. Grinnell........................... 25,000
Richard W. Lowry............................ 25,000
William E. Mayer(r)......................... 14,000
John J. Neuhauser(s)........................ 25,000
</TABLE>

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

<TABLE>
<S> <C>
(n) The Funds do not currently provide pension or retirement
plan benefits to the Trustees.

(o) The Liberty All-Star Funds are advised by Liberty Asset
Management Company (LAMCO). LAMCO is an indirect
wholly-owned subsidiary of Liberty Financial (an
intermediate parent of the Advisor).

(p) Does not receive compensation because he is an "interested
person" of the Advisor and an employee of Liberty Financial.

(q) Elected by the trustees/directors of the Liberty All-Star
Funds on June 30, 1998.

(r) Elected by the shareholders of the Liberty All-Star Equity
Fund on April 22, 1998, and by the trustees of the Liberty
All-Star Growth Fund, Inc. on December 17, 1998.

(s) Elected by the shareholders of the Liberty All-Star Funds on
April 22, 1998.
</TABLE>

7
<PAGE> 51

OWNERSHIP OF THE FUND

At , 1999, the officers and Trustees of the Fund as a group
owned less than 1% of the outstanding shares of the Fund.

At , 1999, The Depository Trust Company (Cede & Co.), 7 Hanover
Square, New York, New York 10004, owned of record shares
representing % of the Fund's outstanding shares.

8
<PAGE> 52

MANAGEMENT OF THE FUND

The Advisor is the investment adviser to each of the Liberty Funds (except
for Colonial Money Market Fund, Colonial Municipal Money Market Fund, Stein Roe
Advisor Tax Managed Growth Fund, Stein Roe Advisor Tax Managed Value Fund,
Colonial Utilities Fund, Colonial Global Utilities Fund, Newport Tiger Fund,
Newport Tiger Cub Fund, Newport Japan Opportunities Fund, Newport Asia Pacific
Fund, Newport Greater China Fund, The Crabbe Huson Special Fund, Crabbe Huson
Small Cap Fund, Crabbe Huson Real Estate Fund, Crabbe Huson Equity Fund, Crabbe
Huson Managed Income & Equity Fund, Crabbe Huson Oregon Fund, Crabbe Huson
Contrarian Income Fund, Crabbe Huson Contrarian Fund and Liberty Variable
Investment Trust, for each of which the Advisor serves as Administrator). The
Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One Financial
Center, Boston, Massachusetts 02111. LFG is a direct subsidiary of Liberty
Financial Companies, Inc. ("Liberty Financial"), which in turn is a direct
subsidiary of LFC Holdings, Inc., which in turn is a direct subsidiary of
Liberty Mutual Equity Corporation, which in turn is a wholly-owned subsidiary of
Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty Mutual is an
underwriter of workers' compensation insurance and a property and casualty
insurer in the U.S. Liberty Financial's address is 600 Atlantic Avenue, Boston,
Massachusetts 02210. Liberty Mutual's address is 175 Berkeley Street, Boston,
Massachusetts 02117.

Under a Management Agreement (the "Agreement"), the Advisor has agreed to
furnish the Fund with investment research and recommendations, and office space,
equipment and other facilities at the Advisor's expense. For these services and
facilities, the Fund pays a monthly fee equal, on an annual basis, to 0.65% of
the average weekly net assets of the Fund (which, for the purposes of
determining such fee, shall mean the average weekly value of the total assets of
the Fund, minus the sum of accrued liabilities of the Fund). The Fund pays
operating costs, including auditing, legal, administration, custodian, Trustees,
shareholder services and transfer and dividend paying agent and registrar fees
and expenses. In addition, the Board of Trustees of the Fund has approved,
subject to shareholder approval, an amendment to the Fund's management agreement
under which the Fund would pay the Advisor an amount equal to 20% of any excess
of the earnings on the Fund's leverage over the interest payable on such
leverage and the Advisor's fee under the Fund's management agreement would be
decreased by an amount equal to 20% of any excess of the interest payable on the
Fund's leverage over the earnings on the Fund's leverage.

Under the Agreement, any liability of the Advisor to the Fund and its
shareholders is limited to situations involving the Advisor's own willful
misfeasance, bad faith, gross negligence or reckless disregard of duties.

The Agreement may be terminated at any time on 60 days' notice by the
Advisor or by the Trustees of the Fund or by vote of a majority of the
outstanding voting securities of the Fund. The Agreement will automatically
terminate upon any assignment thereof and will continue in effect after two
years from the date of its execution only so long as such continuance is
approved at least annually (i) by the Trustees of the Fund or by vote of a
majority of the outstanding voting securities of the Fund and (ii) by vote of a
majority of the Trustees who are not interested persons (as such term is defined
in the Act) of the Advisor or the Fund, cast in person at a meeting called for
the purpose of voting on such approval.

The Advisor also provides the Fund with bookkeeping and pricing services,
and for these services, the Fund pays the Advisor a monthly fee of $2,250 for
the first $50 million of Fund assets, plus a monthly percentage fee at the
following annual rates: .035% on the next $950 million; .025% on the next $1
billion; .015% on the next $1 billion; and .001% on the excess over $3 billion
of the average net assets of the Fund for such month.

The Advisor also acts as investment adviser to the other Colonial Funds
(described under "Fund Charges and Expenses--Trustees' Fees"). Various officers
and Trustees of the Fund also serve as officers, directors or trustees of other
Funds advised by the Advisor and of other corporate or fiduciary clients of the
Advisor. The other investment companies and clients advised by the Advisor may
sometimes invest in securities and options in which the Fund will also invest.
If the Fund, such other investment companies and such clients desire to buy or
sell the same portfolio securities or options at about the same time, the
purchases and sales will normally be made as nearly as practicable on a pro rata
basis in proportion to the amounts desired to be purchased or sold by each.
Although in some cases these practices may have a detrimental effect on the
price or volume of the securities or options as far as the Fund is concerned, in
most cases it is believed that these practices should produce better executions.

9
<PAGE> 53

CUSTODIAN

The Chase Manhattan Bank (the "Custodian") is the Fund's custodian. The
Custodian is responsible for safeguarding the Fund's cash and securities,
receiving and delivering securities and collecting the Fund's interest and
dividends. The Custodian's address is 270 Park Avenue, New York, New York
10017-2070.

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP are the Fund's independent accountants providing
audit and tax return preparation services and assistance and consultation in
connection with the review of various Securities and Exchange Commission
filings. The address of PricewaterhouseCoopers LLP is 160 Federal Street,
Boston, Massachusetts 02110. The financial statements incorporated by reference
in this SAI have been so incorporated, and the financial highlights included in
the Prospectus have been so included, in reliance upon the report of
PricewaterhouseCoopers LLP given on the authority of said firm as experts in
accounting and auditing.

The financial statements and Report of Independent Accountants appearing in
the October 31, 1998 Annual Report are incorporated in this SAI by reference.

INCORPORATION OF FINANCIAL STATEMENTS BY REFERENCE

The Fund's Annual Report, which includes financial statements for the
fiscal year ended October 31, 1998 and which either accompanies the Prospectus
or has previously been provided to persons to whom the Prospectus has been sent,
is incorporated herein by reference with respect to all information other than
the information set forth in the Letter to Shareholders included therein. Any
statement contained in the Fund's Annual Report that was incorporated herein
shall be deemed modified or superseded for purposes of the Prospectus or this
SAI to the extent a statement contained in the Prospectus or this SAI varies
from such statement. Any such statement so modified or superseded shall not,
except as so modified or superseded, be deemed to constitute a part of the
Prospectus or this SAI. The Information Agent for the Offer will furnish,
without charge, a copy of its Annual Report, upon request to Shareholder
Communications Corporation, 17 State Street, 27th Floor, New York, New York
10004, telephone (800) 733-8481, ext. 486, Monday through Friday from 9:00 a.m.
to 5:00 p.m.

DETERMINATION OF NET ASSET VALUE

Net asset value ("NAV") of the Fund's shares will be determined as of the
close of regular trading on the Exchange (generally 4:00 p.m. New York City
time) on the last Business Day of each week (generally Friday), and at such
other times as the Fund may authorize. It will be determined by dividing the
value of the net assets of the Fund (for the purpose of determining the net
asset value per share, the value of the Fund's net assets shall be deemed to
equal the value of the Fund's assets less the Fund's liabilities (including the
outstanding principal amount of the Term Note and unpaid interest on the Term
Note)) by the total number of shares outstanding. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short term investments maturing in 60 days or less are valued at amortized cost
when the Advisor determines, pursuant to procedures adopted by the Board of
Trustees, that such cost approximates current market value. All other securities
and assets are valued at their fair value following procedures adopted by the
Board of Trustees.

Debt securities generally are valued by a pricing service which determines
valuations based upon market transactions for normal, institutional-size trading
units of similar securities. However, in circumstances where such prices are not
available or where the Advisor deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities listed on an
exchange or on NASDAQ are valued at the last sale price. Listed securities for
which there were no sales during the day and unlisted securities are valued at
the last quoted bid price. Options are valued at the last sale price or, in the
absence of a sale, the mean between the last quoted bid and offering prices.
Short-term obligations with a maturity of 60 days or less are valued at

10
<PAGE> 54

amortized cost pursuant to procedures adopted by the Trustees. The values of
foreign securities quoted in foreign currencies are translated into U.S. dollars
at the exchange rate for that day. Portfolio positions for which there are no
such valuations and other assets are valued at fair value as determined by the
Advisor in good faith under the direction of the Fund's Trustees.

Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of regular
trading on the Exchange. Trading on certain foreign securities markets may not
take place on all business days in New York, and trading on some foreign
securities markets takes place on days which are not business days in New York
and on which the Fund's NAV is not calculated. The values of these securities
used in determining the NAV are computed as of such times. Also, because of the
amount of time required to collect and process trading information as to large
numbers of securities, the values of certain securities (such as convertible
bonds, U.S. government securities and tax-exempt securities) are determined
based on market quotations collected earlier in the day at the latest
practicable time prior to the close of regular trading on the Exchange.
Occasionally, events affecting the value of such securities may occur between
such times and the close of the Exchange which will not be reflected in the
computation of the Fund's NAV. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value following procedures approved by the Fund's Trustees.

PORTFOLIO TRANSACTIONS

The Advisor is responsible for decisions to buy and sell securities and
other portfolio holdings for the Fund, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if any.
Fixed-income securities are generally traded on a "net" basis with dealers
acting as principals for their own accounts without a stated commission,
although the price of the security will likely include a profit to the dealer.
In underwritten offerings, securities are usually purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.

In placing orders for portfolio securities of the Fund, the Advisor is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Advisor will seek to execute each
transaction at a price and commission, if any, which provides the most favorable
total cost or proceeds reasonably attainable under the circumstances. In seeking
the most favorable price and execution, the Advisor, having in mind the Fund's
best interests, will consider all factors it deems relevant, including, by way
of illustration, price, the size of the transaction, the nature of the market
for the security, the amount of commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions. Though the Advisor generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of the
policy of obtaining the most favorable price and efficient execution, the
Advisor will consider research and investment services provided by brokers and
dealers who effect or are parties to portfolio transactions with the Fund, the
Advisor or the Advisor's other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include statistical and economic data and research reports on particular
issuers and industries. Such services are used by the Advisor in connection with
all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in
managing other investment accounts. Conversely, brokers furnishing such services
may be selected for the execution of transactions for such other accounts, and
the services furnished by such brokers may be used by the Advisor in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations based on the quality and quantity of execution services provided by
the broker or dealer in light of generally prevailing rates. The management fee
paid by the Fund will not be reduced because the Advisor and/or other clients
receive such services. The allocation of orders and the commission rates paid by
the Fund will be reviewed periodically by the Board of Trustees.

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As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Advisor may cause the Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in the 1934 Act) to
the Advisor, an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker-dealer
would have charged for effecting that transaction.

For the fiscal years ended October 31, 1996, 1997 and 1998, the Fund paid
no brokerage commissions for the execution of portfolio transactions. The rate
of portfolio turnover for each of the fiscal years ended October 31, 1996, 1997
and 1998 was 92%, 92% and 69%, respectively.

MISCELLANEOUS INVESTMENT PRACTICES

SHORT-TERM TRADING

In seeking the Fund's objective, the Advisor will buy or sell portfolio
securities whenever the Advisor believes it appropriate to do so. In deciding
whether to sell a portfolio security, the Advisor does not consider how long the
Fund has owned the security. From time to time the Fund will buy securities
intending to seek short-term trading profits. A change in the securities held by
the Fund is known as "portfolio turnover" and generally involves some expense to
the Fund. This expense may include brokerage commissions or dealer markups and
other transaction costs on both the sale of securities and the reinvestment of
the proceeds in other securities. If sales of portfolio securities cause the
Fund to realize net short-term capital gains, such gains will be taxable as
ordinary income. As a result of the Fund's investment policies, under certain
market conditions the Fund's portfolio turnover rate may be higher than that of
other investment companies. Portfolio turnover rate for a fiscal year is the
ratio of the lesser of purchases or sales of portfolio securities to the monthly
average of the value of portfolio securities -- excluding securities whose
maturities at acquisition were one year or less. The Fund's portfolio turnover
rate is not a limiting factor when the Advisor considers a change in the Fund's
portfolio.

LOWER-RATED SECURITIES

The Fund may invest all or any portion of its assets in lower-rated
securities (commonly known as "high yield," high risk securities or "junk
bonds"). The lower ratings of certain securities held by the Fund reflect a
greater possibility that adverse changes in the financial condition of the
issuer or in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payments of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
such securities. In the absence of a liquid trading market for securities held
by it, the Fund at times may be unable to establish the fair value for such
securities.

Securities ratings are based largely on the issuer's historical financial
condition and the rating agencies' analysis at the time of rating. Consequently,
the rating assigned to any particular security is not necessarily a reflection
of the issuer's current financial condition, which may be better or worse than
the rating would indicate. In addition, the rating assigned to a security by
Moody's Investors Service, Inc. or Standard & Poor's Ratings Group (or by any
other nationally recognized securities rating organization) does not reflect an
assessment of the volatility of the security's market value or the liquidity of
an investment in the security. See Appendix A to the Prospectus for a
description of security ratings.

Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. A decrease in
interest rates will generally result in an increase in the value of the Fund's
assets. Conversely, during periods of rising interest rates, the value of the
Fund's assets will generally decline. The values of lower-rated securities may
often be affected to a greater extent by changes in general economic conditions
and business conditions affecting the issuers of such securities and their
industries. Negative publicity or investor perceptions may also adversely affect
the values of lower-rated securities. Changes by recognized rating services in
their ratings of any fixed-income security and changes in the ability

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<PAGE> 56

of an issuer to make payments of interest and principal may also affect the
value of these investments. Changes in the value of portfolio securities
generally will not affect income derived from these securities, but will affect
the Fund's net asset value. The Fund will not necessarily dispose of a security
when its rating is reduced below its rating at the time of purchase. However,
the Advisor will monitor the investment to determine whether its retention will
assist in meeting the Fund's investment objective.

Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. Such issuers may not
have more traditional methods of financing available to them and may be unable
to repay outstanding obligations at maturity by refinancing. The risk of loss
due to default in payment of interest or repayment of principal by such issuers
is significantly greater because such securities frequently are unsecured and
subordinated to the prior payment of senior indebtedness.

At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other Funds and
accounts managed by the Advisor and its affiliates, holds all or a major portion
of the securities outstanding. Although the Advisor generally considers such
securities to be liquid because of the availability of an institutional market
for such securities, it is possible that, under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell these securities when the
Advisor believes it advisable to do so or may be able to sell the securities
only at prices lower than if they were more widely held. Under these
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value. In order to
enforce its rights in the event of a default under such securities, the Fund may
be required to participate in various legal proceedings or take possession of
and manage assets securing the issuer's obligations on such securities. This
could increase the Fund's operating expenses and adversely affect the Fund's net
asset value.

Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed. The Fund may invest without limit in such bonds.

Zero-coupon bonds are issued at a significant discount from their principal
amount in lieu of paying interest periodically. Payment-in-kind bonds allow the
issuer, at its option, to make current interest payments on the bonds either in
cash or in additional bonds. Because zero coupon and payment-in-kind bonds do
not pay current interest in cash, their value is subject to greater fluctuation
in response to changes in market interest rates than bonds that pay interest
currently. Both zero coupon and payment-in-kind bonds allow an issuer to avoid
the need to generate cash to meet current interest payments. Accordingly, such
bonds may involve greater credit risks than bonds paying interest currently in
cash. The Fund is required to accrue interest income on such investments and to
distribute such amounts at least annually to shareholders even though such bonds
do not pay current interest in cash. Thus, it may be necessary at times for the
Fund to liquidate investments in order to satisfy its dividend distribution
requirements.

To the extent the Fund invests in securities in the lower rating
categories, the achievement of the Fund's goals is more dependent on the
Advisor's investment analysis than would be the case if the Fund were investing
in securities in the higher rating categories.

PRIVATE PLACEMENTS

The Fund may invest in securities that are purchased in private placements
and, accordingly, are subject to restrictions on resale as a matter of contract
or under federal securities laws. Because there may be relatively few potential
purchasers for such investments, especially under adverse market or economic
conditions or in the event of adverse changes in the financial condition of the
issuer, the Fund could find it more difficult to sell such securities when the
Advisor believes it advisable to do so or may be able to sell such securities
only at prices lower than if such securities were more widely held. At times, it
may also be more difficult to determine the fair value of such securities for
purposes of computing the Fund's net asset value.

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<PAGE> 57

STEP COUPON BONDS (STEPS)

The Fund may invest in debt securities which do not pay interest for a
stated period of time and then pay interest at a series of different rates for a
series of periods. In addition to the risks associated with the credit rating of
the issuers, these securities are subject to the volatility risk of zero coupon
bonds for the period when no interest is paid.

TENDER OPTION BONDS

A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term tax-exempt rates
that has been coupled with the agreement of a third party, such as a bank,
broker-dealer or other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to tender their
securities to the institution and receive the face value thereof. As
consideration for providing the option, the financial institution receives
periodic fees equal to the difference between the municipal security's fixed
coupon rate and the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the securities, coupled
with the tender option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Advisor will consider on an ongoing basis the creditworthiness of the issuer of
the underlying municipal securities, of any custodian, and of the third-party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying municipal securities and for other
reasons.

PAY-IN-KIND (PIK) SECURITIES

The Fund may invest in securities which pay interest either in cash or
additional securities at the issuer's option. These securities are generally
high yield securities and in addition to the other risks associated with
investing in high yield securities are subject to the risks that the interest
payments, which consist of additional securities, will also be subject to the
risks of high yield securities.

MONEY MARKET INSTRUMENTS

The Fund may invest in short-term money market instruments as follows:
Government obligations are issued by the U.S. or foreign governments, their
subdivisions, agencies and instrumentalities. Supranational obligations are
issued by supranational entities and are generally designed to promote economic
improvements. Certificates of deposit are issued against deposits in a
commercial bank with a defined return and maturity. Banker's acceptances are
used to finance the import, export or storage of goods and are "accepted" when
guaranteed at maturity by a bank. Commercial paper is promissory notes issued by
businesses to finance short-term needs (including those with floating or
variable interest rates, or including a frequent interval put feature).
Short-term corporate obligations are bonds and notes (with one year or less to
maturity at the time of purchase) issued by businesses to finance long-term
needs.

SECURITIES LOANS

The Fund may make secured loans of its portfolio securities, on either a
short-term or long-term basis, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy,
securities loans are made to broker-dealers pursuant to agreements requiring
that the loans be continuously secured by collateral consisting of cash or
short-term debt obligations at least equal at all times to the value of the
securities on loan, "marked-to-market" daily. The borrower pays to the Fund an
amount equal to any dividends or interest received on securities loaned. The
Fund retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities may pass to the
borrower, the Fund retains the right to call the loans at any time on reasonable
notice, and it will do so to

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<PAGE> 58

enable the Fund to exercise voting rights on any matters materially affecting
the investment. The Fund may also call such loans in order to sell the
securities.

FORWARD COMMITMENTS

The Fund may enter into contracts to purchase securities for a fixed price
at a future date beyond customary settlement time ("forward commitments") if the
Fund sets aside, on the books and records of its custodian, liquid assets in an
amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. In the
case of to-be-announced ("TBA") purchase commitments, the unit price and the
estimated principal amount are established when the Fund enters into a contract,
with the actual principal amount being within a specified range of the estimate.
Forward commitments may be considered securities in themselves, and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in the value
of the Fund's other assets. Where such purchases are made through dealers, the
Fund relies on the dealer to consummate the sale. The dealer's failure to do so
may result in the loss to the Fund of an advantageous yield or price. Although
the Fund will generally enter into forward commitments with the intention of
acquiring securities for its portfolio or for delivery pursuant to options
contracts it has entered into, the Fund may dispose of a commitment prior to
settlement if the Advisor deems it appropriate to do so. The Fund may realize
short-term profits or losses on the sale of forward commitments.

The Fund may enter into TBA sale commitments to hedge its portfolio
positions or to sell securities it owns under delayed delivery arrangements.
Proceeds of TBA sale commitments are not received until the contractual
settlement date. During the time a TBA sale commitment is outstanding,
equivalent deliverable securities, or an offsetting TBA purchase commitment
deliverable on or before the sale commitment date, are held as "cover" for the
transaction. Unsettled TBA sale commitments are valued at current market value
of the underlying securities. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain or
loss on the commitment without regard to any unrealized gain or loss on the
underlying security. If the Fund delivers securities under the commitment, the
Fund realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the Fund acquires a security for a relatively short period
(usually not more than one week), subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). It is the Fund's present intention
to enter into repurchase agreements only with commercial banks and registered
broker-dealers and only with respect to obligations of the U.S. government or
its agencies or instrumentalities. Repurchase agreements may also be viewed as
loans made by the Fund which are collateralized by the securities subject to
repurchase. The Advisor will monitor such transactions to ensure that the value
of the underlying securities will be at least equal at all times to the total
amount of the repurchase obligation, including the interest factor. If the
seller defaults, the Fund could realize a loss on the sale of the underlying
security to the extent that the proceeds of sale, including accrued interest,
are less than the resale price provided in the agreement, including interest. In
addition, if the seller should be involved in bankruptcy or insolvency
proceedings, the Fund may incur delay and costs in selling the underlying
security or may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor and required to return the underlying collateral to the
seller's estate.

Pursuant to an exemptive order issued by the Securities and Exchange
Commission, the Fund may transfer uninvested cash balances into a joint account,
along with cash of other Colonial Funds and certain other accounts. These
balances may be invested in one or more repurchase agreements and/or short-term
money market instruments.

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OPTIONS ON SECURITIES

WRITING COVERED OPTIONS. The Fund may write covered call options and
covered put options on optionable securities held in its portfolio, when in the
opinion of the Advisor such transactions are consistent with the Fund's
investment objective and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.

The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.

The Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. The amount of the premium
reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the
underlying security, the amount of time remaining until expiration, current
interest rates and the effect of supply and demand in the options market and in
the market for the underlying security. By writing a call option, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option but continues to bear
the risk of a decline in the value of the underlying security. By writing a put
option, the Fund assumes the risk that it may be required to purchase the
underlying security for an exercise price higher than its then-current market
value, resulting in a potential capital loss unless the security subsequently
appreciates in value.

The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option. If the
Fund writes a call option but does not own the underlying security, and when it
writes a put option, the Fund may be required to deposit cash or securities with
its broker as "margin," or collateral, for its obligation to buy or sell the
underlying security. As the value of the underlying security varies, the Fund
may have to deposit additional margin with the broker. Margin requirements are
complex and are fixed by individual brokers, subject to minimum requirements
currently imposed by the Federal Reserve Board and by stock exchanges and other
self-regulatory organizations.

PURCHASING PUT OPTIONS. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs.

PURCHASING CALL OPTIONS. The Fund may purchase call options to hedge
against an increase in the price of securities that the Fund wants ultimately to
buy. Such hedge protection is provided during the life of the call option since
the Fund, as holder of the call option, is able to buy the underlying security
at the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs.

RISK FACTORS IN OPTIONS TRANSACTIONS

The successful use of the Fund's options strategies depends on the ability
of the Advisor to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on

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the Advisor's expectation that the price of the underlying security would fall,
but the price were to rise instead, the Fund could be required to sell the
security upon exercise at a price below the current market price. Similarly, if
the Fund were to write a put option based on the Advisor's expectation that the
price of the underlying security would rise, but the price were to fall instead,
the Fund could be required to purchase the security upon exercise at a price
higher than the current market price.

When the Fund purchases an option, it runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing sale transaction before the
option's expiration. If the price of the underlying security does not rise (in
the case of a call) or fall (in the case of a put) to an extent sufficient to
cover the option premium and transaction costs, the Fund will lose part or all
of its investment in the option. This contrasts with an investment by the Fund
in the underlying security, since the Fund will not realize a loss if the
security's price does not change.

The effective use of options also depends on the Fund's ability to
terminate option positions at times when the Advisor deems it desirable to do
so. There is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price.

If a secondary market in options were to become unavailable, the Fund could
no longer engage in closing transactions. Lack of investor interest might
adversely affect the liquidity of the market for particular options or series of
options. A market may discontinue trading of a particular option or options
generally. In addition, a market could become temporarily unavailable if unusual
events -- such as volume in excess of trading or clearing capability -- were to
interrupt its normal operations.

A market may at times find it necessary to impose restrictions on
particular types of options transactions, such as opening transactions. For
example, if an underlying security ceases to meet qualifications imposed by the
market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening
transactions in existing series may be prohibited. If an options market were to
become unavailable, the Fund as a holder of an option would be able to realize
profits or limit losses only by exercising the option, and the Fund, as option
writer, would remain obligated under the option until expiration or exercise.

Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could lose
its entire investment if the prohibition remained in effect until the put
option's expiration.

Foreign-traded options are subject to many of the same risks presented by
foreign securities. In addition, because of time differences between the United
States and various foreign countries, and because different holidays are
observed in different countries, foreign options markets may be open for trading
during hours or on days when U.S. markets are closed. As a result, option
premiums may not reflect the current prices of the underlying interest in the
United States.

FUTURES CONTRACTS AND RELATED OPTIONS

Subject to applicable law, the Fund may invest without limit in the types
of futures contracts and related options identified in the Prospectus for
hedging and non-hedging purposes, such as to manage the effective duration of
the Fund's portfolio or as a substitute for direct investment. A financial
futures contract sale creates an obligation by the seller to deliver the type of
financial instrument called for in the contract in a

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specified delivery month for a stated price. A financial futures contract
purchase creates an obligation by the purchaser to take delivery of the type of
financial instrument called for in the contract in a specified delivery month at
a stated price. The determination is made in accordance with the rules of the
exchange on which the futures contract sale or purchase was made. Futures
contracts are traded in the United States only on commodity exchanges or boards
of trade -- known as "contract markets" -- approved for such trading by the
Commodity Futures Trading Commission (the "CFTC"), and must be executed through
a futures commission merchant or brokerage firm which is a member of the
relevant contract market.

Although futures contracts (other than index futures) by their terms call
for actual delivery or acceptance of commodities or securities, in most cases
the contracts are closed out before the settlement date without the making or
taking of delivery. Closing out a futures contract sale is effected by
purchasing a futures contract for the same aggregate amount of the specific type
of financial instrument or commodity with the same delivery date. If the price
of the initial sale of the futures contract exceeds the price of the offsetting
purchase, the seller is paid the difference and realizes a gain. Conversely, if
the price of the offsetting purchase exceeds the price of the initial sale, the
seller realizes a loss. If the Fund is unable to enter into a closing
transaction, the amount of the Fund's potential loss is unlimited. The closing
out of a futures contract purchase is effected by the purchaser's entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the purchaser realizes a gain, and if the purchase price exceeds the
offsetting sale price, the purchaser realizes a loss. In general, 40% of the
gain or loss arising from the closing out of a futures contract traded on an
exchange approved by the CFTC is treated as short-term gain or loss, and 60% is
treated as long-term gain or loss.

Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of liquid
assets. This amount is known as "initial margin." The nature of initial margin
in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds to finance the transactions. Rather, initial margin is similar to a
performance bond or good faith deposit which is returned to the Fund upon
termination of the futures contract, assuming all contractual obligations have
been satisfied. Futures contracts also involve brokerage costs.

Subsequent payments, called "variation margin" or "maintenance margin," to
and from the broker (or the custodian) are made on a daily basis as the price of
the underlying security or commodity fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking to the market." For example, when the Fund has purchased a futures
contract on a security and the price of the underlying security has risen, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment based on that increase in value. Conversely, when the
Fund has purchased a security futures contract and the price of the underlying
security has declined, the position would be less valuable and the Fund would be
required to make a variation margin payment to the broker.

The Fund may elect to close some or all of its futures positions at any
time prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its positions by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.

The Fund does not intend to purchase or sell futures or related options for
other than hedging purposes if, as a result, the sum of the initial margin
deposits on the Fund's existing futures and related options positions and
premiums paid for outstanding options on futures contracts would exceed 5% of
the Fund's net assets.

OPTIONS ON FUTURES CONTRACTS. The Fund may purchase and write call and put
options on futures contracts and it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions.
Options on futures contracts give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at the specified option
exercise price at any time during the period of the option. The Fund may use
options on futures contracts in lieu of writing or buying options directly on
the underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call

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options or write put options on futures contracts as a substitute for the
purchase of futures contracts to hedge against a possible increase in the price
of securities which the Fund expects to purchase. Such options generally operate
in the same manner as options purchased or written directly on the underlying
investments.

As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.

The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements, similar to those described above in connection with
the discussion of futures contracts.

RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful
use of futures contracts by the Fund is subject to the Advisor's ability to
predict movements in various factors affecting securities markets, including
interest rates. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transaction costs). However, there may be circumstances when the
purchase of a call or put option on a futures contract would result in a loss to
the Fund when the purchase or sale of a futures contract would not, such as when
there is no movement in the prices of the hedged investments. The writing of an
option on a futures contract involves risks similar to those risks relating to
the sale of futures contracts.

The use of options and futures strategies also involves the risk of
imperfect correlation among movements in the prices of the securities underlying
the futures and options purchased and sold by the Fund, of the options and
futures contracts themselves, and, in the case of hedging transactions, of the
securities which are the subject of a hedge.

There is no assurance that higher than normal trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.

To reduce or eliminate a position held by the Fund, the Fund may seek to
close out such position. The ability to establish and close out positions will
be subject to the development and maintenance of a liquid secondary market. It
is not certain that this market will develop or continue to exist for a
particular futures contract or option. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain contracts or options, (ii) restrictions
may be imposed by an exchange on opening transactions or closing transactions or
both, (iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities, (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange, (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume,
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange for such contracts or options (or in the class
or series of contracts or options) would cease to exist, although outstanding
contracts or options on the exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.

U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury
security futures contracts require the seller to deliver, or the purchaser to
take delivery of, the type of U.S. Treasury security called for in the contract
at a specified date and price. Options on U.S. Treasury security futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a U.S. Treasury security futures contract at the specified
option exercise price at any time during the period of the option.

Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Advisor's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
would be

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<PAGE> 63

likely to lose part or all of the benefit of the increased value of its
securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily maintenance margin
requirements at a time when it may be disadvantageous to do so.

There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for particular securities. For example, if the Fund has hedged against a
decline in the values of high yield corporate securities held by it by selling
Treasury security futures and the values of Treasury securities subsequently
increase while the values of its high yield corporate securities decrease, the
Fund would incur losses on both the Treasury security futures contracts written
by it and the high yield corporate securities held in its portfolio.

INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objective. The Fund may also purchase and sell options on
index futures contracts.

There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge. The Advisor will, however, attempt to reduce
this risk by buying or selling, to the extent possible, futures on indices the
movements of which will, in its judgment, have a significant correlation with
movements in the prices of the securities sought to be hedged.

Successful use of index futures by the Fund is also subject to the
Advisor's ability to predict movements in the direction of the market. For
example, it is possible that, where the Fund has sold futures to hedge its
portfolio against a decline in the market, the index on which the futures are
written may advance and the value of securities held in the Fund's portfolio may
decline. If this occurred, the Fund would lose money on the futures and also
experience a decline in value in its portfolio securities. It is also possible
that, if the Fund has hedged against the possibility of a decline in the market
adversely affecting securities held in its portfolio and securities prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of those securities it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements at a time when it is disadvantageous to do so.

In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the index and
futures markets. Second, margin requirements in the futures market are less
onerous than margin requirements in the securities market, and as a result the
futures market may attract more speculators than the securities market does.
Increased participation by speculators in the futures market may also cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and also because of the imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Advisor may still not result in a
profitable position over a short time period.

OPTIONS ON INDEX FUTURES. Options on index futures are similar to options
on securities except that options on index futures give the purchaser the right,
in return for the premium paid, to assume a position in an index futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the

<PAGE> 64

market price of the index futures contract, at exercise, exceeds (in the case of
a call) or is less than (in the case of a put) the exercise price of the option
on the index future. If an option is exercised on the last trading day prior to
its expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.

OPTIONS ON INDICES

As an alternative to purchasing call and put options on index futures, the
Fund may purchase and sell call and put options on the underlying indices
themselves. Such options would be used in a manner identical to the use of
options on index futures.

INDEX WARRANTS

The Fund may purchase put warrants and call warrants whose values vary
depending on the change in the value of one or more specified securities indices
("index warrants"). Index warrants are generally issued by banks or other
financial institutions and give the holder the right, at any time during the
term of the warrant, to receive upon exercise of the warrant a cash payment from
the issuer based on the value of the underlying index at the time of exercise.
In general, if the value of the underlying index rises above the exercise price
of the index warrant, the holder of a call warrant will be entitled to receive a
cash payment from the issuer upon exercise based on the difference between the
value of the index and the exercise price of the warrant. If the value of the
underlying index falls, the holder of a put warrant will be entitled to receive
a cash payment from the issuer upon exercise based on the difference between the
exercise price of the warrant and the value of the index. The holder of a
warrant would not be entitled to any payments from the issuer at any time when,
in the case of a call warrant, the exercise price is greater than the value of
the underlying index, or, in the case of a put warrant, the exercise price is
less than the value of the underlying index. If the Fund were not to exercise an
index warrant prior to its expiration, then the Fund would lose the amount of
the purchase price paid by it for the warrant.

The Fund will normally use index warrants in a manner similar to its use of
options on securities indices. The risks of the Fund's use of index warrants are
generally similar to those relating to its use of index options. Unlike most
index options, however, index warrants are issued in limited amounts and are not
obligations of a regulated clearing agency, but are backed only by the credit of
the bank or other institution which issues the warrant. Also, index warrants
generally have longer terms than index options. Although the Fund will normally
invest only in exchange-listed warrants, index warrants are not likely to be as
liquid as certain index options backed by a recognized clearing agency. In
addition, the terms of index warrants may limit the Fund's ability to exercise
the warrants at such time, or in such quantities, as the Fund would otherwise
wish to do.

FOREIGN INVESTMENTS

The Fund may invest in securities of foreign issuers that are not actively
traded in U.S. markets. These foreign investments involve certain special risks
described below.

Foreign securities are normally denominated and traded in foreign
currencies. As a result, the value of the Fund's foreign investments and the
value of its shares may be affected favorably or unfavorably by changes in
currency exchange rates relative to the U.S. dollar. There may be less
information publicly available about a foreign issuer than about a U.S. issuer,
and foreign issuers are not generally subject to accounting, auditing and
financial reporting standards and practices comparable to those in the United
States. The securities of some foreign issuers are less liquid and at times more
volatile than securities of comparable U.S. issuers. Foreign brokerage
commissions and other fees are also generally higher than in the United States.
Foreign settlement procedures and trade regulations may involve certain risks
(such as delay in payment or delivery of securities or in the recovery of the
Fund's assets held abroad) and expenses not present in the settlement of
investments in U.S. markets.

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<PAGE> 65

In addition, the Fund's investments in foreign securities may be subject to
the risk of nationalization or expropriation of assets, imposition of currency
exchange controls or restrictions on the repatriation of foreign currency,
confiscatory taxation, political or financial instability and diplomatic
developments which could affect the value of the Fund's investments in certain
foreign countries. Dividends or interest on, or proceeds from the sale of,
foreign securities may be subject to foreign withholding taxes, and special U.S.
tax considerations may apply.

Legal remedies available to investors in certain foreign countries may be
more limited than those available with respect to investments in the United
States or in other foreign countries. The laws of some foreign countries may
limit the Fund's ability to invest in securities of certain issuers organized
under the laws of those foreign countries.

The risks described above, including the risks of nationalization or
expropriation of assets, are typically increased in connection with investments
in "emerging markets." For example, political and economic structures in these
countries may be in their infancy and developing rapidly, and such countries may
be in their infancy and developing rapidly, and such countries may lack the
social, political and economic stability characteristic of more developed
countries. Certain of these countries have in the past failed to recognize
private property rights and have at times nationalized and expropriated the
assets of private companies. High rates of inflation or currency devaluations
may adversely affect the economies and securities markets of such countries.
Investments in emerging markets may be considered speculative.

In addition, unanticipated political or social developments may affect the
value of the Fund's investments in emerging markets and the availability to the
Fund of additional investments in these markets. The small size, limited trading
volume and relative inexperience of the securities markets in these countries
may make the Fund's investments in securities traded in emerging markets
illiquid and more volatile than investments in securities traded in more
developed countries, and the Fund may be required to establish special custodial
or other arrangements before making investments in securities traded in emerging
markets. There may be little financial or accounting information available with
respect to issuers of emerging market securities, and it may be difficult as a
result to assess the value of prospects of an investment in such securities.

Certain of the foregoing risks may also apply to some extent to securities
of U.S. issuers that are denominated in foreign currencies or that are traded in
foreign markets, or securities of U.S. issuers having significant foreign
operations.

FOREIGN CURRENCY TRANSACTIONS

The Fund may engage without limit in currency exchange transactions,
including purchasing and selling foreign currency, foreign currency options,
foreign currency forward contracts and foreign currency futures contracts and
related options, to protect against uncertainty in the level of future currency
exchange rates. In addition, the Fund may write covered call and put options on
foreign currencies for the purpose of increasing its current return.

Generally, the Fund may engage in both "transaction hedging" and "position
hedging." When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables,
generally arising in connection with the purchase or sale of portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Fund will attempt to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is earned, and the date on which such payments are made or
received.

The Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. If conditions
warrant, for transaction hedging purposes the Fund may also enter into contracts
to purchase or sell foreign currencies at a future date ("forward contracts")
and purchase and sell foreign currency futures

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<PAGE> 66

contracts. A foreign currency forward contract is a negotiated agreement to
exchange currency at a future time at a rate or rates that may be higher or
lower than the spot rate. Foreign currency futures contracts are standardized
exchange-traded contracts and have margin requirements. In addition, for
transaction hedging purposes the Fund may also purchase or sell exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. The Fund may also enter into contracts to purchase or
sell foreign currencies at a future date ("forward contracts") and purchase and
sell foreign currency futures contracts.

For transaction hedging purposes the Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund the
right to assume a short position in the futures contract until the expiration of
the option. A put option on a currency gives the Fund the right to sell the
currency at an exercise price until the expiration of the option. A call option
on a futures contract gives the Fund the right to assume a long position in the
futures contract until the expiration of the option. A call option on a currency
gives the Fund the right to purchase the currency at the exercise price until
the expiration of the option.

The Fund may engage in position hedging to protect against a decline in the
value relative to the U.S. dollar of the currencies in which its portfolio
securities are denominated or quoted (or an increase in the value of the
currency in which the securities the Fund intends to buy are denominated, when
the Fund holds cash or short-term investments). For position hedging purposes,
the Fund may purchase or sell foreign currency futures contracts, foreign
currency forward contracts and options on foreign currency futures contracts and
on foreign currencies on exchanges or in over-the-counter markets. In connection
with position hedging, the Fund may also purchase or sell foreign currency on a
spot basis.

It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and a decision is made to
sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.

Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.

The Fund may seek to increase its current return or to offset some of the
costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. See "Risk Factors in
Options Transactions" above.

The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. The
Advisor will engage in such "cross hedging" activities when it believes that
such transactions provide significant hedging opportunities for the Fund. Cross
hedging transactions by the Fund involve the risk of imperfect correlation
between changes in the values of the currencies to which such transactions
relate and changes in the value of the currency or other asset or liability
which is the subject of the hedge.

The value of any currency, including U.S. dollars and foreign currencies,
may be affected by complex political and economic factors applicable to the
issuing country. In addition, the exchange rates of foreign

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<PAGE> 67

currencies (and therefore the values of foreign currency options, forward
contracts and futures contracts) may be affected significantly, fixed, or
supported directly or indirectly by U.S. and foreign government actions.
Government intervention may increase risks involved in purchasing or selling
foreign currency options, forward contracts and futures contracts, since
exchange rates may not be free to fluctuate in response to other market forces.

The value of a foreign currency option, forward contract or futures
contract reflects the value of an exchange rate, which in turn reflects relative
values of two currencies, the U.S. dollar and the foreign currency in question.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign currency options, forward contracts and futures contracts, investors may
be disadvantaged by having to deal in an odd-lot market for the underlying
foreign currencies in connection with options at prices that are less favorable
than for round lots. Foreign governmental restrictions or taxes could result in
adverse changes in the cost of acquiring or disposing of foreign currencies.

There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global, around-
the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets.

The decision as to whether and to what extent the Fund will engage in
foreign currency exchange transactions will depend on a number of factors,
including prevailing market conditions, the composition of the Fund's portfolio
and the availability of suitable transactions. Accordingly, there can be no
assurance that the Fund will engage in foreign currency exchange transactions at
any given time or from time to time.

CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.

Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required. A forward
contract generally requires no margin or other deposit.

At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.

Positions in the foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although the Fund intends to purchase or sell

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<PAGE> 68

foreign currency futures contracts only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
secondary market on an exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures position and, in the event of adverse price movements, the Fund
would continue to be required to make daily cash payments of variation margin.

FOREIGN CURRENCY OPTIONS. In general, options on foreign currencies
operate similarly to options on securities and are subject to many of the risks
described above. Foreign currency options are traded primarily in the
over-the-counter market, although options on foreign currencies are also listed
on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the European Currency Unit ("ECU"). The ECU is
composed of amounts of a number of currencies, and is the official medium of
exchange of the European Community's European Monetary System.

The Fund will only purchase or write foreign currency options when the
Advisor believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.

SETTLEMENT PROCEDURES. Settlement procedures relating to the Fund's
investments in foreign securities and to the Fund's foreign currency exchange
transactions may be more complex than settlements with respect to investments in
debt or equity securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments. For example, settlement of
transactions involving foreign securities or foreign currencies may occur within
a foreign country, and the Fund may be required to accept or make delivery of
the underlying securities or currency in conformity with any applicable U.S. or
foreign restrictions or regulations, and may be required to pay any fees, taxes
or charges associated with such delivery. Such investments may also involve the
risk that an entity involved in the settlement may not meet its obligations.

FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.

RULE 144A SECURITIES

The Fund may purchase securities that have been privately placed but that
are eligible for purchase and sale under Rule 144A under the Securities Act of
1933 (the "1933 Act"). That Rule permits certain qualified institutional buyers,
such as the Fund, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. In some instances, these investments may
be less liquid (and consequently harder to value) than securities that were
issued in a public offering.

TAXES

The following discussion offers only a brief outline of the federal income
tax consequences of investing in the Fund's shares. Potential investors should
consult their own tax advisers for more detailed information regarding the
impact of federal, state, local and foreign taxes upon such an investment.

FEDERAL INCOME TAX TREATMENT OF THE FUND

The Fund has elected and has qualified and intends to continue to qualify
to be treated as a regulated investment company under the Internal Revenue Code.
To qualify as a regulated investment company, the Fund must, among other things,
(a) derive in each taxable year at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the sale
or other disposition of stock, securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment company's
principal business of investing in stock or securities, or options and futures
with respect to stock or securities) and other income derived with respect to
its business of investing in such stocks, securities or currencies (including,
but not limited to, gains from options, futures and forward contracts); and

25
<PAGE> 69

(b) diversify its holdings so that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuers and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuers) and
(ii) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies) or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses.

As a regulated investment company, in any fiscal year with respect to which
the Fund distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends and interest but excludes net
capital gains (i.e., net long-term capital gains in excess of net short-term
capital losses [and capital loss carryovers from prior years, if any])), the
Fund (but not its shareholders) generally will be relieved of U.S. federal
income tax on its net investment income and net capital gains that it
distributes to shareholders. To the extent the Fund retains its net capital
gains for investment, it will be subject under current tax rates to a federal
income tax at a maximum effective rate of 35% on the amount retained. See
"Federal Income Tax Treatment of Holders of Shares" below. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax payable by the Fund. To
avoid this tax, the Fund must distribute, or be deemed to have distributed,
during each calendar year an amount at least equal to the sum of (1) 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year, (2) 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the twelve-month period ending on
October 31 of the calendar year, and (3) all ordinary income and capital gains
for previous years that were not distributed during such years. See "Risk
Factors and Special Considerations--Dividends and Distributions" in the
Prospectus.

If in any taxable year the Fund fails to qualify as a regulated investment
company under the Internal Revenue Code, the Fund will be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders will
not be deductible by the Fund in computing its taxable income. In addition, in
the event of the failure to qualify, the Fund's distributions, to the extent
derived from the Fund's current or accumulated earnings and profits, will
constitute dividends (eligible for the corporate dividends-received deduction,
subject to certain requirements) which are taxable to shareholders as ordinary
income, even though the gains generating those distributions might otherwise (at
least in part) have been treated in the shareholders' hands as long-term capital
gains. In addition, in order to requalify for taxation as a regulated investment
company, the Fund may be required to recognize unrealized gain, pay substantial
taxes and interest, and make certain distributions.

If the Fund does not meet the asset coverage requirements of the Act, it
will be required to suspend distributions to the holders of shares until the
asset coverage is restored. See "Description of Shares of Beneficial
Interest--Dividends and Distributions" in the Prospectus. Such a suspension of
distributions might prevent the Fund from meeting the 90% distribution
requirement, as is required in order to qualify for taxation as a regulated
investment company, or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on its undistributed taxable income (including
gain), or both.

Upon any failure to meet the asset coverage requirements of the Act, the
Fund intends to repurchase or redeem the Term Note in order to maintain or
restore the requisite asset coverage and avoid failing to remain qualified as a
regulated investment company. The determination to repurchase or redeem the Term
Note will be made in the sole discretion of the Fund. Furthermore, the Fund will
be required to make mandatory partial redemptions of the Term Note that in the
event its failure to maintain Act Asset Coverage is not cured in a timely
manner. See "Description of Term Note--Restrictive Covenants" in the Prospectus.

Use of the Fund's cash to repurchase or redeem the Term Note may adversely
affect the Fund's ability to satisfy the 90% distribution requirement, which is
required to qualify for taxation as a regulated investment company. In order to
fund repurchases or redemptions of the Term Note, the Fund may have to sell
assets (including assets that the Fund otherwise would have continued to hold)
and any income generated by such

26
<PAGE> 70

sales will be included in the Fund's income that is subject to the distribution
requirements described above. Depending on the size of the Fund's assets
relative to its outstanding senior securities, redemption of the Term Note might
restore asset coverage. Payment of distributions after restoration of asset
coverage could requalify (or avoid a disqualification of) the Fund as a
regulated investment company, depending upon the facts and circumstances.

The Fund's portfolio may include zero coupon bonds. Zero coupon bonds are
original issue discount bonds which pay no current interest. Original issue
discount is the excess (if any) of the stated redemption price at maturity of a
debt instrument over the issue price of the instrument. Original issue discount
on a taxable obligation is required to be currently included in the income of
the holder of the obligation generally on a constant interest rate basis
resembling the economic accrual of interest. The tax basis of the holder of an
original issue discount debt instrument is increased by the amount of original
issue discount thereon properly included in the holder's gross income as
determined for federal income tax purposes. Current inclusion in gross income of
original issue discount on a taxable debt instrument is required, even though no
cash is received at the time the original issue discount is required to be
included in gross income. Because such income may not be matched by a
corresponding receipt of cash by the Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make required distributions
to the holders of shares.

The Fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Internal Revenue Code
(including constructive sale, mark-to-market, straddle, wash sale and short sale
rules) that, among other things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund, defer Fund losses, and
affect the determination of whether capital gains and losses are characterized
as long-term or short-term capital gains or losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require the Fund to mark-to-market certain types of the
positions in its portfolio (i.e, treat them as if they were disposed of at their
fair market value at the close of the taxable year) which may cause the Fund to
recognize income or gain without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirements described above
for avoiding income and excise taxes. The Fund will monitor its transactions and
will make the appropriate tax elections and appropriate entries in its books and
records when it acquires any foreign currency, option, futures contract, forward
contract, or hedged investment in order to mitigate the effect of these rules
and prevent disqualification of the Fund as a regulated investment company and
minimize the imposition of income and excise taxes.

The Fund may acquire stock of a "passive foreign investment company" (a
"PFIC"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive income 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 shares
of PFIC stock or of any gain from the disposition of such 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 taxable income and, accordingly, will not be
taxable to the extent that income is distributed to its shareholders. If the
Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund," 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 qualified
electing fund's annual ordinary earnings and net capital gains, even if such
amounts are not distributed to the Fund. These amounts likely would have to be
distributed to satisfy the requirements for avoiding income and excise taxes. In
most instances it will be very difficult, if not impossible, to make this
election because of certain requirements.

As an alternative to making the above-described election to treat the PFIC
as a qualified electing fund, the Fund may make an election to annually
mark-to-market certain publicly traded PFIC stock (a "PFIC Mark-to-Market
Election"). "Marking-to-Market," in this context, means recognizing as ordinary
income (and, to a limited extent, loss) each year an amount equal to the
difference between the Fund's adjusted tax basis in such PFIC stock and its fair
market value. The PFIC Mark-to-Market Election applies to the taxable year for
which made and to all subsequent taxable years, unless the PFIC stock ceases to
be publicly traded or

27
<PAGE> 71

the Internal Revenue Service consents to revocation of the election. By making
the PFIC Mark-to-Market Election, the Fund could ameliorate the adverse tax
consequences arising from its ownership of PFIC stock, but in any particular
year may be required to recognize income in excess of the distributions it
receives from the PFIC and proceeds from the dispositions of PFIC stock.

FEDERAL INCOME TAX TREATMENT OF HOLDERS OF SHARES

For any period during which the Fund qualifies as a regulated investment
company for federal income tax purposes, dividends paid out of the Fund's net
investment income and short-term capital gains to holders of shares will be
taxable as ordinary income. It is expected that dividends paid to by corporate
shareholders will not be eligible for the dividends received deduction.
Distributions of net capital gains designated by the Fund as "capital gain
dividends," if any, are taxable as long-term capital gains, regardless of how
long the shareholder has held the Fund's shares. See the discussion below for a
summary of the capital gains rates applicable to capital gain dividends. Capital
gain dividends are not eligible for the corporate dividends received deduction.
Dividends and distributions of capital gain dividends will be taxable to
shareholders as if actually distributed, even if they are reinvested in
additional shares of the Fund. Shareholders receiving distributions in the form
of newly issued shares will have a cost basis in each share received equal to
the fair market value of a share of the Fund on the distribution date.

Generally, dividends paid by the Fund are treated as received in the
taxable year in which the distribution is made; however, any dividend declared
by the Fund in October, November or December of any calendar year, payable to
shareholders of record on a specified date in any such month and actually paid
during January of the following year, will be treated as received on December 31
of the year in which declared.

Any distribution by the Fund to a holder of shares not made out of the
Fund's current or accumulated earnings and profits will be treated as a return
of capital to such holder of shares, will reduce the basis of each share or
shares with respect to which it is distributed and will be subject to tax as
capital gain to the extent that the distribution exceeds the basis of the share
or shares with respect to which it is distributed. Potential investors should
carefully consider the tax implications of buying shares just prior to a
distribution, as the price of shares purchased at this time may reflect the
amount of the forthcoming distribution which will, except in unusual
circumstances, be taxable when received.

In the event the Fund retains any net capital gains, it may designate such
retained amounts as undistributed capital gains in a notice to its shareholders.
In the event such a designation is made, the Fund will be subject to tax at a
35% rate on the undistributed amounts and shareholders subject to U.S. federal
income tax will be required to include in income, as long-term capital gains,
their proportionate share of such undistributed amounts, but will be allowed a
credit or refund, as the case may be, for their proportionate share of the 35%
tax paid by the Fund. If the designation is made, for U.S. federal income tax
purposes, the tax basis of shares owned by a shareholder will be increased by an
amount equal to the difference between (i) the amount included in such
shareholder's income as long-term capital gains and (ii) such shareholder's
proportionate share of the tax paid by the Fund.

After the close of each taxable year, the Fund will notify its shareholders
of the amounts of dividends and capital gain dividends paid (or deemed paid) in
such taxable year, and undistributed capital gains designated for that year. The
information regarding capital gain dividends and undistributed capital gains
will designate the portion thereof subject to the different maximum rates of tax
applicable to non-corporate taxpayers' net capital gain as discussed below.

The Internal Revenue Code allows certain miscellaneous itemized deductions
by individuals, including deductions of investment expenses, only to the extent
the aggregate of such deductions exceeds 2% of an individual's adjusted gross
income as determined for federal income tax purposes. The Internal Revenue Code
and the regulations promulgated thereunder treat such expenses incurred by a
regulated investment company as being indirectly incurred by its shareholders.
Shareholder expenses indirectly incurred through publicly offered regulated
investment companies are exempted from the application of the 2% floor. Thus,
the limitation will not apply with respect to indirect deductions through the
Fund. Shareholders of the Fund that are corporations are not subject to the 2%
floor with respect to their expenses indirectly incurred through the Fund.

28
<PAGE> 72

If the Fund suffers a net taxable loss in any taxable year, its
shareholders will not be permitted to utilize that loss in their tax returns.

Generally, gain recognized by a shareholder on the sale of shares held for
more than one year will be taxable as long-term capital gain. If a shareholder
holds shares primarily for sale to customers in the ordinary course of business
rather than for investment, any gain recognized on the sale of those shares
would be taxable as ordinary income. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are replaced within a
period of 61 days beginning 30 days before and ending 30 days after the date on
which shares are disposed. In such a case, the basis of the shares acquired will
be adjusted to reflect the disallowed loss. Any loss recognized by a shareholder
on a disposition of Fund shares held by the shareholder for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of capital gain dividends received or treated as having been received by the
shareholder with respect to such shares. Shareholders who acquire shares on
multiple dates should consult their tax advisers to determine how to allocate
the cost of shares for basis purposes.

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 capital assets held for one year or less and (ii)
20% for capital assets held for more than one year. Shareholders should consult
their own tax advisors regarding the availability and effect of a certain tax
election to mark-to-market shares of the Fund held on January 1, 2001. Capital
gains or losses recognized by corporate shareholders are subject to tax at the
ordinary income tax rates applicable to corporations. The tax rates for capital
gains described above will apply to distributions of capital gain dividends by
the Fund as well as to sales and exchanges of shares in the Fund.

In general, federal withholding taxes at a 30% rate or a lower rate
established by treaty will apply to distributions to shareholders (except to
those distributions designated by the Fund as capital gain dividends) that are
nonresident aliens or foreign partnerships, trusts or corporations to the extent
that such income is not "effectively connected" with a U.S. trade or business
carried on by such shareholders.

The U.S. Treasury Department and the Internal Revenue Service recently
issued Treasury regulations, generally effective for payments made after
December 31, 2000, concerning the withholding of tax and reporting for certain
amounts paid to nonresident aliens and foreign corporations (the "Final
Withholding Regulations"). Among other things, the Final Withholding Regulations
may require shareholders that are not United States persons within the meaning
of the Internal Revenue Code to furnish new certification of their foreign
status after December 31, 2000. Investors should consult their tax advisers
concerning the applicability and effect of the Final Withholding Regulations on
an investment in shares of the Fund.

BACKUP WITHHOLDING

The Fund may be required to withhold for U.S. federal income taxes 31% of
all taxable distributions paid to shareholders who (i) fail to provide the Fund
with their correct taxpayer identification number, (ii) fail to make required
certifications or (iii) have been notified or with respect to whom the Fund has
been notified by the U.S. Internal Revenue Service that distributions to such
shareholder are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Internal Revenue Code are exempt
from such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.

OTHER TAXATION

Investors are advised to consult their own tax advisers with respect to the
application to their own circumstances of the above-described general taxation
rules and with respect to the federal, state, local or foreign tax consequences
to them of an investment in shares of the Fund.

29
<PAGE> 73

SHAREHOLDER LIABILITY

Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Fund. However, the
Agreement and Declaration of Trust of the Fund (the "Declaration") disclaims
shareholder liability for acts or obligations of the Fund and requires that a
notice of such disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Fund or the Trustees. The Declaration provides
for indemnification out of Fund property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances (which are considered remote) in which the
Fund would be unable to meet its obligations and the disclaimer was inoperative.

30
<PAGE> 74

PART C

OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(1) Financial Statements:

Included in Part A

Fee Table
Financial Highlights

Included in Part B

Incorporated by reference into Part B are the financial
statements contained in the Registrant's Annual Report dated
October 31, 1998 (which were previously filed electronically
pursuant to Section 30(b)(2) of the Investment Company Act
of 1940 - Accession Number: 0000950156-99-000028):

The Financial Statements contained in the Registrant's
Annual Report are as follows:

Investment portfolio, October 31, 1998; Statement of assets
and liabilities, October 31, 1998; Statement of operations,
October 31, 1998; Statement of changes in net assets, Years
ended October 31, 1997 & 1998; Notes to Financial
Statements; Financial Highlights; Report of Independent
Accountants

(2) Exhibits

(a)(1) Agreement and Declaration of Trust (1)
(a)(2) Amendment No. 1 to Agreement and Declaration of
Trust (1)
(b) By-Laws, as amended (1)
(c) Not applicable
(d)(1) Form of specimen share certificate for Shares of
Beneficial Interest, without par value (1)
(d)(2) Form of Subscription Certificate (2)
(d)(3) Form of Notice of Guaranteed Delivery
(d)(4) Form of Nominee Holder Over-Subscription Exercise
Form
(d)(5) Form of Beneficial Owner Listing Certification
(e) Dividend Reinvestment Plan (1)
(f) Not applicable
(g) Management Agreement with Colonial Management
Associates, Inc. (1)
(h) Form of Dealer Manager Agreement with
PaineWebber Incorporated (2)

(i) Not applicable
(j)(1) Custody Agreement with The Chase Manhattan Bank
(incorporated herein by reference to Exhibit 8 to
Post-Effective Amendment No. 13 to the Registration
Statement of Colonial Trust VI, Registration Nos.
33-45117 & 811-6529, filed with the Commission on
October 27, 1997)
<PAGE> 75
(k)(1) Transfer Agency and Registrar Agreement (3)
(k)(1)(a) Amendment No 1. to Transfer Agency and Registrar
Agreement (3)
(k)(1)(b) Consent to Assignment to TBC Shareholders
Services Inc.(now known as First Data Investor
Services Group, Inc.)(3)
(k)(2) Pricing and Bookkeeping Agreement with Colonial
Management Associates, Inc. (1)
(k)(3) Credit Line Agreement with Bank of America
Illinois (1)
(k)(4) Form of Subscription Agent Agreement with
First Data Investor Services Group, Inc. (2)
(k)(5) Form of Information Agent Agreement with
Shareholder Communications Corporation (2)
(l) Opinion of counsel (including consent of
counsel) (2)
(m) Not applicable
(n) Consent of independent accountants (2)
(o) Not applicable
(p) Not applicable
(q) Not applicable
- --------------------------------
(1) Filed with the Securities and Exchange Commission on April 15, 1998.

(2) To be filed by Amendment.

(3) Filed with the Securities and Exchange Commission on May 18, 1998.

Item 25. Marketing Arrangements.
See Exhibit (h) of Item 24(2) of this Registration Statement.

Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the Offer described in this Registration
Statement:
<PAGE> 76

<TABLE>
<CAPTION>
<S> <C>
Registration fees $
National Association of Securities Dealers, Inc. Fees
New York Stock Exchange listing fee
Printing (other than stock certificates)
Accounting fees and expense
Legal fees and expenses
Dealer Managers' expense reimbursement
Information Agent fees and expenses
Subscription Agent fees and expenses
Miscellaneous
----------
Total
==========
</TABLE>

Item 27. Persons controlled by or under Common Control with Registrant.
None

Item 28. Number of Holders of Securities
Number of Record Holders
Title of Class as of July 31, 1999
-------------- ------------------------

Shares of Beneficial Interest 1,198

Item 29. Indemnification
The Agreement and Declaration of Trust, as amended, filed as
Exhbit(a)(1) to this Registration Statement provides for
Indemnification to each of the Registrant's Trustees and officers
against all liabilities and expenses incurred in acting as
Trustee or officer, except in the case of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such Trustees and officers.

Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with 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 Act and will be governed by the final
adjudication of such issued.

The Registrant, Colonial Management Associates, Inc. and their
respective trustees, directors and officers are insured by a
directors and officers/errors and omissions liability policy.

<PAGE> 77

Item 30. Business and Other Connections of Investment Adviser

The following sets forth business and other connections of each
director and officer of Colonial Management Associates, Inc. (see
next page):

Registrant's investment advisor/administrator, Colonial Management Associates,
Inc. ("Colonial"), is registered as an investment adviser under the Investment
Advisers Act of 1940 ("Advisers Act"). Colonial Advisory Services, Inc.
("CASI"), an affiliate of Colonial, is also registered as an investment advisor
under the 1940 Act. As of the end of the fiscal year, December 31, 1998, CASI
had four institutional, corporate or other accounts under management or
supervision, the total market value of which was approximately $227 million. As
of the end of the fiscal year, December 31, 1998, Colonial was the investment
advisor, sub-advisor and/or administrator to 57 mutual funds, including funds
sub-advised by Colonial, the total market value of which investment companies
was approximately $18,950.90 million. Liberty Funds Distributor, Inc., a
subsidiary of Colonial Managemen Associates, Inc., is the principal underwriter
and the national distributor of all of the funds in the Liberty Mutual Funds
complex, including the Registrant.

The following sets forth the business and other connections of each
director and officer of Colonial Management Associates, Inc.:

<TABLE>
<CAPTION>
(1) (2) (3) (4)
Name and principal
business
addresses* Affiliation
of officers and with Period is through 06/30/99. Other
directors of investment business, profession, vocation or
investment adviser adviser employment connection Affiliation
- ------------------ ---------- -------------------------------- -----------
<S> <C> <C> <C>
Allard, Laurie V.P.

Archer, Joseph A. V.P.

Ballou, William J. V.P., Liberty Funds Trust I through IX Asst. Sec.
Asst. Colonial High Income Municipal Trust Asst. Sec.
Sec., Colonial InterMarket Income Trust I Asst. Sec.
Counsel Colonial Intermediate High Income
Fund Asst. Sec.
Colonial Investment Grade Municipal
Trust Asst. Sec.
Colonial Municipal Income Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor, Inc. Asst. Clerk
Liberty Financial Advisers, Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund, Inc. Asst. Sec.

Barron, Suzan M. V.P., Liberty Funds Trust I through IX Asst. Sec.
Asst. Colonial High Income Municipal Trust Asst. Sec.
Sec., Colonial InterMarket Income Trust I Asst. Sec.
Counsel Colonial Intermediate High Income
Fund Asst. Sec.
Colonial Investment Grade Municipal
Trust Asst. Sec.
Colonial Municipal Income Trust Asst. Sec.
AlphaTrade Inc. Asst. Clerk
Liberty Funds Distributor, Inc. Asst. Clerk
Liberty Financial Advisers, Inc. Asst. Sec.
Liberty Funds Group LLC Asst. Sec.
Liberty Variable Investment Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund, Inc. Asst. Sec.

Barsketis, Ophelia Sr.V.P. Stein Roe & Farnham Incorporated Snr. V.P.

Berliant, Allan V.P.

Bissonnette, Michael Sr.V.P.
</TABLE>

<PAGE> 78

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Inc. Exec. V.P.
IPC Mbr. Stein Roe & Farnham Incorporated Exec. V.P.

Bunten, Walter V.P.

Campbell, Kimberly V.P.

Carnabucci, Dominick V.P.

Carome, Kevin M. Sr.V.P.; Liberty Funds Distributor, Inc. Assistant Clerk
IPC Mbr. Liberty Funds Group LLC Sr. V.P.;
General Counsel
Stein Roe & Farnham Incorporated General Counsel;
Secretary
Stein Roe Services, Inc. Asst. Clerk

Carroll, Sheila A. Sr.V.P.

Citrone, Frank, Jr. Sr.V.P.

Conlin, Nancy L. Sr. V.P.; Liberty Funds Trust I through IX Secretary
Sec.; Clerk Colonial High Income Municipal Trust Secretary
IPC Mbr.; Colonial InterMarket Income Trust I Secretary
Dir; Gen. Colonial Intermediate High Income
Counsel Fund Secretary
Colonial Investment Grade Municipal
Trust Secretary
Colonial Municipal Income Trust Secretary
Liberty Funds Distributor, Inc. Dir.; Clerk
Liberty Funds Services, Inc. Clerk; Dir.
Liberty Funds Group LLC V.P.; Gen.
Counsel and
Secretary
Liberty Variable Investment Trust Secretary
Colonial Advisory Services, Inc. Dir.; Clerk
AlphaTrade Inc. Dir.; Clerk
Liberty Financial Advisors, Inc. Dir.; Sec.
Liberty All-Star Equity Fund Secretary
Liberty All-Star Growth Fund, Inc. Secretary

Connaughton, J. Kevin V.P. Liberty Funds Trust I through VIII CAO; Controller
Liberty Variable Investment Trust CAO; Controller
Colonial High Income Municipal Trust CAO; Controller
Colonial Intermarket Income Trust I CAO; Controller
Colonial Intermediate High Income
Fund CAO; Controller
Colonial Investment Grade Municipal
Trust CAO; Controller
Colonial Municipal Income Trust CAO; Controller
Liberty All-Star Equity Fund Controller
Liberty All-Star Growth Fund, Inc. Controller
Liberty Funds Trust IX Controller

Daniszewski, Joseph J. V.P.

Dearborn, James V.P.

Desilets, Marian H. V.P. Liberty Funds Distributor, Inc. V.P.
Liberty Funds Trust I through IX Asst. Sec.
Colonial High Income Municipal Trust Asst. Sec.
Colonial Intermarket Income Trust I Asst. Sec.
Colonial Intermediate High Income
Fund Asst. Sec.
Colonial Investment Grade Municipal
Trust Asst. Sec.
Colonial Municipal Income Trust Asst. Sec.
</TABLE>

<PAGE> 79

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Variable Investment Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund, Inc. Asst. Sec.

DiSilva-Begley, Linda V.P. Colonial Advisory Services, Inc. Compliance
IPC Mbr. Officer

Eckelman, Marilyn Sr.V.P.

Ericson, Carl C. Sr.V.P. Colonial Intermediate High Income
IPC Mbr. Fund V.P.
Colonial Advisory Services, Inc. Pres.; CEO
and CIO

Evans, C. Frazier Sr.V.P. Liberty Funds Distributor, Inc. Mng. Director

Feloney, Joseph L. V.P. Colonial Advisory Services, Inc. Asst. Treas.
Asst. Tres. Liberty Funds Group LLC Asst. Treas.

Finnemore, Leslie W. Sr.V.P. Colonial Advisory Services, Inc. Sr. V.P.

Franklin, Fred J. Sr. V.P. AlphaTrade Inc. President
IPC Mbr. Liberty Financial Companies, Chief
Inc. Compliance Ofcr; V.P.

Garrison, William M. V.P. Stein Roe & Farnham Incorporated V.P.

Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.;
CEO; Pres.; CEO;
Chairman of Exec. Cmte.
the Board; Mbr.; Chm.
IPC Mbr. Liberty Funds Distributor, Inc. Dir.; Chm.
Colonial Advisory Services, Inc. Dir.; Chm.
Liberty Funds Services, Inc. Dir.; Chm.
AlphaTrade Inc. Dir.
Liberty Funds Trust I through VIII President
Colonial High Income Municipal Trust President
Colonial InterMarket Income Trust I President
Colonial Intermediate High Income
Fund President
Colonial Investment Grade Municipal
Trust President
Colonial Municipal Income Trust President
Liberty Financial Advisors, Inc. Director
Stein Roe & Farnham Incorporated Asst. Chairman;
Exec. V.P.
Liberty Variable Investment Trust President

Grabowski, Neil V.P.

Hansen, Loren A. Sr. V.P.; Stein Roe & Farnham Incorporated Exec. V.P.
IPC Mbr.

Harasimowicz, Stephen V.P.

Hartford, Brian Sr.V.P.

Haynie, James P. Sr.V.P. Colonial Advisory Services, Inc. Sr. V.P.
Stein Roe & Farnham Incorporated Sr. V.P.

Held, Dorothy V.P.

Hernon, Mary V.P.

Hounsell, Clare F. V.P. Stein Roe & Farnham Incorporated V.P.

Iudice, Philip J., Jr. V.P.; Liberty Funds Group LLC Controller,
Controller CAO, Asst.
Asst. Treas.
Treasurer Liberty Funds Distributor, Inc. CFO,
Treasurer
Colonial Advisory Services, Inc. Controller;
Asst. Treas.
</TABLE>

<PAGE> 80

<TABLE>
<CAPTION>
<S> <C> <C> <C>
AlphaTrade Inc. CFO, Treas.
Liberty Financial Advisors, Inc. Asst. Treas.

Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr.,
CFO; CFO
Treasurer Liberty Funds Trust I through VIII Treasr.,CFO
Colonial High Income Municipal Trust Treasr.,CFO
Colonial InterMarket Income Trust I Treasr.,CFO
Colonial Intermediate High Income
Fund Treasr.,CFO
Colonial Investment Grade Municipal
Trust Treasr.,CFO
Colonial Municipal Income Trust Treasr.,CFO
Colonial Advisory Services, Inc. CFO, Treasr.
Liberty Financial Advisors, Inc. Treasurer
Stein Roe & Farnham Incorporated Snr. V.P.
Liberty Variable Investment Trust Treasurer, CFO
Liberty All-Star Equity Fund Treasurer
Liberty All-Star Growth Fund, Inc. Treasurer
Liberty Funds Trust IX Treasurer

Jansen, Deborah Sr.V.P. Stein Roe & Farnham Incorporated Sr. V.P.

Jersild, North T. V.P. Stein Roe & Farnham Incorporated V.P.

Johnson, Gordon V.P.

Knudsen, Gail E. V.P. Liberty Funds Trust I through IX Asst. Treas.
Colonial High Income Municipal Trust Asst. Treas.
Colonial InterMarket Income Trust I Asst. Treas.
Colonial Intermediate High Income
Fund Asst. Treas.
Colonial Investment Grade Municipal
Trust Asst. Treas.
Colonial Municipal Income Trust Asst. Treas.
Liberty Variable Investment Trust Asst. Treas.
Liberty All-Star Equity Fund Asst. Treas.
Liberty All-Star Growth Fund, Inc. Asst. Treas.

Lapointe, Thomas V.P.

Lasman, Gary V.P.

Lennon, John E. Sr.V.P. Colonial Advisory Services, Inc. V.P.

Lenzi, Sharon V.P.

Lessard, Kristen V.P.

Loring, William C., Jr. Sr.V.P.

MacKinnon, Donald S. Sr.V.P.

Marcus, Harold V.P.

Muldoon, Robert V.P.

Newman, Maureen Sr.V.P.

O'Brien, David Sr.V.P.

Ostrander, Laura Sr.V.P. Colonial Advisory Services, Inc. V.P.

Palombo, Joseph R. Dir.; Colonial Advisory Services, Inc. Dir.
Exe.V.P.;
IPC Mbr.; Colonial High Income Municipal Trust V.P.
Colonial InterMarket Income Trust I V.P.
</TABLE>

<PAGE> 81

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Colonial Intermediate High Income
Fund V.P.
Colonial Investment Grade Municipal
Trust V.P.
Colonial Municipal Income Trust V.P.
Liberty Funds Trust I through IX V.P.
Liberty Funds Services, Inc. Director
Liberty Funds Group LLC CAO; Ex. V.P.
Liberty Funds Distributor, Inc. Director
AlphaTrade Inc. Director
Liberty Financial Advisors, Inc. Director
Stein Roe & Farnham Incorporated Exec. V.P.
Liberty Variable Investment Trust V.P.
Liberty All-Star Equity Fund V.P.
Liberty All-Star Growth Fund, Inc. V.P.

Peishoff, William V.P.

Peterson, Ann T. V.P. Colonial Advisory Services, Inc. V.P.

Pielech, Mitchell V.P.

Pope, David V.P.

Rao, Gita Sr.V.P.

Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk
Asst. Liberty Funds Group LLC Asst. Sec.
Sec.; Colonial Advisory Services, Inc. Asst. Clerk
Asst.
Clerk and Liberty Funds Distributor, Inc. Asst. Clerk
Counsel AlphaTrade Inc. Asst. Clerk
Liberty Funds Trust I through IX Asst. Sec.
Colonial High Income Municipal Trust Asst. Sec.
Colonial InterMarket Income Trust I Asst. Sec.
Colonial Intermediate High Income
Fund Asst. Sec.
Colonial Investment Grade Municipal
Trust Asst. Sec.
Colonial Municipal Income Trust Asst. Sec.
Liberty Financial Advisors, Inc. Asst. Sec.
Liberty Variable Investment Trust Asst. Sec.
Liberty All-Star Equity Fund Asst. Sec.
Liberty All-Star Growth Fund, Inc. Asst. Sec.

Rega, Michael V.P. Colonial Advisory Services, Inc. V.P.

Richards, Scott B. Sr. V.P. Colonial Advisory Services, Inc. Senior V.P.

Schermerhorn, Scott Sr. V.P.

Seibel, Sandra L. V.P. Colonial Advisory Services, Inc. V.P.

Shields, Yvonne B. V.P. Stein Roe & Farnham Incorporated V.P.

Smalley, Gregg V.P.

Spanos, Gregory J. Sr. V.P. Colonial Advisory Services, Inc. Exec. V.P.

Stevens, Richard V.P. Colonial Advisory Services, Inc. V.P.

Stoeckle, Mark Sr.V.P. Colonial Advisory Services, Inc. V.P.

Swayze, Gary Sr.V.P.

Thomas, Ronald V.P.

Wallace, John R. V.P. Colonial Advisory Services, Inc. Asst. Treas.
Asst.Tres.
</TABLE>

<PAGE> 82

<TABLE>
<CAPTION>
<S> <C> <C> <C>
Liberty Funds Group LLC Asst. Treas.

Ware, Elizabeth M. V.P.

Wiley, Christine V.P.

Wiley, Peter V.P.
</TABLE>

- ------------------------------------------------
*The Principal address of all of the officers and directors of the investment
advisor is One Financial Center, Boston, MA 02111.

<PAGE> 83

Item 31. Location of Accounts and Records:

Registrant: Colonial Intermediate High Income Fund
One Financial Center
Boston, Massachusetts 02111-2621

Investment Adviser: Colonial Management Associates, Inc.
One Financial Center
Boston, Massachusetts 02111-2621

Custodian: The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017-2070

Transfer Agent: First Date Investor Services Group, Inc.
P.O. Box 1376
Boston, Massachusetts 02104

Item 32. Management Services.
Not applicable.

Item 33. Undertakings.
(1) The Registrant undertakes to suspend the offering of shares
covered hereby until it amends its prospectus contained herein if
(i) subsequent to the effective date of this Registration
Statement, its net asset value per share declines more than 10
percent from its net asset value per share as of the effective
date of the Registration Statement, or (ii) its net asset value
increases to an amount greater than its net proceeds as stated in
the prospectus contained herein.

(2) Not applicable.

(3) Not applicable.

(4) Not applicable.

The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;

(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in aggregate, represent a fundamental change in
the information set forth in the Registration Statement;

(iii) To include any material information with respect to
the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information
in the Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
<PAGE> 84

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
Amendment to the Registration Statement on Form N-2 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Boston and the
Commonwealth of Massachusetts on the 25th day of August, 1999.

COLONIAL INTERMEDIATE HIGH
INCOME FUND

By: /s/ STEPHEN E. GIBSON
-----------------------
Stephen E. Gibson
President

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form N-2 has been signed below by the following persons in their
capacities as officers and Trustees of the Registrant.

SIGNATURES TITLE DATE
- ---------- ----- ----

/s/ STEPHEN E. GIBSON President (chief August 25, 1999
- ------------------------ executive officer)
Harold W. Cogger

/s/ J. KEVIN CONNAUGHTON Controller and Chief August 25, 1999
- ------------------------ Accounting Officer
J. Kevin Connaughton

/s/ TIMOTHY J. JACOBY Treasurer and Chief August 25, 1999
- ------------------------ Financial Officer
Timothy J. Jacoby

/s/ ROBERT J. BIRNBAUM*
- ------------------------- Trustee
Robert J. Birnbaum

/s/ TOM BLEASDALE*
- ------------------------- Trustee
Tom Bleasdale

/s/ JOHN V. CARBERRY* Trustee
- -------------------------
John V. Carberry

/s/ LORA S. COLLINS*
- ------------------------- Trustee
Lora S. Collins

/s/ JAMES E. GRINNELL*
- ------------------------- Trustee
James E. Grinnell

<PAGE> 85

/s/ RICHARD W. LOWRY*
- ------------------------- Trustee
Richard W. Lowry

/s/ SALVATORE MACERA*
- ------------------------- Trustee
Salvatore Macera

/s/ WILLIAM E. MAYER*
- ------------------------- Trustee
William E. Mayer

/s/ JAMES L. MOODY, JR. *
- ------------------------- Trustee *SUZAN M. BARRON
James L. Moody, Jr. -------------------
Suzan M. Barron
Attorney-in-fact
August 25, 1999
/s/ JOHN J. NEUHAUSER*
- ------------------------- Trustee
John J. Neuhauser

/s/ THOMAS E. STITZEL*
- ------------------------- Trustee
Thomas E. Stitzel

/s/ ROBERT L. SULLIVAN*
- ------------------------- Trustee
Robert L. Sullivan

/s/ ANNE-LEE VERVILLE*
- ------------------------- Trustee
Anne-Lee Verville

INDEX OF EXHIBITS

(d)(3) Form of Notice of Guaranteed Delivery
(d)(4) Form of Nominee Holder Over-Subscription Exercise Form
(d)(5) Form of Beneficial Owner Listing Certification

<PAGE> 1
Exhibit (d)(3)

NOTICE OF GUARANTEED DELIVERY FOR SHARES OF
BENEFICIAL INTEREST OF COLONIAL INTERMEDIATE HIGH INCOME FUND
SUBSCRIBED FOR PURSUANT TO THE PRIMARY SUBSCRIPTION
AND THE OVER-SUBSCRIPTION PRIVILEGE

COLONIAL INTERMEDIATE HIGH INCOME FUND RIGHTS OFFERING

As set forth in the Prospectus dated _______, 1999 (the "Prospectus") under
"The Offer--Payment for Shares," this form or one substantially equivalent
hereto may be used as a means of effecting subscription and payment for all
shares of Colonial Intermediate High Income Fund shares of beneficial interest
(the "Shares") subscribed for by exercise of Rights pursuant to the Primary
Subscription and the Over-Subscription Privilege. Such form may be delivered by
hand or sent by facsimile transmission, overnight courier or mail to the
Subscription Agent and must be received prior to 5:00 p.m., New York City time,
on _______, 1999, unless extended by the Fund (the "Expiration Date"). The terms
and conditions of the Offer set forth in the Prospectus are incorporated by
reference herein. Capitalized terms not defined hereby have the meanings
attributed to them in the Prospectus.

The Subscription Agent is:

FIRST DATA INVESTOR SERVICES GROUP, INC.
C/O BANKBOSTON N.A.

<TABLE>
<S> <C>
BY FACSIMILE: BY FIRST CLASS MAIL:
(TELECOPIES) FIRST DATA INVESTOR SERVICES GROUP, INC.
(781) 794-6333 C/O BANKBOSTON N.A.
CONFIRM BY TELEPHONE TO: CORPORATE REORGANIZATION
(781) 794-6388 P.O. BOX 9049
BOSTON, MASSACHUSETTS 02205-9838
U.S.A.
BY OVERNIGHT BY HAND:
COURIER: FIRST DATA INVESTOR SERVICES GROUP, INC.
FIRST DATA INVESTOR SERVICES GROUP, INC. C/O BANKBOSTON N.A.
C/O BANKBOSTON N.A. SECURITIES TRANSFER &
CORPORATE REORGANIZATION REPORTING SERVICES, INC.
70 CAMPANELLI DRIVE 55 BROADWAY -- 3RD FLOOR
BRAINTREE, MASSACHUSETTS 02184 NEW YORK, NEW YORK 10006
U.S.A. U.S.A.
</TABLE>

DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS VIA A
TELECOPY OR FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE
A VALID DELIVERY.

The New York Stock Exchange member firm or bank or trust company which
completes this form must communicate the guarantee and the number of Shares
subscribed for under both the Primary Subscription and the Over-Subscription
Privilege to the Subscription Agent and must deliver this Notice of Guaranteed
Delivery guaranteeing delivery of (i) payment in full for all subscribed Shares
and (ii) a properly completed and executed Subscription Certificate to the
Subscription Agent prior to 5:00 p.m., New York City time, on the Expiration
Date. The Subscription Certificate and full payment must then be delivered to
the Subscription Agent by the close of business on _________, 1999, which is the
third business day after the Expiration Date, unless extended by the Fund.
Failure to do so will result in a forfeiture of the Rights.

(CONTINUED ON OTHER SIDE)
<PAGE> 2

GUARANTEE

The undersigned, a member firm of the New York Stock Exchange or a bank or
trust company guarantees delivery of payment to the Subscription Agent by the
close of business (5:00 p.m., New York City time) on the third business day
(_______, 1999) after the Expiration Date (_______, 1999, unless extended by the
Fund) of (i) a properly completed and executed Subscription Certificate and (ii)
payment of the full Subscription Price for shares subscribed for in the Primary
Subscription and pursuant to the Over-Subscription Privilege, if applicable, as
subscription for such shares is indicated herein or in the Subscription
Certificate.
<TABLE>

- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Primary Subscription Number of Rights to Number of Primary Payment to be made in
be exercised Shares requested for connection with Primary
_________ Rights which you are Shares
guaranteeing delivery
of Rights and Payment
____________ Shares
(Rights / by 3) $ _____________________

- --------------------------------------------------------------------------------------------------
2. Over-Subscription Number of Over- Payment to be made in
Subscription Shares connection with Over-
requested for which Subscription Shares
you are guaranteeing
payment
____________ Shares $ _____________________
- --------------------------------------------------------------------------------------------------
3. Totals Total Number of
Rights to be Delivered $ _____________________
_________ Rights Total Payment
- --------------------------------------------------------------------------------------------------
Method of Delivery of Rights (circle one) A. Through The Depository Trust Company ("DTC")*
B. Direct to the Subscription Agent
</TABLE>

Please note that if you are guaranteeing for Over-Subscription Shares and
are a DTC participant, you must also execute and forward to First Data Investor
Services Group, Inc. a Nominee Holder Over-Subscription Exercise Form.

<TABLE>
<S> <C>
- --------------------------------------------- ---------------------------------------------
Name of Firm Authorized Signature

- --------------------------------------------- ---------------------------------------------
Address Title

- --------------------------------------------- ---------------------------------------------
Zip Code Name (Please Type or Print)

- ---------------------------------------------
Name of Registered Holder (If Applicable)

- --------------------------------------------- ---------------------------------------------
Telephone Number Date
</TABLE>

* IF THE RIGHTS ARE TO BE DELIVERED THROUGH DTC, CALL THE SUBSCRIPTION AGENT TO
OBTAIN A PROTECT IDENTIFICATION NUMBER, WHICH NEEDS TO BE COMMUNICATED BY YOU
TO DTC.

<PAGE> 1
Exhibit (d)(4)

DTC PARTICIPANT OVER-SUBSCRIPTION EXERCISE FORM
NOMINEE HOLDER OVER-SUBSCRIPTION EXERCISE FORM

COLONIAL INTERMEDIATE HIGH INCOME FUND
RIGHTS OFFERING FOR SHARES OF BENEFICIAL INTEREST

This form is to be used only by nominee holders or by The Depository Trust
Company ("DTC") participants to exercise the Over-Subscription Privilege in
respect of Rights with respect to which the Primary Subscription Privilege was
exercised in full and delivered through the facilities of a common depository or
DTC. All other exercises of Over-Subscription Privileges must be effected by the
delivery of the Subscription Certificate.

The terms and conditions of the Rights Offering are set forth in the Fund's
Prospectus dated _______, 1999 (the "Prospectus") and are incorporated herein be
reference. Copies of the Prospectus are available upon request from the
Information Agent.

PLEASE COMPLETE ALL APPLICABLE INFORMATION

Void unless received by the Subscription Agent with payment in full or with
a properly completed Notice of Guaranteed Delivery before 5:00 p.m. New York
City time, on ______, 1999, unless extended by the Fund (the "Expiration Date").

1. The undersigned hereby certifies to the Subscription Agent that it is a
participant in _________________________ [Name of Depository] (the "Depository")
and that it has either (i) exercised the Primary Subscription in respect of the
Rights and delivered such exercised Rights to the Subscription Agent by means of
transfer to the Depository Account of the Fund or (ii) delivered to the
Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of
the Primary Subscription Privilege and will deliver the Rights called for in
such Notice of Guaranteed Delivery to the Subscription Agent by means of
transfer to such Depository Account of the Fund.

2. The undersigned hereby exercises the Over-Subscription Privilege to
purchase, to the extent available, _________ shares of beneficial interest (the
"Shares") and certifies to the Subscription Agent that such Over-Subscription
Privilege is being exercised for the account or accounts of persons (which may
include the undersigned) on whose behalf all Primary Subscription Rights have
been exercised.

3. The undersigned understands that payment of the Subscription Price of
$ per Share for each Share subscribed for pursuant to the Over-Subscription
Privilege must be received by the Subscription Agent before 5:00 p.m., New York
City time, on the Expiration Date, unless a Notice of Guaranteed Delivery is
used, in which case payment in full must be received by the Subscription Agent
not later than the close of business on the third business day after the
Expiration Date. The undersigned represents that such payment, in the aggregate
amount of $__________________, either

(CONTINUED ON OTHER SIDE)
<PAGE> 2

(CHECK APPROPRIATE BOX):

[ ] has been or is being delivered to the Subscription Agent pursuant to the
Notice of Guaranteed Delivery referred to above;

[ ] is being delivered to the Subscription Agent herewith;

[ ] has been delivered separately to the Subscription Agent;

<TABLE>
<S> <C>
- ----------------------------------------------------- -----------------------------------------------------
Primary Subscription Confirmation Number Name of Nominee Holder

- ----------------------------------------------------- -----------------------------------------------------
Depository Participant Number Address

Contact Name ---------------------------------------- -----------------------------------------------------
City State Zip Code

Phone Number ---------------------------------------- By: -------------------------------------------------

Dated: ----------------------------------------, 1998 Name: -----------------------------------------------

Title: ----------------------------------------------
</TABLE>

PLEASE ATTACH A BENEFICIAL OWNER LISTING CONTAINING THE RECORD DATE POSITION OF
RIGHTS OWNED, THE NUMBER OF PRIMARY SHARES SUBSCRIBED AND THE NUMBER OF
OVER-SUBSCRIPTION SHARES, IF APPLICABLE, REQUESTED BY EACH SUCH OWNER.

PLEASE NOTE: THIS FORM WILL NOT BE ACCEPTED AS VALID UNLESS THE FOLLOWING
INFORMATION IS PROVIDED FOR THE ALLOCATION OF OVER-SUBSCRIPTION SHARES.

The positions below pertain to those persons on whose behalf the
Over-Subscription is being exercised:

<TABLE>
<S> <C>
- ------------------------ Total number of record date shares

- ------------------------ Total number of primary rights exercised
</TABLE>

<PAGE> 1
Exhibit (d)(5)

BENEFICIAL OWNER LISTING CERTIFICATION

COLONIAL INTERMEDIATE HIGH INCOME FUND RIGHTS OFFERING

The undersigned, a bank, broker or other nominee holder of rights
("Rights") to purchase shares of beneficial interest, no par value (the
"Shares"), of Colonial Intermediate High Income Fund (the "Fund") pursuant to
the Rights offering (the "Offer") described and provided for in the Fund's
Prospectus dated ________, 1999 (the "Prospectus"), hereby certifies to the Fund
and to First Data Investor Services Group, Inc., as Subscription Agent for such
Offer, that for each numbered line filled in below, the undersigned has
exercised, on behalf of the beneficial owner thereof (which may be the
undersigned), the number of Rights specified on such line pursuant to the
Primary Subscription (as defined in the Prospectus) and such beneficial owner
wishes to subscribe for the purchase of additional Shares pursuant to the
Over-Subscription Privilege (as defined in the Prospectus), in the amount set
forth in the third column of such line.

<TABLE>
<CAPTION>
NUMBER OF RIGHTS NUMBER OF SHARES
NUMBER OF RECORD DATE EXERCISED PURSUANT TO THE REQUESTED PURSUANT TO THE
SHARES OWNED PRIMARY SUBSCRIPTION OVER-SUBSCRIPTION PRIVILEGE
<S> <C> <C> <C>
1)
---------------------------- ---------------------------- ----------------------------
2)
---------------------------- ---------------------------- ----------------------------
3)
---------------------------- ---------------------------- ----------------------------
4)
---------------------------- ---------------------------- ----------------------------
5)
---------------------------- ---------------------------- ----------------------------
6)
---------------------------- ---------------------------- ----------------------------
7)
---------------------------- ---------------------------- ----------------------------
8)
---------------------------- ---------------------------- ----------------------------
9)
---------------------------- ---------------------------- ----------------------------
10)
---------------------------- ---------------------------- ----------------------------

---------------------------------- vested
Name of Nominee Holder
</TABLE>

By:
- --------------------------------------

Name:
-----------------------------------

Title:
-----------------------------------

Dated: _________________________, 1999

Provide the following information, if applicable:

- ----------------------------------------- Name of Broker: ___________________
Depository Trust Corporation ("DTC")
Participant Number

- ----------------------------------------- Address: __________________________
DTC Primary Subscription Confirmation
Number(s)
</TABLE>