VAN KAMPEN MERRITT TRUST /IL, 485BPOS, 1995-04-28

VAN KAMPEN MERRITT TRUST /IL
485BPOS, 1995-04-28

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1995

FILE NOS. 33-4410
811-4629
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/

Pre-Effective Amendment No. / /

Post-Effective Amendment No. 30 /X/
and

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/

Amendment No. 31 /X/

VAN KAMPEN MERRITT TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)

One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)

(708) 684-6000
(Registrant's Telephone Number)

Dennis J. McDonnell
President, Van Kampen Merritt Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)

Copies to:

Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, Illinois 60606
(312) 407-0700

Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Director
Van Kampen American Capital
Investment Advisory Corp.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181

It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)

X on April 30, 1995, pursuant to paragraph (b)
___

___ 60 days after filing pursuant to paragraph (a)(1)

___ on (date) pursuant to paragraph (a)(1) of Rule 485.
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of Rule 485

DECLARATION PURSUANT TO RULE 24F-2

REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND WILL FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDING JUNE 30, 1995 ON OR BEFORE AUGUST 31, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

This Post-Effective Amendment No. 30 to the Registration Statement contains
four Prospectuses and four Statements of Additional Information describing four
sub-trusts of the Registrant. The Registration Statement is organized as
follows:

Facing Page

Cross Reference Sheet with respect to Van Kampen Merritt High Yield Fund

Cross Reference Sheet with respect to Van Kampen Merritt Short-Term Global
Income Fund

Cross Reference Sheet with respect to Van Kampen Merritt Adjustable Rate
U.S. Government Fund

Cross Reference Sheet with respect to Van Kampen Merritt Strategic Income
Fund.

Prospectus relating to Van Kampen Merritt High Yield Fund

Statement of Additional Information relating to Van Kampen Merritt High
Yield Fund

Prospectus relating to Van Kampen Merritt Short-Term Global Income Fund

Statement of Additional Information relating to Van Kampen Merritt
Short-Term Global Income Fund

Prospectus relating to the Van Kampen Merritt Adjustable Rate U.S.
Government Fund

Statement of Additional Information relating to Van Kampen Merritt
Adjustable Rate U.S. Government Fund

Prospectus relating to Van Kampen Merritt Strategic Income Fund

Statement of Additional Information relating to Van Kampen Merritt
Strategic Income Fund

Part C Information

Exhibits

The Prospectus and Statement of Additional Information with respect
to Van Kampen Merritt Emerging Markets Income Fund, a series of the
Registrant, included in Post-Effective Amendment No. 27 to the
Registration Statement is incorporated herein by reference in its entirety
and no changes to the Prospectus or Statement of Additional Information
are effected by this Post-Effective Amendment No. 30.

<PAGE> 3

VAN KAMPEN MERRITT HIGH YIELD FUND,
A SUB-TRUST OF
VAN KAMPEN MERRITT TRUST

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
----------------------- -----------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page............. Cover Page
Item 2. Synopsis............... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information.......... FINANCIAL HIGHLIGHTS; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; INVESTMENT OBJECTIVE AND POLICIES; THE
FUND; INVESTMENT PRACTICES; DESCRIPTION OF SHARES OF THE
FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; INVESTMENT ADVISORY
SERVICES; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; NET ASSET VALUE; THE DISTRIBUTION AND SERVICE PLANS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; FUND
PERFORMANCE; SHAREHOLDER PROGRAMS
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>

(i.)
<PAGE> 4

<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
----------------------- -----------------------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page............. Cover Page
Item 11. Table of Contents...... Table of Contents
Item 12. General Information
and History.......... The Fund and the Trust
Item 13. Investment Objectives
and Policies......... Investment Policies and Restrictions
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in the Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory and
Other Services; Legal Counsel; Officers and Trustees; The
Distributor; Notes to Financial Statements
Item 17. Brokerage Allocation... Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities..... Contained in the Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF
SHARES; NET ASSET VALUE;
Item 20. Tax Status............. Contained in the Prospectus under captions: TAX STATUS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; Tax Status
of the Fund
Item 21. Underwriters........... The Distributor
Item 22. Calculations of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under captions: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
PART C
</TABLE>

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

(ii.)
<PAGE> 5

VAN KAMPEN MERRITT SHORT-TERM GLOBAL INCOME FUND,
A SUB-TRUST OF
VAN KAMPEN MERRITT TRUST

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

<TABLE>
<CAPTION>
ITEM NUMBER OF LOCATION OR CAPTION
FORM N-1A IN PROSPECTUS
- ---------------------------------- -----------------------------------------------------------
PART A INFORMATION REQUIRED IN A PROSPECTUS
<S> <C> <C>

Item 1. Cover Page............. Cover Page

Item 2. Synopsis............... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE

Item 3. Condensed Financial
Information.......... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; INVESTMENT PRACTICES DESCRIPTION OF SHARES OF THE
FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; INVESTMENT ADVISORY
SERVICES; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX-SHELTERED RETIREMENT PROGRAMS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; THE DISTRIBUTION AND SERVICE PLANS; INVESTMENTS OF
TAX-SHELTERED RETIREMENT PROGRAMS; NET ASSET VALUE;
SHAREHOLDER PROGRAMS; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>

(iii.)
<PAGE> 6

<TABLE>
<CAPTION>
LOCATION OR CAPTION
ITEM NUMBER OF IN STATEMENT OF
FORM N-1A ADDITIONAL INFORMATION
- ---------------------------------- -----------------------------------------------------------
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page............. Cover Page
Item 11. Table of Contents...... Table of Contents
Item 12. General Information
and History.......... The Fund and the Trust
Item 13. Investment Objectives
and Policies......... Investment Policies and Restrictions; Additional Investment
Considerations
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in the Prospectus under captions: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory and
Other Services; Legal Counsel; Officers and Trustees; The
Distributor; Notes to Financial Statements
Item 17. Brokerage Allocation... Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities..... Contained in the Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under the captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF
SHARES; NET ASSET VALUE
Item 20. Tax Status............. Contained in the Prospectus under captions TAX STATUS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; Tax Status
of the Fund
Item 21. Underwriters........... The Distributor; Notes to Financial Statements
Item 22. Calculation of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under the caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

(iv.)
<PAGE> 7

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND,
A SUB-TRUST OF
VAN KAMPEN MERRITT TRUST

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

Item 1. Cover Page............. Cover Page

Item 2. Synopsis............... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE

Item 3. Condensed Financial
Information.......... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; OTHER INVESTMENT PRACTICES; DESCRIPTION OF SHARES
OF THE FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; INVESTMENT ADVISORY
SERVICES; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX SHELTERED RETIREMENT PLANS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; THE DISTRIBUTION AND SERVICE PLANS; NET ASSET VALUE;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; SHAREHOLDER
PROGRAMS; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>

(v.)
<PAGE> 8

<TABLE>
<CAPTION>
LOCATION OR CAPTION
ITEM NUMBER OF IN STATEMENT OF
FORM N-1A ADDITIONAL INFORMATION
- ----------------------------------- ----------------------------------------------------------
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page............. Cover Page
Item 11. Table of Contents...... Table of Contents
Item 12. General Information
and History.......... The Fund and the Trust
Item 13. Investment Objectives
and Policies......... Investment Policies and Restrictions; Additional
Investment
Considerations
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in the Prospectus under captions: PURCHASING
SHARES IN THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory and
Other Services; Legal Counsel; Officers and Trustees; The
Distributor; Notes to Financial Statements
Item 17. Brokerage Allocation... Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities..... Contained in the Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under the captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF
SHARES; NET ASSET VALUE
Item 20. Tax Status............. Contained in the Prospectus under the captions: TAX
STATUS; INVESTMENTS OF TAX SHELTERED RETIREMENT PLANS; Tax
Status of the Fund
Item 21. Underwriters........... The Distributor
Item 22. Calculation of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under the caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

(vi.)
<PAGE> 9

VAN KAMPEN MERRITT STRATEGIC INCOME FUND
A SUB-TRUST OF
VAN KAMPEN MERRITT TRUST

CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)

Item 1. Cover Page............. Cover Page

Item 2. Synopsis............... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE

Item 3. Condensed Financial
Information.......... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; INVESTMENT PRACTICES; DESCRIPTION OF SHARES OF
THE FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; PORTFOLIO TRANSACTIONS AND BROKERAGE
ALLOCATION; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX-SHELTERED RETIREMENT PROGRAMS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; THE DISTRIBUTION AND SERVICE PLANS; INVESTMENTS BY
TAX-SHELTERED RETIREMENT PROGRAMS; NET ASSET VALUE;
SHAREHOLDER PROGRAMS; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>

(vii.)
<PAGE> 10

<TABLE>
<CAPTION>
LOCATION OR CAPTION
ITEM NUMBER OF IN STATEMENT OF
FORM N-1A ADDITIONAL INFORMATION
- ----------------------------------- ----------------------------------------------------------
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page............. Cover Page
Item 11. Table of Contents...... Table of Contents
Item 12. General Information
and History.......... The Fund and the Trust
Item 13. Investment Objectives
and Policies......... Investment Policies and Restrictions; Additional
Investment
Considerations
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in Prospectus under captions: PURCHASING SHARES
OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Legal Counsel; Investment
Advisory and Other Services; Custodian and Independent
Auditors; Officers and Trustees; The Distributor; Notes to
Financial Statements
Item 17. Brokerage Allocation... Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities..... Contained in the Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; Description of Shares of the Fund
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under the captions:
SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF SHARES; NET
ASSET VALUE
Item 20. Tax Status............. Contained in the Prospectus under the caption: TAX STATUS;
INVESTMENT BY TAX-SHELTERED INVESTMENTS;
Tax Status of the Fund
Item 21. Underwriters........... The Distributor; Notes to Financial Statements
Item 22. Calculation of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under the caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
</TABLE>

PART C

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.

(viii.)
<PAGE> 11

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

VAN KAMPEN MERRITT
HIGH YIELD FUND

Van Kampen Merritt High Yield Fund (the "Fund") is a separate diversified
sub-trust of Van Kampen Merritt Trust, an open-end management investment company
commonly known as a mutual fund. The Fund's primary investment objective is to
provide a high level of current income. As a secondary objective, the Fund seeks
capital appreciation. The Fund will attempt to achieve its investment objectives
primarily through investment in a diversified portfolio of medium and lower
grade domestic corporate debt securities. The Fund also may invest up to 35% of
its assets in foreign government and foreign corporate debt securities of
similar quality. The Fund may invest in debt securities rated between BB and D
(inclusive) by Standard & Poor's Ratings Group, Ba and C (inclusive) by Moody's
Investors Service, Inc., comparably rated short-term debt obligations and
unrated debt securities determined by the Fund's investment adviser to be of
comparable quality, which securities are commonly referred to as "junk bonds."

The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing. Please read and retain this
Prospectus for future reference. The address of the Fund is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, and its telephone number is (800) 225-2222.

(Continued on next page.)
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------

FOR ARIZONA AND WASHINGTON INVESTORS:
THESE ARE SPECULATIVE SECURITIES.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

Additional information about the Fund is contained in a Statement of
Additional Information, dated April 30, 1995, which has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge, by calling 1-800-225-2222, ext. 6504
or, for Telecommunication Device for the Deaf, 1-800-772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 12

(Continued from previous page.)

The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") which may be purchased at a price equal to their net asset
value per share, plus sales charges which, at the election of the investor, may
be imposed (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and the Class C Shares are the same as those of the initial sales
charge and the distribution and service fees with respect to the Class A Shares
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
different classes have different exchange privileges. Class B Shares
automatically will convert to Class A Shares seven years after the end of the
calendar month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.
See "Purchasing Shares of the Fund."

2
<PAGE> 13

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................. 4
Shareholder Transaction Expenses.................................... 8
Annual Fund Operating Expenses and Example.......................... 9
Financial Highlights................................................ 11
The Fund............................................................ 13
Investment Objective and Policies................................... 13
Investment Practices................................................ 19
Purchasing Shares of the Fund....................................... 22
Distributions from the Fund......................................... 32
Redemption of Shares................................................ 33
Net Asset Value..................................................... 36
Investment Advisory Services........................................ 37
Portfolio Transactions and Brokerage Allocation..................... 38
The Distribution and Service Plans.................................. 39
Tax Status.......................................................... 41
Shareholder Programs................................................ 43
Investments By Tax-Sheltered Retirement Plans....................... 47
Fund Performance.................................................... 49
Shareholder Services................................................ 50
Description of Shares of the Fund................................... 50
Shareholder Reports and Inquiries................................... 51
Additional Information.............................................. 51
Appendix A: Ratings of Corporate Obligations........................ A-1
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.

3
<PAGE> 14

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

THE FUND Van Kampen Merritt High Yield Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Trust, an open-end management
investment company organized as a Massachusetts business trust. See "The Fund."

INVESTMENT OBJECTIVE AND POLICIES The Fund's primary investment objective is to
provide a high level of current income. As a secondary objective, the Fund seeks
capital appreciation. The Fund will attempt to achieve its investment objectives
primarily through investment in a diversified portfolio of medium and lower
grade domestic corporate debt securities. The Fund also may invest up to 35% of
its assets in foreign government and foreign corporate debt securities of
similar quality as determined by the Fund's investment adviser, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser").

Medium grade debt securities are those rated BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investor Services, Inc. ("Moody's"), comparably
rated short-term debt obligations and unrated debt securities determined by the
Adviser to be of comparable quality. Debt securities rated BBB by S&P generally
are regarded by S&P as having an adequate capacity to pay interest and repay
principal; adverse economic conditions or changing circumstances are, however,
more likely in S&P's view to lead to a weakened capacity to pay interest and
repay principal as compared with higher rated debt securities. Debt securities
rated Baa by Moody's generally are considered by Moody's as medium grade
obligations, i.e., they are neither highly protected nor poorly secured. In
Moody's view, 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. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.

Lower grade debt securities are those rated between BB and D (inclusive) by
S&P, Ba and C (inclusive) by Moody's, comparably rated short-term debt
obligations and unrated debt securities determined by the Adviser to be of
comparable quality, which securities sometimes are referred to as "junk bonds."
Debt securities rated BB, B, CCC, CC and C by S&P generally are regarded by S&P,
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 degree of
speculation. While such debt will likely have some quality and protective
characteristics, in S&P's view these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated C1 by S&P is debt (income
bonds) on which no interest is being paid. Debt securities rated D by S&P are in
default, and payment of interest and/or repayment of principal is in arrears.
Debt securities rated B by Moody's are viewed by Moody's as generally lacking
characteristics of the desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Debt securities which are rated Caa
by Moody's are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest. Bonds which
are rated Ca by

4
<PAGE> 15

Moody's represent obligations which are speculative in a high degree. Such
issues are often in default or have other market shortcomings. Bonds which are
rated C by Moody's 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. A complete description of the various S&P and Moody's
rating categories is included as Appendix A to this Prospectus.

Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn or a significant increase in
interest rates, greater market price volatility and less liquid secondary market
trading, among others. Investment in securities that are in default, or with
respect to which payment of interest and/or principal are in arrears, presents
additional special risk considerations. Investment in foreign securities
involves certain risks in addition to those associated with the domestic
securities in which the Fund may invest. There is no assurance that the Fund
will achieve its investment objective. The Fund may not be an appropriate
investment for all investors. The net asset value per share of the Fund can be
expected to increase or decrease depending on real or perceived changes in the
credit risks associated with its portfolio investments, changes in interest
rates and other factors affecting the credit markets generally. See "Investment
Objective and Policies" and "Appendix A."

INVESTMENT PRACTICES Subject to certain limitations, the Fund may enter into
strategic transactions, write covered call options, lend its portfolio
securities, enter into when issued or delayed delivery transactions, and enter
into repurchase and reverse repurchase agreements. These investment practices
entail certain risks. See "Investment Practices."

ALTERNATIVE SALES ARRANGEMENTS The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.

The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of the
purchase ("Class A Shares") or (ii) on a contingent deferred basis (Class A
Share accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A
Share accounts over $1,000,000 or otherwise subject to a contingent deferred
sales charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred
to herein collectively as CDSC Shares.

5
<PAGE> 16

The minimum initial investment with respect to each of the Class A Shares,
Class B Shares and Class C Shares is $1,000. The minimum subsequent investment
with respect to each class of shares is $100.

Class A Shares. Class A Shares are subject to an initial sales charge equal to
4.75% of the public offering price (4.99% of the net amount invested), reduced
on investments of $100,000 or more. Class A Shares are not subject to any sales
charge when they are redeemed. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.30% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a contingent deferred sales charge.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a contingent deferred sales charge equal
to 4.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after purchase
which charge is reduced each year thereafter. Class B Shares are subject to
ongoing distribution and service fees at an aggregate annual rate of up to 1.00%
of the Fund's average daily net assets attributable to the Class B Shares. Class
B Shares automatically will convert to Class A Shares seven years after the end
of the calendar month in which the investor's order to purchase was accepted, in
the circumstances and subject to the qualifications described in this
Prospectus.

Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a contingent deferred sales charge
equal to 1.00% of the lesser of the then current net asset value or the original
purchase price on Class C Shares redeemed during the first year after purchase.
Class C Shares are subject to ongoing distribution and service fees at an
aggregate annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class C Shares.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Investment Advisory
Corp. (the "Adviser") is the Fund's investment adviser. The annual advisory fee
is 0.75% of average daily net assets, reduced on net assets over $500 million.
This fee is higher than that paid by most mutual funds. See "Investment Advisory
Services."

DISTRIBUTIONS FROM THE FUND The Fund will declare distributions on a daily
basis and will pay such distributions from net investment income, net recognized
short-term capital gains and principal on a monthly basis. Long-term capital
gains, if any, are distributed annually. Distributions with respect to each
class of shares will be calculated in the same manner on the same day and will
be in the same amount except that the different distribution and service fees
and administrative expenses relating to each class of shares will be borne
exclusively by the respective class of shares. See "Distributions from the
Fund."

6
<PAGE> 17

REDEMPTION Class A Shares may be redeemed at net asset value, without charge
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."

The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.

7
<PAGE> 18

- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as percentage of the
offering price)................... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price)............................ None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of the
then current net asset value or
original purchase price on
redemption proceeds).............. None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
Redemption fees (as a percentage of
amount redeemed).................. None None None
Exchange fees....................... None None None
</TABLE>

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

(1) Reduced on investments of $100,000 or more.

(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.

(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."

8
<PAGE> 19

- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average daily
net assets)...................................... 0.75% 0.75% 0.75%
12b-1 Fees(1) (as a percentage of average daily
net assets)...................................... 0.26%(2) 1.00% 1.00%
Other expenses (as a percentage of average daily
net assets)...................................... 0.35% 0.38% 0.39%
Total expenses (as a percentage of average daily
net assets)...................................... 1.36% 2.13% 2.14%
</TABLE>

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

(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund to the selling broker as compensation for ongoing services
rendered to investors. With respect to each class of shares, amounts in
excess of 0.25%, if any, represent an asset based sales charge. The asset
based sales charge with respect to Class C Shares includes an amount up to
0.75% (as a percentage of net asset value) paid to investors' broker-dealers
as sales compensation.

(2) The Fund's distribution and service plans with respect to Class A Shares
provide that 12b-1 and service fees are charged only with respect to Class A
Shares of the Fund sold after the implementation date of such plans. Due to
the incremental "phase-in" of the Fund's 12b-1 and service plans with
respect to Class A Shares, it is anticipated that 12b-1 and service fees
attributable to Class A Shares will increase in accordance with such plans
to a maximum aggregate amount of 0.30% of the net assets attributable to the
Fund's Class A Shares. Accordingly, it is unlikely that future expenses will
remain consistent with those disclosed in the fee table. See "The
Distribution and Service Plans."

9
<PAGE> 20

EXAMPLE:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (i) an
operating expense ratio of 1.36% for
Class A Shares, 2.13% for Class B
Shares, and 2.14% for the Class C
Shares, (ii) a 5% annual return and
(iii) redemptions at the end of each
time period.
Class A Shares................... $ 61 $ 89 $118 $ 203
Class B Shares................... $ 62 $ 102 $129 $ 209
Class C Shares................... $ 32 $ 67 $115 $ 247
An investor would pay the following
expenses on the same $1,000
investment assuming no redemption at
the end of each period:
Class A Shares................... $ 61 $ 89 $118 $ 203
Class B Shares................... $ 22 $ 67 $114 $ 209
Class C Shares................... $ 22 $ 67 $115 $ 247
</TABLE>

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Examples" reflect expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion to
Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Investment Advisory Services" and "The Distribution and
Service Plans."

10
<PAGE> 21

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for one share outstanding throughout the period)
- --------------------------------------------------------------------------------

The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants for each of the periods
unless otherwise indicated, and their report thereon appears in the Fund's
related Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the Statement of Additional Information.

<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------------------------------------------------------
JUNE 27, 1986
(COMMENCEMENT
SIX MONTHS OF INVESTMENT
ENDED YEAR ENDED JUNE 30, OPERATIONS)
DECEMBER 31, ---------------------------------------------------------------------- TO
1994 1994 1993 1992 1991 1990 1989 1988 1987 JUNE 30, 1986
----------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
(UNAUDITED)

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning
of Period.............. $9.643 $10.380 $ 9.896 $ 9.202 $ 9.960 $12.980 $13.650 $14.570 $14.336 $14.265
----- ------- ------- ------- ------- ------- ------- ------- ------- -----
Net Investment
Income............... .420 .908 1.118 1.189 1.297 1.608 1.650 1.586 1.426 .019
Net Realized and
Unrealized Gain/Loss
on Investments....... (.533) (.595) .566 .793 (.645) (2.970) (.610) (.747) .326 .052
----- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total from Investment
Operations............. (.133) .313 1.684 1.982 .652 (1.362) 1.040 .839 1.752 .071
----- ------- ------- ------- ------- ------- ------- ------- ------- -----
Less:
Distributions from and
in excess of Net
Investment Income.... .510 .950 1.129 1.189 1.297 1.608 1.650 1.619 1.412 .000
Distributions from Net
Realized Gain on
Investments.......... .000 .000 .000 .000 .000 .000 .000 .029 .106 .000
Return of Capital
Distributions(1)..... .000 .100 .071 .099 .113 .050 .060 .111 .000 .000
----- ------- ------- ------- ------- ------- ------- ------- ------- -----
Total Distributions..... .510 1.050 1.200 1.288 1.410 1.658 1.710 1.759 1.518 .000
----- ------- ------- ------- ------- ------- ------- ------- ------- -----
Net Asset Value, End
of Period.............. $9.000 $ 9.643 $10.380 $ 9.896 $ 9.202 $ 9.960 $12.980 $13.650 $14.570 $14.336
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
Total Return (Non-
annualized)............ (1.36%) 2.92% 18.09% 22.85% 8.22% (10.88%) 7.96% 6.26% 12.83% .49%
Net Assets at End of
Period (In millions)... $239.0 $260.7 $251.5 $221.4 $199.5 $220.5 $353.8 $248.6 $121.3 $10.5
Ratio of Expenses to
Average Net Assets
(Annualized)........... 1.36% 1.32% 1.20% 1.42% 1.41% 1.28% 1.27% 1.23% 1.25% .85%
Ratio of Net Investment
Income to Average Net
Assets (Annualized).... 9.10% 8.85% 11.13% 12.33% 14.45% 13.68% 12.47% 11.36% 10.28% 11.93%
Portfolio Turnover...... 63.81% 202.7% 198.06% 173.97% 157.84% 66.92% 119.73% 125.97% 135.10% 0%
</TABLE>

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

(1) The determination of a return of capital distribution is made at the end of
the Fund's fiscal year. Therefore, while it is likely that a portion of the
Fund's distributions will ultimately be characterized as a return of capital
for tax purposes, no such designation has been made for the six months ended
December 31, 1994.

See Financial Statements and Notes Thereto

11
<PAGE> 22

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

FINANCIAL HIGHLIGHTS -- CONTINUED

(for one share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------------------ -------------------------------
SIX MONTHS YEAR MAY 17, 1993 SIX MONTHS AUGUST 13, 1993
ENDED ENDED (COMMENCEMENT OF ENDED (COMMENCEMENT OF
DECEMBER 31, JUNE 30, DISTRIBUTION) TO DECEMBER 31, DISTRIBUTION) TO
1994 1994 JUNE 30, 1993 1994 JUNE 30, 1994
------------- -------- ---------------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $9.638 $10.382 $ 10.190 $9.643 $ 10.340
----- ------- ----- ----- -----
Net Investment Income..................... .397 .889 .117 .369 .761
Net Realized and Unrealized Gain/Loss on
Investments............................. (.565) (.665) .217 (.538) (.605)
----- -------- ----- ----- -----
Total from Investment Operations........... (.168) .224 .334 (.169) .156
----- ------- ----- ----- -----
Less:
Distributions from and in excess of Net
Investment Income....................... .469 .877 .128 .469 .763
Distributions from Net Realized Gain on
Investments............................. .000 .000 .000 .000 .000
Return of Capital Distributions(1)........ .000 .091 .014 .000 .090
----- ------- ----- ----- -----
Total Distributions........................ .469 .968 .142 .469 .853
----- ------- ----- ----- -----
Net Asset Value, End of Period............. $9.001 $ 9.638 $ 10.382 $9.005 $ 9.643
====== ======= ======== ====== ========
Total Return (Non-annualized).............. (1.27%) 2.11% 3.27% (1.68%) 1.37%
Net Assets at End of Period (In
millions)................................. $ 42.4 $ 33.2 $ 2.7 $ 1.6 $ 2.2
Ratio of Expenses to Average Net Assets
(Annualized).............................. 2.13% 2.13% 2.06% 2.14% 2.14%
Ratio of Net Investment Income to Average
Net Assets (Annualized)................... 8.31% 7.94% 7.17% 8.27% 7.91%
Portfolio Turnover......................... 63.81% 202.7% 198.06% 63.81% 202.7%
</TABLE>

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

See Financial Statements and Notes Thereto

12
<PAGE> 23

- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------

Van Kampen Merritt High Yield Fund (the "Fund") is a mutual fund, which pools
shareholders' money to seek to achieve a specified investment objective. In
technical terms, the Fund is a separate diversified sub-trust of Van Kampen
Merritt Trust (the "Trust"), an open-end management investment company, commonly
known as a "mutual fund," which is organized as a Massachusetts business trust.
Mutual funds sell their shares to investors and invest the proceeds in a
portfolio of securities. A mutual fund allows investors to pool their money with
that of other investors in order to obtain professional investment management.
Mutual funds generally make it possible for investors to obtain greater
diversification of their investments and to simplify their recordkeeping.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund's primary investment objective is to provide a high level of current
income. As a secondary objective, the Fund seeks capital appreciation. These
objectives are fundamental and cannot be changed without shareholder approval.
The Fund will attempt to achieve its investment objectives primarily through
investment in a diversified portfolio of medium and lower grade domestic
corporate debt securities. The Fund also may invest up to 35% of its assets in
foreign government and foreign corporate debt securities of similar quality as
determined by the Adviser. The Fund will invest in a broad range of issues
representing various companies and industries and traded on various markets.

Medium grade debt securities are those rated BBB by Standard & Poor's Ratings
Group ("S&P") or Baa by Moody's Investors Service, Inc. ("Moody's"), comparably
rated short-term debt obligations and unrated debt securities determined by the
Adviser to be of comparable quality. Debt securities rated BBB by S&P generally
are regarded by S&P as having an adequate capacity to pay interest and repay
principal; adverse economic conditions or changing circumstances are, however,
more likely in S&P's view to lead to a weakened capacity to pay interest and
repay principal as compared with higher rated debt securities. Debt securities
rated Baa by Moody's generally are considered by Moody's as medium grade
obligations, i.e., they are neither highly protected nor poorly secured. In
Moody's view, 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. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.

Lower grade debt securities are those rated between BB and D (inclusive) by
S&P, Ba and C by Moody's, comparably rated short-term debt obligations and
unrated debt securities determined by the Adviser to be of comparable quality,
which securities

13
<PAGE> 24

sometimes are referred to as "junk bonds". Debt securities rated BB, B, CCC, CC
and C by S&P generally are regarded by S&P, 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 degree of speculation with respect to such
securities. While such debt will likely have some quality and protective
characteristics, in S&P's view these are outweighed by large uncertainties or
major risk exposures to adverse conditions. Debt rated C1 by S&P is debt (income
bonds) on which no interest is being paid. Debt securities rated D by S&P are in
default, and payment of interest and/or repayment of principal is in arrears.
The D rating 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. Securities
rated B by Moody's are viewed by Moody's as generally lacking characteristics of
the desirable investment. In Moody's view, assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small. Bonds which are rated Caa by Moody's are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest. Bonds which are rated Ca by Moody's represent
obligations which are speculative in a high degree. Such issues are often in
default or have other market shortcomings. Bonds which are rated C by Moody's
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.
A complete description of the various S&P and Moody's rating categories is
included as Appendix A to this Prospectus.

Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn or a significant increase in
interest rates, greater market price volatility and less liquid secondary market
trading, among others. Investment in securities that are in default, or with
respect to which payment of interest and/or repayment of principal is in
arrears, presents special risk considerations. The Fund may incur additional
expenses to the extent that it is required to seek recovery of interest or
principal, and the Fund may be unable to obtain full recovery thereof. See
"Special Risk Considerations Regarding Medium and Lower Grade Debt Securities,"
below. Investment in foreign government and foreign corporate debt securities
entails risks in addition to those associated with the domestic securities in
which the Fund may invest. See "Foreign Securities," below. There can be no
assurance that the Fund will achieve its investment objective, and the Fund may
not be an appropriate investment for all investors. The net asset value per
share of the Fund can be expected to increase or decrease depending on real or
perceived changes in the credit risks associated with its portfolio investments,
changes in interest rates and other factors affecting the credit markets
generally.

14
<PAGE> 25

The table below sets forth the percentages of the Fund's assets invested as of
December 31, 1994 in the various Moody's and S&P rating categories and in
unrated securities determined by the Adviser to be of comparable quality. The
percentages are based on the dollar-weighted average of credit ratings of all
debt securities held by the Fund during the 1994 fiscal year computed on a
monthly basis.

<TABLE>
<CAPTION>
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING (AS A PERCENTAGE OF (AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE) PORTFOLIO VALUE)
- ------------------------------------------ -------------------- ---------------------
<S> <C> <C>
AAA/Aaa................................... 0.00% 0.00%
AA/Aa..................................... 0.00% 0.00%
A/A....................................... 0.00% 0.00%
BBB/Baa................................... 0.81% 0.00%
BB/Ba..................................... 18.79% 0.00%
B/B....................................... 75.75% 0.41%
CCC/Caa................................... 4.21% 0.00%
CC/Ca..................................... 0.00% 0.00%
C/C....................................... 0.00% 0.00%
D......................................... 0.00% 0.03%
------- ------
Percentage of Rated and Unrated
Debt Securities......................... 99.56% 0.44%
======= ======
</TABLE>

The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during a period in which the Fund did not acquire debt
securities rated below B-by S&P and B3 by Moody's. The Fund currently may
acquire such debt securities. Accordingly, the percentage of the Fund's assets
invested in securities of various grades may from time to time vary
substantially from those set forth in the above table.

There is no limitation with respect to the maturities of the securities in
which the Fund may invest.

SPECIAL RISK CONSIDERATIONS REGARDING MEDIUM AND LOWER GRADE DEBT SECURITIES.
The Fund invests in medium and lower grade debt securities. Debt securities
which are in the medium and lower grade categories generally offer a higher
current yield than is offered by higher grade debt securities, but they also
generally involve greater price volatility and greater credit and market risk.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Market risk relates to the changes in market value that
occur as a result of variation in the level of prevailing interest rates and
yield relationships in the debt securities market and as a result of real or
perceived changes in credit risk. Debt securities rated BB or below by S&P and
Ba or below by Moody's commonly are referred to as "junk bonds." Although the
Fund primarily will invest in medium and lower grade debt securities, the Fund
may invest in higher grade debt securities for temporary defensive purposes.
Such investments may result in a lower current income than if the Fund were
fully invested in medium and lower grade debt securities.

15
<PAGE> 26

The value of the Fund's portfolio securities can be expected to fluctuate over
time. When interest rates decline, the value of a portfolio invested in fixed
income securities generally can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in fixed income securities
generally can be expected to decline. However, the secondary market prices of
medium and lower grade debt securities are less sensitive to changes in interest
rates and are more sensitive to adverse economic changes or individual
developments than are the secondary market prices of higher grade debt
securities. A significant increase in interest rates or a general economic
downturn could severely disrupt the market for lower grade debt securities and
adversely affect the market value of such securities. Such events also could
lead to a higher incidence of default by issuers of lower grade debt securities
as compared with historical default rates. In addition, changes in interest
rates and periods of economic uncertainty can be expected to result in increased
volatility in the market price of the debt securities in the Fund's portfolio
and thus in the net asset value of the Fund. Also, adverse publicity and
investor perceptions, whether or not based on rational analysis, may affect the
value and liquidity of medium and lower grade debt securities. The secondary
market value of debt securities structured as zero coupon securities and
payment-in-kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.

Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium and lower grade debt securities to pay interest
and to repay principal, to meet projected financial goals and to obtain
additional financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.

To the extent that there is no established retail market for some of the
medium or lower grade debt securities in which the Fund may invest, trading in
such securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
debt securities held in the Fund's portfolio, the ability of the Adviser to
value the Fund's securities becomes more difficult and the Adviser's use of
judgment may play a greater role in the valuation of the Fund's securities due
to the reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist. To the extent that the Fund purchases illiquid debt securities or
securities which are restricted as to resale, the Fund may be required to incur
costs in connection with the registration of restricted securities in order to
dispose of such

16
<PAGE> 27

securities, although under Rule 144A under the Securities Act of 1933 such
securities may become more liquid.

Legislation has been and may be adopted which may have an adverse impact on
the market for medium and lower grade debt securities. The Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 required savings and
loan associations to dispose of their high yield bonds no later than July 1,
1994. Qualified affiliates of savings and loan associations may purchase and
retain such securities, however, and any savings and loan associations may
divest such securities by sale to their qualified affiliates. The Adviser is
unable at this time to predict what negative effect, if any, this legislation
may have on the market for high yield corporate debt securities. In addition,
participation by banks in highly leveraged transactions may subject such banks
to increased regulatory scrutiny. Other legislation may be proposed which, if
enacted, could have an adverse impact on the market for medium and lower grade
debt securities.

The Fund may invest in zero coupon and payment-in-kind debt securities. Zero
coupon securities are debt obligations that do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date when the
securities begin paying current interest. They are issued and traded at a
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
Internal Revenue Code of 1986, as amended, requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distribution to shareholders in each year any income attributable to zero
coupon securities that is in excess of 10% of the Fund's net investment income
in that year. The Fund may be required to borrow or to liquidate portfolio
securities at a time that it otherwise would not have done so in order to make
such distributions. As of December 31, 1994, approximately 7.00% of the Fund's
total assets were invested in zero coupon securities.

Payment-in-kind securities are securities that pay interest through the
issuance of additional securities. They are issued by companies that have
significant amounts of debt outstanding and are seeking to raise additional
funds without incurring additional periodic cash interest payment obligations.
Although payment-in-kind securities generally offer the opportunity for higher
returns than securities that pay interest periodically in cash, they also
generally are more volatile in response to changes in interest rates and are
more speculative investments than such securities. The Fund is required, in
order to maintain its desired tax treatment, to include in its distributions to
shareholders in each year any income attributable to securities received as
interest on payment-in-kind securities that is in excess of 10% of the Fund's
net investment income in that year. The Fund may be required to borrow or to
liquidate portfolio securities at a time that it otherwise would not have done
so in order to make such distributions. As of December 31, 1994, approximately
1.00% of the Fund's total assets were invested in payment-in-kind securities.

17
<PAGE> 28

The Adviser seeks to minimize the risks involved in investing in medium and
lower grade debt securities through portfolio diversification, careful
investment analysis, and attention to current developments and trends in the
economy and financial and credit markets. The Fund will rely on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issue. In its analysis, the Adviser 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. As described under "Investment Advisory Services," the
Adviser will utilize at its own expense, credit analysis and research services
provided by its affiliate, McCarthy, Crisanti & Maffei, Inc. ("MCM"). The
Adviser may consider the credit ratings of Moody's and S&P in evaluating debt
securities although it does not rely primarily on these ratings. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser continuously monitors the issuers of debt securities held in the Fund's
portfolio.

Many medium and lower grade debt securities are not listed for trading on any
national securities exchange, and many issuers of medium and lower grade debt
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Fund's
portfolio may consist of a relatively high proportion of unlisted and/or unrated
securities as compared with an investment company that invests primarily in
higher grade securities. The amount of information available about the financial
condition of an issuer of unrated or unlisted securities generally is not as
extensive as that which is available with respect to issuers of listed or rated
securities. Because of the nature of medium and lower rated debt securities,
achievement by the Fund of its investment objective may be more dependent on the
credit analysis of the Adviser than is the case for an investment company which
invests primarily in higher grade securities.

FOREIGN SECURITIES. The Fund may invest up to 35% of its assets in foreign
government and foreign corporate debt securities of similar quality as the
securities described above as determined by the Adviser. These investments
generally will be limited to securities issued by foreign companies with at
least three years of operations in developed countries or by foreign
governments. Investments in foreign securities present certain risks not
ordinarily found in investments in securities of U.S. issuers. These risks
include fluctuations in foreign exchange rates, political and economic
developments (including war or other instability, expropriation of assets,
nationalization and confiscatory taxation), the imposition of foreign exchange
limitations, withholding taxes on income or capital transactions or other
restrictions, higher transaction costs and difficulty in taking judicial action.
Generally, a significant factor affecting the performance of the Fund's
investments in foreign securities is the fluctuation in the relative values of
the currencies in which such securities are denominated. In addition, there
generally is less publicly available information about many foreign issuers, and
auditing, accounting and financial reporting requirements are less stringent and
less uniform in many foreign countries and, accordingly, their securities
markets may be less liquid than those in the U.S. Because there is usually less
supervision

18
<PAGE> 29

and governmental regulation of exchanges, brokers and dealers than there is in
the U.S., the Fund may experience settlement difficulties or delays not usually
encountered in the U.S.

- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------

In connection with the investment objectives and policies described above, the
Fund may, but is not required to, utilize various other investment strategies as
described below to earn income, facilitate portfolio management and mitigate
risk. Such strategies are generally accepted by modern portfolio managers and
are regularly utilized by many mutual funds and other institutional investors.
Although the Adviser believes that these investment practices may further the
Fund's investment objectives, no assurance can be given that these investment
practices will achieve this result.

STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts, enter into various interest rate
transactions such as swaps, caps, floors or collars, and enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currency or currency futures.
Collectively, all the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. The Fund may sell options on
securities the Fund owns or has the right to purchase without additional
payments, up to a maximum of 25% of the Fund's assets, for non-hedging purposes.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.

19
<PAGE> 30

realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.

REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks and broker-dealers, under which the Fund purchases securities and agrees
to resell the securities at an agreed upon time and at an agreed upon price.
Under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), repurchase agreements may be considered collateralized loans by the Fund,
and the difference between the amount the Fund pays for the securities and the
amount it receives upon resale is accrued as interest and reflected in the
Fund's net income. When the Fund enters into repurchase agreements, it relies on
the seller to repurchase the securities. Failure to do so may result in a loss
for the Fund if the market value of the securities is less than the repurchase
price. At the time the Fund enters into a repurchase agreement, the value of the
underlying security including accrued interest will be equal to or exceed the
value of the repurchase agreement and, for repurchase agreements that mature in
more than one day, the seller will agree that the value of the underlying
security including accrued interest will continue to be at least equal to the
value of the repurchase agreement. In determining whether to enter into a
repurchase agreement with a bank or broker-dealer, the Fund will take into
account the creditworthiness of such party. In the event of default by such
party, the Fund may not have a right to the underlying security and there may be
possible delays and expenses in liquidating the security purchased, resulting in
a decline in its value and loss of interest. The Fund will use repurchase
agreements as a means of making short-term investments, and may invest in
repurchase agreements of duration of seven days or less without limitation. The
Fund's ability to invest in repurchase agreements that mature in more than seven
days is subject to an investment restriction that

20
<PAGE> 31

limits the Fund's investment in "illiquid" securities, including such repurchase
agreements, to 10% of the Fund's net assets.

SECURITIES LENDING. The Fund may lend its portfolio securities to brokers or
dealers, banks or other recognized institutional borrowers of securities to a
maximum of 25% of the net assets of the Fund, provided that the borrower at all
times maintains cash or equivalent collateral or secures a letter of credit in
favor of the Fund in an amount equal to at least 100% of the market value of the
securities loaned. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest paid
on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower who has delivered equivalent collateral or secured a letter of
credit. Loans are subject to termination at the option of the Fund or the
borrower. The Fund may pay reasonable administration and custodial fees in
connection with a loan.

RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in securities the
disposition of which is subject to substantial legal or contractual restrictions
or the markets for which are illiquid.. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar securities
that are not subject to restrictions on resale. Restricted securities salable
among qualified institutional buyers without restriction pursuant to Rule 144A
under the Securities Act of 1933 that are determined to be liquid by the Adviser
under guidelines adopted by the Board of Trustees of the Trust (under which
guidelines the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on securities in connection with such purchase
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the securities at delivery may be more or less than their purchase price, and
yields generally available on comparable securities when delivery occurs may be
higher or lower than yields on the securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or portfolio securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will make
commitments to purchase securities on such basis only with the intention of
actually acquiring these securities, but the Fund may sell such securities prior
to the settlement date if such sale is considered to be advisable. No specific
limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when issued" or "delayed delivery" basis. To the extent
the Fund engages in "when issued" and "delayed delivery" transactions, it will
do so for the purpose of acquiring securities for the

21
<PAGE> 32

Fund's portfolio consistent with the Fund's investment objective and policies
and not for the purpose of investment leverage.

PORTFOLIO TURNOVER. Portfolio turnover is calculated by dividing the lesser of
purchases or sales of portfolio securities by the monthly average value of the
securities in the portfolio during the year. Securities, including options,
whose maturity or expiration date at the time of acquisition were one year or
less are excluded from such calculation. The Fund anticipates that the annual
portfolio turnover rate for the Fund's portfolio will generally be less than
200%, and may be significantly less in a period of stable or rising interest
rates. If the turnover rate for the Fund does not reach or exceed this
percentage, the Fund's brokerage costs may increase and the Adviser for the Fund
will monitor the Fund's trading practices to avoid potential adverse tax
consequences. See "Portfolio Transactions and Brokerage Allocation" in the
Statement of Additional Information.

TEMPORARY DEFENSIVE POSITIONS. When the Adviser determines that market
conditions warrant and deems it to be in the best interest of the Fund, the Fund
may, for temporary defensive purposes, invest up to 100% of its total assets in
(i) cash, (ii) U.S. Government securities and (iii) money market instruments.
When maintaining such a temporary defensive position, the Fund's yield may be
lower and, therefore, it may be more difficult to achieve the Fund's investment
objective of high current income.

INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act. See
"Investment Policies and Restrictions" in the Statement of Additional
Information.

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund has designated three classes of shares for sale to the public on a
continuous basis through Van Kampen American Capital Distributors, Inc. (the
"Distributor"), as principal underwriter, which is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered through members
of the National Association of Securities Dealers, Inc. ("NASD") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The Fund
reserves the right to suspend or terminate the continuous public offering at any
time and without prior notice.

ALTERNATIVE SALES ARRANGEMENTS

The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and aggregate
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.

22
<PAGE> 33

The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of the Fund referred to as Class C
Shares in this Prospectus were referred to as Class D Shares in prospectuses
dated prior to March 7, 1994. Shares of each class are offered at a price equal
to their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1,000,000
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares or Class C Shares in an amount of $1,000,000 or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares. If such an
investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares. Investors must weigh the benefits of deferring
the sales charge and having all of their funds invested against the higher
aggregate distribution and service fee applicable to Class B Shares and Class C
Shares (discussed below). Investors who intend to hold their shares for a
significantly long time may not wish to continue to bear the ongoing
distribution and service expenses of Class C Shares which, in the aggregate,
eventually would exceed the aggregate amount of the initial sales charge and
distribution and service expenses applicable to Class A Shares, irrespective of
the fact that a CDSC would eventually not apply to a redemption of such Class C
Shares.

23
<PAGE> 34

(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, service fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee, service fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Net Asset Value."

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission ("SEC") registration fees incurred by a
class of shares; (iv) the expense of administrative personnel and services as
required to support the shareholders of a specific class; (v) Trustees' fees or
expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be approved by the SEC pursuant to
an amended exemptive order. All such expenses incurred by a class will be borne
on a pro rata basis by the outstanding shares of such class. All allocations of
administrative expenses to a particular class of shares will be limited to the
extent necessary to preserve the Fund's qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended.

The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase directly with the investor's securities
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Fund by such broker, dealer or financial intermediary prior to such time in
order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Fund to receive a purchase order prior to such time must be
settled between the investor and the broker, dealer or financial intermediary
submitting the order. See "Net Asset Value."

24
<PAGE> 35

Distributor, an amount not exceeding the total applicable sales charges on the
sales generated by the broker, dealer or financial intermediary at the public
offering price during such programs. Other programs provide, among other things
and subject to certain conditions, for certain favorable distribution
arrangements for shares of the Fund. Also, the Distributor in its discretion may
from time to time, pursuant to objective criteria established by it, pay fees
to, and sponsor business seminars for, qualifying brokers, dealers or financial
intermediary for certain services or activities which are primarily intended to
result in sales of shares of the Fund. Fees may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. Such
fees paid for such services and activities with respect to the Fund will not
exceed in the aggregate 1.25% of the average total daily net assets of the Fund
on an annual basis. The Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. Such payments are made
by the Distributor out of its own assets. These programs will not change the
price an investor will pay for shares or the amount that the Fund will receive
from such sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an initial sales charge which is a variable percentage of
the offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive more than 90% or more
of the sales charge may be deemed to be "underwriters" as that term is defined
in the Securities Act of the 1933.

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ------------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
$100 but less than $100,000...................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000.................. 3.75 3.90 3.25
$250,000 but less than $500,000.................. 2.75 2.83 2.25
$500,000 but less than $1,000,000................ 2.00 2.04 1.75
$1,000,000 or more............................... * * *
</TABLE>

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

* No sales charge is payable at the time of purchase on investments of
$1,000,000 or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one year
of the purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1% on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million. See "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

25
<PAGE> 36

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
sales charges through a combination of investments, rights of accumulation, or a
Letter of Intent (even if investors do not wish to make an immediate investment
of a size that would normally qualify for a quantity discount).

Investors, or their brokers, dealers or financial intermediaries must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, contact your securities broker, dealer,
financial intermediary or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, by any of the foregoing; or

(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company Act.

1. Combination of Investments. Purchases of Class A Shares of the Fund, or of
other Van Kampen Merritt funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares, "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase and amount of
Class A Shares, during a 13 month period, an amount that would qualify the
investor for a reduced sales charge. An investor may do this by signing a
nonbinding Letter of Intent, which may be signed at any time within 90 days
after the first investment to be included under the Letter of Intent. Shares
purchased under the "Rights of Accumulation" described above (including
investments in other funds distributed by the Distributor and sold subject to an
initial sales charge) may be, at the time of the signing of the Letter of
Intent, applied towards completion of an investor's Letter of Intent. In
addition, if an investor's broker, dealer or financial intermediary and the
Distributor agree to refund the appropriate portion of their respective
concessions to the Fund, the sales charge on an investor's previous

26
<PAGE> 37

purchases made within 90 days may be adjusted to the reduced sales charge under
the Letter of Intent, and the refunded concession will be used to purchase Class
A Shares of the Fund or ISC Shares at the public offering price next determined
after receipt of such funds. Each investment made after signing the Letter of
Intent will be entitled to the sales charge applicable to the total investment
indicated in the Letter of Intent. If an investor does not complete the
necessary purchases under the Letter of Intent within 13 months from the date of
the first purchase included thereunder, the sales charge will be adjusted
upward, corresponding to the amount actually purchased.

When an investor signs a Letter of Intent, Class A Shares purchased with a
value of 5% of the amount specified in the Letter of Intent will be restricted;
that is, these Class A Shares cannot be sold or redeemed until the Letter of
Intent is satisfied or the additional sales charges have been paid. If the total
purchases made under the Letter of Intent, less redemptions, equal or exceed the
amount specified in the Letter of Intent, these Class A Shares will no longer be
restricted. If the total purchases, less redemptions, exceed the amount
specified, and qualify the investor for a further quantity discount, the
Distributor and the investor's securities broker, dealer or financial
intermediary will, upon request, make a retroactive sales charge adjustment and
will apply the adjustment to purchase additional Class A Shares of the Fund for
the investor's account at the next computed offering price. If an investor does
not complete the necessary purchases under the Letter of Intent, the sales
charges will be adjusted upward and if, after written notice, the investor does
not pay the increased sales charge, sufficient restricted Class A Shares will be
redeemed to pay such charge.

OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced initial sales charges in connection with unit trust reinvestment
programs and purchases by registered representatives of selling firms or
purchases by persons affiliated with the Fund or the Distributor. The Fund
reserves the right to modify or terminate these arrangements at any time.

1. Unit Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund and other ISC Shares with no minimum initial or subsequent
investment requirement and with a lower sales charge if the administrator of an
investor's unit investment trust program meets certain uniform criteria relating
to cost savings to the Fund and the Distributor. The total sales charge for all
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the broker, dealer or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their securities broker, dealer, financial
intermediary or the Distributor.

27
<PAGE> 38

distribution period by all investors who choose to invest in the Fund through
the program and (2) provide the Fund's transfer agent with appropriate backup
data for each participating investor in a computerized format fully compatible
with the transfer agent's processing system.

As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc. or John Govett & Co. Limited and such persons'
families and their beneficial accounts. The term "families" includes a
person's spouse, children and grandchildren, parents, and a person's
spouse's parents.

(b) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.

(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling agreement with the Distributor and their
spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.

(d) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The Fund
-- Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals
at least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.

(e) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1% for such purchases.

28
<PAGE> 39

(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts"), provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.

(g) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.

3. Purchases Pursuant to the Skyline Fund Agreement and Plan of
Reorganization. Pursuant to an Agreement and Plan of Reorganization by and
between the Trust and the Skyline Fund on behalf of its series, the Skyline Fund
Monthly Income Portfolio (the "Skyline Portfolio"), dated as of May 5, 1994 (the
"Agreement"), on the Closing Date for the transactions contemplated in the
Agreement, the Fund issued to the Skyline Portfolio, Class A Shares of the Fund
having a net asset value per share equal in amount to the net asset value of the
total value of the Skyline Portfolio's Assets (as defined in the Agreement) as
of the Closing Date, which Class A Shares were then distributed to the then
existing shareholders of the Skyline Portfolio. Such Class A Shares were issued
by the Fund without the imposition of a sales charge. In addition, former
shareholders of the Skyline Portfolio acquiring Class A Shares of the Fund
pursuant to the Agreement may acquire additional Class A Shares of the Fund
without the imposition of a sales charge for so long as they remain a
shareholder of any Van Kampen open-end mutual fund.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative Class A Shares in an
amount of $1 million or more, Class B Shares or Class C Shares. The public
offering price of a CDSC Share is equal to the net asset value per share without
the imposition of a sales charge at the time of purchase. CDSC Shares are sold
without an initial sales charge so that the Fund may invest the full amount of
the investor's purchase payment. The Distributor will compensate brokers,
dealers and financial intermediaries participating in the continuous public
offering of the CDSC Shares out of its own assets, and not out of the assets of
the Fund, at a percentage rate of the dollar value of the CDSC Shares purchased
from the Fund by such brokers, dealers and financial intermediaries, which
percentage rate will be equal to (i) 1.00% with respect to Class A Shares in an
amount of $1 million or more; (ii) 4.00% with respect to Class B Shares and
(iii) 1.00% with respect to Class C Shares. Such compensation will not change
the price an investor will pay for CDSC Shares or the amount that the Fund will
receive from such sale. Sales compensation with respect to Class A Shares
subject to a CDSC is set forth under "Purchasing Shares of the Fund -- Initial
Sales Charge Alternative."

29
<PAGE> 40

of the CDSC Shares being redeemed. Accordingly, no sales charge will be imposed
on increases in net asset value above the initial purchase price. In addition,
no contingent deferred sales charge will be assessed on CDSC Shares derived from
reinvestment of dividends or capital gains distributions. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
CDSC Shares, all payments during a month will be aggregated and deemed to have
been made on the last day of the month.

Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of shares of such class of CDSC Shares, such as
the payment of compensation to selected dealers and agents for selling such
shares. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell such CDSC Shares
without a sales charge being deducted at the time of purchase.

In determining whether a contingent deferred sales charge is applicable to a
redemption of shares from a class of CDSC Shares, it will be assumed that the
redemption is made first of any CDSC Shares acquired pursuant to reinvestment of
dividends or distributions, second of CDSC Shares that have been held for a
sufficient period of time such that the contingent deferred sales charge no
longer is applicable to such shares, third of Class A Shares in the
shareholder's Fund account that have converted from Class B Shares, if any, and
fourth of CDSC Shares held longest during the period of time that a contingent
deferred sales charge is applicable to such CDSC Shares. The charge will not be
applied to dollar amounts representing an increase in the net asset value per
share since the time of purchase.

To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) at $10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 3.75% (the applicable rate in the second year after
purchase).

The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1,000,000 or more, although for such
investments the Fund imposes a contingent deferred sales charge of 1.00% on
redemptions made within one year of the purchase. A commission will be paid to
dealers who initiate and are responsible for purchases of $1 million or more as
follows: 1% on sales to $2 million, plus

30
<PAGE> 41

0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- --------------------------------------------------------------------------------
<S> <C>
First.................................................... 4.00%
Second................................................... 3.75%
Third.................................................... 3.50%
Fourth................................................... 2.50%
Fifth.................................................... 1.50%
Sixth.................................................... 1.00%
Seventh and after........................................ 0.00%
</TABLE>

The contingent deferred sales charge generally is waived on redemption of
Class B Shares made pursuant to the Systematic Withdrawal Program. See
"Shareholder Programs -- Systematic Withdrawal Program."

CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a contingent deferred sales charge of
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge.

CONVERSION FEATURE. Seven years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher aggregate distribution and service fees applicable to
Class B Shares. The purpose of the conversion feature is to relieve the holders
of Class B Shares that have been outstanding for a period of time sufficient for
the Distributor to have been compensated for distribution expenses related to
the Class B Shares from most of the burden of such distribution and service
expenses.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to the Class B Shares acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to a Class B Share of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of the Fund prior to conversion, a Class B Share
of the Fund

31
<PAGE> 42

issued in connection with an exercise of the exchange privilege, or a series of
exchanges, shall be deemed to have been issued on the date on which the
investor's order to purchase the exchanged Class B Share was accepted or, in the
case of a series of exchanges, when the investor's order to purchase the
original Class B Share was accepted.

The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution and service fees and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended, and (ii) that the conversion of Class B Shares does
not constitute a taxable event under federal income tax law. The conversion of
Class B Shares to Class A Shares may be suspended if such an opinion is no
longer available. In that event, no further conversions of Class B Shares would
occur, and Class B Shares might continue to be subject to the higher aggregate
distribution and service fees for an indefinite period.

- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------

The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare distributions on a daily basis and to pay such
distributions from net investment income, net recognized short-term capital
gains and principal attributable to the respective classes on a monthly basis.
The Fund also presently intends to make distributions of net long-term capital
gains, if any, annually. The monthly distribution is composed of all or a
portion of investment income earned by the Fund, all or a portion of net
short-term capital gains recognized by the Fund on transactions in securities
and in futures and options, in each case, less the expenses attributable to the
respective class, and principal. A distribution from principal made by the Fund
will result in a decrease in the Fund's net assets equal to the amount of such
principal distribution. Long-term capital gains distributions consist of the
Fund's recognized long-term gain on transactions in securities and futures and
options, net of any realized capital losses, less any carryover capital losses
from previous years.

Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.

Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.

32
<PAGE> 43

Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate information under the "Distributions" section of the
accompanying account application or available from State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent"). After the
Transfer Agent receives this completed form, distribution checks will be sent to
the bank or other person so designated by such shareholder.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund automatically will
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge, unless a shareholder elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device For the Deaf (TDD), dial 1-800-772-8889. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.

- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular fund and the class designations of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
signature(s) must be guaranteed by a member firm of a principal stock exchange
or by a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Certificates should be sent by registered mail to National
Financial Data Services, 1004 Baltimore Avenue, Dwight Building, 6th Floor,
Kansas City, MO 64105-1807. Shareholders will receive the net asset value per
share next determined after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.

TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund.

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<PAGE> 44

For inquiries through Telecommunications Device for the Deaf (TDD), dial 1-800-
772-8889. There is a minimum of $500 and a maximum of $1,000,000 per request if
the redemption proceeds are to be mailed to the shareholder. If the redemption
proceeds are to be wired to a bank, there is a minimum of $5,000 and a maximum
of $1,000,000 per request. Prior to redeeming shares by telephone the "Expedited
Telephone Redemption" section of either the Account Application or Expedited
Telephone Redemption and Exchange Request Form (the "Authorization") must be
completed by the shareholder and be on file with the Transfer Agent. The
signature(s) on the Authorization must be guaranteed by a member firm of a
principal stock exchange or by a commercial bank or trust company which is a
member of the Federal Deposit Insurance Corporation, a credit union or a savings
association, unless the Authorization is completed at the time an account is
originally established. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. A redemption requested by
telephone will be processed at the net asset value next determined after the
request is received. Any applicable contingent deferred sales charge with
respect to CDSC Shares redeemed will be deducted from the redemption proceeds
prior to transmittal of such proceeds to the shareholder. The proceeds will then
be made payable to the registered shareowner(s) and mailed to the address
registered on the account or wired to a bank, as requested on the Authorization.
Shareholders cannot redeem shares by telephone if certificates are held for
those shares. This service is not available with respect to shares held in an
Individual Retirement Account (IRA) for which State Street Bank and Trust
Company acts as custodian. In addition, this service is not available with
respect to shares purchased by check until 15 days after such purchase.

By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If an investor is unable to reach the Fund by
telephone, he or she may redeem shares pursuant to the procedures set forth
below under the caption "Written Redemption Request." During periods of extreme
economic or market changes, it may be difficult for investors to reach the Fund
by telephone and to effect telephone redemptions.

REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
transmit the request to the

34
<PAGE> 45

Distributor. Shareholders will receive the net asset value next determined after
such shareholder places the sell order. Any applicable contingent deferred sales
charge with respect to CDSC Shares redeemed will be deducted from the redemption
proceeds prior to transmittal of such proceeds to the shareholder. It is the
responsibility of the shareholder's broker, dealer or financial intermediary to
transmit the redemption order to the Distributor. Because the Fund generally
will determine net asset value once each business day as of the close of
business, sell orders placed through a shareholder's broker, dealer or financial
intermediary must be transmitted to the Distributor by such broker, dealer or
financial intermediary prior to such time in order for the shareholder's order
to be fulfilled on the basis of the net asset value to be determined that day.
Any change in the redemption price due to the failure of the Distributor to
receive a sell order prior to such time must be settled between the shareholder
and the broker, dealer or financial intermediary submitting the order. The Fund
does not charge for this transaction (other than any contingent deferred sales
charge applicable to CDSC Shares). Shareholders must submit a written redemption
request in proper form to their securities dealer within five business days
after calling the dealer with the sell order. The request should indicate the
number of shares to be redeemed and the class designation of such shares,
identify the account number and the order or confirmation number assigned to the
trade, and be signed by the shareholder exactly as the shares are registered. If
the amount of the redemption exceeds $50,000 or if the redemption will be sent
to an address other than the address of record, signature(s) must be guaranteed
by a member firm of a principal stock exchange or by a commercial bank or trust
company which is a member of the Federal Deposit Insurance Corporation, a credit
union or a savings association. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. If certificates are held for
the shares being redeemed, such certificates must be sent endorsed for transfer
or accompanied by an endorsed stock power. Certificates should be sent by
registered mail to State Street Bank and Trust Company, c/o National Financial
Data Services, Van Kampen Merritt Funds, 1004 Baltimore Avenue, Dwight Building,
6th Floor, Kansas City, Missouri 64105-1807. Shareholders whose shares are held
in an Individual Retirement Account (IRA) for which State Street Bank and Trust
Company acts as custodian, may not sell their shares through their securities
dealers.

REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share
redemptions following the disability of a Class B shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Fund will
require satisfactory proof of disability before it determines to waive the CDSC
on Class B Shares.

35
<PAGE> 46

In cases of disability, the CDSC on Class B Shares will be waived where the
disabled person is either an individual shareholder or owns the shares as a
joint tenant with right of survivorship or is the beneficial owner of a
custodial or fiduciary account, and where the redemption is made within one year
of the initial determination of disability. This waiver of the CDSC on Class B
Shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.

GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer as the case may be
within seven calendar days after a redemption request or repurchase order and
stock certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.

The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.

- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class of the Fund outstanding. The net asset value for the Fund
is computed once daily as of 5:00 p.m. Eastern Time, Monday through Friday,
except on customary business holidays, or except on any day on which no purchase
or redemption orders are received, or when there is not sufficient trading in
the Fund's portfolio securities such that the Fund's net asset value per share
might be materially affected. The Fund reserves the right to calculate the net
asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different classes of
shares may differ.

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<PAGE> 47

Fixed income securities are valued by using market quotations, prices provided
by market makers, or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Trustees of the Trust, of which
the Fund is a sub-trust. Short-term securities with remaining maturities of less
than 60 days are valued at amortized cost when amortized cost is determined in
good faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Other assets are valued at fair value as determined in good faith by or
under the direction of the Trustees.

- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, Inc. VK/AC Holding, Inc. is controlled, through
an ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. C & D L.P. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. The general partners of C
& D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. and its subsidiaries (some of whom are officers or
trustees of the Fund) own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of such options, no
officer or trustee of the Fund owns or would own 5% or more of the common stock
of VK/AC Holding, Inc. The address of the Adviser is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Trustees of the Trust of which the Fund is a sub-trust.
Subject to the Trustees' authority, the Adviser and the Fund's officers will
supervise and implement the Fund's investment activities and will be responsible
for overall management of the Fund's

37
<PAGE> 48

business affairs. The Fund will pay the Adviser a fee (accrued daily and paid
monthly) equal to a percentage of the average daily net assets of the Fund as
follows:

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENTAGE PER ANNUM
- ----------------------------------------------------- ---------------------
<S> <C>
First $500 million................................... 0.75 of 1%
Over $500 million.................................... 0.65 of 1%
</TABLE>

Under the investment advisory agreement with the Adviser dated February 17,
1993, and approved by shareholders of the Fund at a meeting held on January 14,
1993, the Fund has agreed to assume and pay the charges and expenses of the
Fund's operations, including: the compensation of the Trustees of the Trust
(other than those who are affiliated persons, as defined in the Investment
Company Act, of the Adviser, Van Kampen American Capital Distributors, Inc. or
Van Kampen American Capital, Inc.); the charges and expenses of independent
accountants, legal counsel, any transfer and dividend disbursing agents and the
custodian (including fees for safekeeping of securities); costs of calculating
net asset value; costs of acquiring and disposing of portfolio securities;
interest (if any) on obligations incurred by the Fund; costs of share
certificates; costs of membership dues in the Investment Company Institute or
any similar organization; costs of reports and notices to shareholders; costs of
registering shares of the Fund under federal securities laws; miscellaneous
expenses and all taxes and fees to federal, state or other governmental
agencies, excluding state securities registration expenses.

The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Code permits trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.

PORTFOLIO MANAGEMENT. Anne K. Lorsung, a Vice President of the Adviser, is
primarily responsible for the day to day management of the Fund's portfolio.
Prior to January 1994, Ms. Lorsung was employed as a Group Vice President in the
high yield research area at Duff & Phelps, MCM.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
- --------------------------------------------------------------------------------

The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The securities in which the
Fund invests are traded principally in the over-the-counter market. In the
over-the-counter market, securities generally are traded on a net basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the price,
a fixed amount of compensation for the managers, underwriters and dealers. The
Fund may also purchase certain money market instruments directly from an issuer,
in which case no commissions or discounts are paid. Purchases and sales of bonds
on a stock exchange are effected through brokers who charge a commission for
their services.

38
<PAGE> 49

The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.

In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser,
the Distributor or dealers participating in the offering of the Fund's shares.
In addition, in selecting among firms to handle a particular transaction, the
Adviser and the Fund may take into account whether the firm has sold or is
selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.

- --------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- --------------------------------------------------------------------------------

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the Investment
Company Act. The Fund also has adopted a service plan (the "Service Plan") with
respect to each class of its shares. The Distribution Plan and the Service Plan
provide that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with the distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

Class A Shares. The Fund may spend an aggregate amount of up to 0.30% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the

39
<PAGE> 50

lesser of the balance of the 0.30% not paid to such financial intermediaries or
the amount of the Distributor's actual distribution related expense.

Class B Shares. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by financial intermediaries and in
connection with the maintenance of such shareholders' accounts.

Class C Shares. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. The Fund, or the Distributor as agent for the Fund, pays
financial intermediaries in connection with the distribution of the Class C
Shares up to 0.75% of the Fund's average daily net assets attributable to Class
C Shares maintained in the Fund more than one year by such financial
intermediary's customers. The Fund pays the Distributor the lesser of the
balance of the 0.75% not paid to such financial intermediaries or the amount of
the Distributor's actual distribution related expense attributable to the Class
C Shares. In addition, the Fund may spend up to 0.25% per year of the Fund's
average daily net assets attributable to the Class C Shares pursuant to the
Service Plan in connection with the ongoing provision of services to holders of
such shares by the Distributor and by financial intermediaries and in connection
with the maintenance of such shareholders' accounts.

Other Information. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.

The Distributor's actual expenses with respect to a class of CDSC Shares for
any given year may exceed the amounts payable to the Distributor with respect to
such class of CDSC Shares under the Distribution Plan, the Service Plan and
payments received pursuant to the contingent deferred sales charge. In such
event, with respect to any such class of CDSC Shares, any unreimbursed expenses
will be carried forward and paid by the Fund (up to the amount of the actual
expenses incurred) in future years so long as such Distribution Plan is in
effect. Except as mandated by applicable law, the Fund does not impose any limit
with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1994, there were $41,654
and $186 of unreimbursed distribution expenses with respect to Class B Shares,
Class C Shares respectively, representing 0.01% and 0.00%, respectively of the
Fund's total net assets. If the Distribution Plan was terminated or not
continued, the Fund would not be contractually obligated

40
<PAGE> 51

to pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.

Because the Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts of the Trust. The Distributors will
endeavor to allocate such expenses among such funds in an equitable manner. The
Distributors will not use the proceeds from the contingent deferred sales charge
applicable to a particular class of CDSC Shares to defray distribution related
expenses attributable to any other class of CDSC Shares. Various federal and
state laws prohibit national banks and some state-chartered commercial banks
from underwriting or dealing in the Fund's shares. In addition, state securities
laws on this issue may differ from the interpretations of federal law, and banks
and financial institutions may be required to register as dealers pursuant to
state law. In the unlikely event that a court were to find that these laws
prevent such banks from providing such services described above, the Fund would
seek alternate providers and expects that shareholders would not experience any
disadvantage.

- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------

The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). To qualify as a regulated investment company, the Fund
must comply with certain requirements of the Code relating to, among other
things, the sources of its income and the diversification of its assets. If the
Fund so qualifies and if it distributes to its shareholders at least 90% of its
net investment income (which includes net short-term capital gains, but not net
capital gains, which are the excess of net long-term capital gains over net
short-term capital losses), it will not be required to pay federal income taxes
on any income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income required to satisfy the 90%
distribution requirement. The Fund will not be subject to federal income tax on
any net capital gains distributed to its shareholders. As a sub-trust of a
Massachusetts business trust, the Fund will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company for federal income tax purposes.

Distributions of the Fund's net investment income are taxable to shareholders
as ordinary income whether received in shares or cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each share equal to the value thereof on the distribution
date. Distributions of the Fund's net capital gains ("capital gain dividends"),
if any, are taxable to shareholders as long-term capital gains regardless of the
length of time the Fund shares have been held by such shareholders.
Distributions in excess of the Fund's earnings and profits, such as
distributions of principal, first will reduce the adjusted tax basis of the
shares held by the shareholders and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such shareholder (assuming such shares
are held as a capital asset). The Fund will inform shareholders of the source
and tax status of such distributions promptly after

41
<PAGE> 52

the close of each calendar year. Distributions by the Fund generally will not be
eligible for the dividends received deduction for corporations.

Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held their shares for more than one year. Any loss
realized upon a taxable disposition of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain dividends
received with respect to such shares.

Some of the Fund's investment practices are subject to special provisions of
the Code that may, among other things, defer the use of losses of the Fund and
affect the holding period of the securities held by the Fund and the nature of
the income realized by the Fund. These provisions may also require the Fund to
mark-to-market some of the positions in its portfolio (i.e., treat them as if
they were closed out), which may cause the Fund to recognize income without
receiving the cash with which to make distributions in amounts necessary to
satisfy the distribution requirements for avoiding federal income and, as
described below, excise taxes. The Fund will monitor its transactions and may
make certain tax elections in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the
distribution requirements for avoiding federal income and, as described below,
excise taxes, the Fund may have to dispose of securities that it would otherwise
have continued to hold.

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.

Income from certain foreign securities may be subject to foreign withholding
taxes. Shareholders of the Fund will not be able to claim any deduction or
foreign tax credit with respect to such foreign taxes.

In order to avoid a 4% excise tax the Fund will be required to distribute by
December 31 of each year, at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (computed on the basis of the
one-year period ending on October 31 of such year), plus any amounts that were
not distributed in previous taxable years. For purposes of the excise tax, any
ordinary income or capital gain net income retained by and subject to federal
income tax in the hands of the Fund will be treated as having been distributed.

42
<PAGE> 53

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund (and received by the
shareholders) on December 31 of the year in which the dividend was declared. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as having been paid by the Fund
(except for purposes of the 4% excise tax) during such taxable year. In such
case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution is actually made.

The Fund is required in certain circumstances to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the
Fund their correct taxpayer identification number (in the case of individuals,
their social security number) or who are otherwise subject to backup
withholding. Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions (whether
received in cash or in shares) at a rate of 30% or such lower rate as prescribed
by any applicable treaty.

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent stock certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost, the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and to obtain
a Surety Bond in form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, and such shareholder's
dividends are being reinvested, a requested dollar amount may be paid from such
account to any person monthly, quarterly, semiannually or annually. The minimum
amount that may be withdrawn each period is $50; withdrawals will be made on the
seventh business day of the month in which they are scheduled to occur.
Depending upon the size of the payments requested and the fluctuations in the
net asset value of the shares redeemed, redemptions

43
<PAGE> 54

for the purpose of making such payments may reduce or even exhaust the amounts
in such account. If an investor acquires additional shares of the Fund after
joining the Systematic Withdrawal Program, the investor must inform the Fund if
he or she wants the new shares to be subject to the systematic Withdrawal
Program by telephoning the Fund at 1-800-341-2911.

With respect to redemptions of Class B Shares made pursuant to the systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares, or, if the
investor does not join the program on the date of his or her initial investment,
the net asset value of the investor's Class B Shares on the date the investor
elects to participate in the systematic Withdrawal Program. The fund will waive
the contingent deferred sales charge applicable to Class B Shares redeemed
pursuant to the Fund's Systematic Withdrawal Program.

It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge, or will become
subject to a contingent deferred sales charge in order to purchase shares at the
same time that shares are being redeemed upon which a sales charge may already
have been paid. Therefore, the Fund will not knowingly permit a shareholder to
make additional investments in shares of less than $5,000 if at the same time
such shareholder is making systematic withdrawals at a rate greater than the
distribution being paid on such shareholder's shares. The Fund reserves the
right to amend or terminate the systematic withdrawal program on thirty days
notice, and a shareholder may withdraw from the program at any time.

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares.
Shares of other Van Kampen Merritt mutual fund distributed by the Distributor
that offer an exchange privilege. Under the exchange privilege, the Fund offers
to exchange its Class A Shares for ISC Shares on the basis of relative net asset
value per share. Any ISC Shares exchanged into the Fund that have been charged a
sales load lower than the sales load applicable to Class A Shares of the Fund
will be charged the applicable sales load differential upon exchange. ISC Shares
of the Van Kampen Merritt Money Market Fund and Van Kampen Merritt Tax Free
Money Fund which have not previously been charged a sales load (except for
shares purchased via the reinvestment option) will be charged the applicable
sales load upon exchange into the Fund.

Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be subject to the deferred sales charge schedule
relating to the Class B Shares of the fund from which the purchase of Class B
Shares was originally made.

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<PAGE> 55

Class C Shares of the Fund are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen Merritt money market fund sponsored by the Distributor
is not available for holders of Class C Shares.

In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders will be able to effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time and requesting the exchange. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. The exchange
will be processed at the net asset value next determined after receipt of such
request. By utilizing the telephone exchange service, a shareholder authorizes
the Fund or the Transfer Agent to act upon the instructions of any person by
telephone to exchange shares from any account for which such service has been
authorized to any identically registered account(s) with any Van Kampen Merritt
fund distributed by the Distributor that offers an exchange privilege. The Fund,
the Distributor, the Transfer Agent and NFDS seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to exchange
shares by telephone to provide, on a recorded line, the name on the account, a
social security or tax identification number and such additional information as
may be deemed necessary or appropriate. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If a shareholder has certificates for any shares
being exchanged, such certificates must be surrendered prior to the exchange in
the same manner as in redemption of such shares. See "Redemption of
Shares--Telephone Redemptions." Any shares exchanged between the Fund and any of
the other funds will begin earning dividends on the next business day after the
exchange is effected.

Before effecting an exchange, shareholders in the Fund should obtain and read
a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.

An exchange between Van Kampen Merritt funds pursuant to the exchange
privilege is treated as a sale for federal income tax purposes and, depending
upon the circumstances, a short- or long-term capital gain or loss may be
realized.

The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Fund give prominent notice thereof at least 60 days
prior to the effective date of the modification or termination in certain
circumstances. The Fund reserves the right to limit the number of times a
shareholder may exercise the exchange privilege.

45
<PAGE> 56

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASS SM).

1. Automated Clearing House ("ACH") Deposits. Holders of Class A Shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
the Transfer Agent has received the application and the voided check or deposit
slip, such shareholder's designated bank account, following any redemption, will
be credited with the proceeds of such redemption. Once enrolled in the ACH plan,
a shareholder may terminate participation at any time by writing the Transfer
Agent.

2. Automated Dividend Program. The Fund will, upon the election of a
shareholder, automatically deposit distributions from a shareholder's account
directly into a shareholder's bank account.

3. Dividend Diversification. In addition to the foregoing, monthly
distributions and any net long-term capital gain distributions to a
shareholder's account may be invested upon election by the shareholder in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE.
This election may be made on the account application, by written notice to the
Transfer Agent or by calling the Fund directly at 1-800-341-2911, during the
hours of 7:00 a.m. to 7:00 p.m. Central Standard Time. For inquiries through
Telecommunications Device for the Deaf (TDD) dial 1-800-772-8889. In order to
qualify for this privilege, a shareholder must have established an account in
the other mutual fund prior to electing this privilege. This privilege may be
modified or terminated by the Fund at any time.

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's Fund account. In order to utilize this option, a
shareholder must fill out and sign the appropriate section of the account
application or the EASESM application which is available from the Transfer
Agent, the Fund, such shareholder's broker or dealer, or the Distributor. Once
the Transfer Agent has received this application, such shareholder's checking
account at his or her designated local bank will be debited each month in the
amount authorized by such shareholder to purchase shares of the Fund. Once
enrolled in the EASESM program, a shareholder may change the monthly amount or
terminate participation at any time by writing the Transfer Agent. Shareholders
in the EASESM program will receive a confirmation of these transactions from the
Fund at least quarterly, and their regular bank account statements will show the
debit transaction each month.

46
<PAGE> 57

the Fund pursuant to the EASESM Plan, or depositing distributions and
redemptions in the bank account indicated by the voided check or deposit slip
accompanying the shareholder's election and/or by depositing the shareholder's
distributions in the Van Kampen Merritt fund account indicated. A shareholder
also agrees that neither the Fund, the Distributor, the Transfer Agent or NFDS
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent request. This service may be amended or
terminated at any time by the Transfer Agent or by the Fund.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.

- --------------------------------------------------------------------------------
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS
- --------------------------------------------------------------------------------

Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:

- Individual Retirement Accounts (IRA's) for individuals.

- Simplified Employee Pension Plans (SEP's) for employees.

- Qualified plans for self-employed individuals.

- Qualified corporate pension and profit sharing plans for employees.

The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan is $250.

47
<PAGE> 58

contributions to their IRA, up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2.

A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specified amount from the employer in the current year will
be eligible to participate. Under a SEP, each participant establishes an IRA to
which the sponsoring employer makes annual calendar year contributions.
Generally, those contributions cannot exceed the lesser of $30,000 or 15% of the
participant's compensation for the year. A participating employee may also make
his or her IRA contribution to the same account. Generally, earnings on accounts
held in an IRA established pursuant to a SEP are not taxable until withdrawn.
Subject to certain exceptions, substantial tax penalties apply to withdrawals
before attainment of age 59 1/2.

All contributions to an IRA made to the Fund through a broker must be settled
by April 15 (or, in the event that the 15th is not a business day, the next
following business day) in any year in order to be deemed a valid contribution
for the preceding year. Contributions made directly to the Fund via the mail
must be postmarked by April 15 in any year in order to be deemed a valid
contribution for the preceding year. A request for distributions from an IRA for
which State Street Bank and Trust Company acts as custodian must be made in
writing.

Shares of the Fund may also be purchased by all types of employer sponsored
tax-qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through your securities
broker, dealer, financial intermediary, the Fund, or the Distributor for
employers (including individuals) who desire to start or amend a retirement
plan. The form of this standardized plan has been determined to be "qualified"
under the Internal Revenue Code. An employer may use this prototype to establish
a profit sharing plan, a money purchase pension plan or both for its eligible
employees. The cost for the use of the prototype plan is $50 and there are no
annual fees. The adopting employer determines within the prescribed limits the
eligibility standards, rate of contributions and other significant provisions of
the prototype plan. The Distributor, as sponsor of this prototype plan, reserves
the right to amend such plan from time to time to assure its continued
qualification under the Internal Revenue Code or for other reasons. Employers
adopting this prototype plan will be bound by such amendments.

Shareholders considering establishing a retirement plan or purchasing shares
of the Fund in connection with a retirement plan should consult with their
attorney or tax advisor with respect to plan requirements and tax aspects
pertaining to them.

48
<PAGE> 59

- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of shares. In lieu of or in addition to total return and yield
calculations, such information may include performance rankings and similar
information from independent organizations such as Lipper Analytical Services,
Inc., Business Week, Forbes or other industry publications. In addition, from
time to time the Fund may compare its performance to certain securities and
unmanaged indices which may have different risk/reward characteristics than the
Fund. Such characteristics may include, but are not limited to, tax features,
guarantees, insurance and the fluctuation of principal and/or return. In
addition, from time to time sales materials and advertisements for the Fund may
include hypothetical information.

The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30-day period. Yield is computed by first dividing the
Fund's net investment income per share earned during such a 30-day period by the
Fund's maximum offering price per share on the last day of such period. The
Fund's net investment income per share is determined by taking the interest
earned by the Fund during the period, subtracting the expenses accrued for the
period (net of any reimbursements), and dividing the result by the product of
(a) the average daily number of Fund shares outstanding during the period that
were entitled to receive dividends and (b) the Fund's maximum offering price per
share on the last day of the period. The yield calculation formula assumes net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six month period.

The Fund calculates average compounded total return by determining the
redemption value at the end of specified periods (after adding back all
dividends and other distributions made during the period) of a $1,000 investment
in the Fund (less the maximum sales charge) at the beginning of the period,
annualizing the increase or decrease over the specified period with respect to
such initial investment and expressing the result as a percentage.

Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.

From time to time, the Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for the
Fund. Distribution rate is a measure of the level of income and short-term
capital gain dividends, if any, distributed for a specified period. Distribution
rate is determined by annualizing the distributions per share for a stated
period and dividing the result by the ending maximum

49
<PAGE> 60

public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield, for instance, it may not include the effect of amortization
of bond premiums, and may include non-recurring short-term capital gains and
premiums from options and futures transactions engaged in by the Fund. In
addition, the Fund may, in supplemental sales literature, advertise
non-standardized total return figures representing the cumulative,
non-annualized total return from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in the Fund at a given date, deducting the maximum sales
charge of 4.75% for Class A Shares, determining the value of all subsequent
reinvested dividends, and dividing the net change in the value of the investment
as of the end of the period by the amount of the initial investment and
expressing the result as a percentage.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Fund, an account will be opened for each shareholder on the Fund's books and
shareholders will receive a written confirmation. Shareholders will receive
monthly statements giving details of all activity in their account and will also
receive a statement whenever an investment in or withdrawal is made in or from
their account. Information for federal income tax purposes will be provided at
the end of the year. Such statements will present separately information with
respect to each class of the Fund's shares. It is expected that the transfer
agency costs attributable to the Class B Shares and the Class C Shares will be
higher than the transfer agency costs attributable to the Class A Shares.

- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund is a sub-trust of the Van Kampen Merritt Trust, a Massachusetts
business trust organized March 14, 1988 (the "Trust"). Shares of the Trust
entitle their holders to one vote per share; however, separate votes are taken
by each sub-trust on matters affecting an individual sub-trust.

50
<PAGE> 61

except that each class bears certain distribution expenses and has exclusive
voting rights with respect to its distribution fee. See "The Distribution and
Service Plans."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of shares is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights, except with respect to the conversion
of Class B Shares into Class A Shares as described above. In the event of
liquidation, each of the shares of the Fund is entitled to its portion of all of
the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B Shares and Class C Shares pay higher distribution expenses, the
liquidation proceeds to Class B Shareholders and Class C Shareholders are likely
to be lower than to other shareholders.

The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

The Fund's fiscal year ends on June 30. The Fund sends to its shareholders at
least semi-annually reports showing the Fund's portfolio and other information.
An annual report, containing financial statements audited by Independent
Auditors, is sent to shareholders each year. After the end of each year,
shareholders will receive federal income tax information regarding dividends and
capital gains distributions.

Shareholder inquiries should be directed to Van Kampen Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn: Correspondence. Its
telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

This prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.

51
<PAGE> 62

APPENDIX A

RATINGS OF CORPORATE OBLIGATIONS

STANDARD & POOR'S RATINGS GROUP

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable Standard
& Poor's Ratings Group (S&P) rating symbols and their meanings (as published by
S&P) follows:

1. DEBT

A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.

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

The ratings are based, in varying degrees, on the following considerations:

1. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.

INVESTMENT GRADE

<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. 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 highest rated issues only in
small degree.

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

A-1
<PAGE> 63

<TABLE>
<S> <C>
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.
</TABLE>

SPECULATIVE GRADE

<TABLE>
<S> <C>
BB Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
B predominantly speculative characteristics with respect to
CCC capacity to pay interest and repay principal. 'BB' indicates the
CC least degree of speculation and 'C' the highest. While such debt
C 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' debt
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.

CI The rating 'CI' is reserved for income bonds on which no interest
is being paid.
</TABLE>

A-2
<PAGE> 64

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

PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.

c The letter 'c' indicates that the holder's option to tender the
security for purchase may be canceled under certain prestated
conditions enumerated in the tender option documents.

i The letter 'i' indicates the rating is implied. Such ratings are
assigned only on request to entities that do not have specific
debt issues to be rated. In addition, implied ratings are
assigned to governments that have not requested explicit ratings
for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on
specific debt issues of entities domiciled in the country.

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

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

* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.

NR Not rated.

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

A-3
<PAGE> 65

<TABLE>
<S> <C>
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds
rated in the top four categories ('AAA', 'AA', 'A', 'BBB',
commonly known as "investment grade" ratings) are generally
regarded as eligible for bank investment. In addition, the laws
of various states governing legal investments impose certain
rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies and
fiduciaries generally.
</TABLE>

3. COMMERCIAL PAPER

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:

<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated 'A-1.'

A-3 Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.

B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.

C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not
expired, unless S&P believes that such payments will be made
during such grace period.

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

A-4
<PAGE> 66

4. VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for example
'AAA/A+'). With short-term demand debt, S&P's note rating symbols are used with
the commercial paper rating symbols (for example, 'SP-1+/A-1+).

5. NOTES

An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assignment:

-- Amortization schedule (the longer the final maturity relative to other
maturities the more likely the issue is to be treated as a note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics will be given a plus (+)
designation.

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.

SP-3 Speculative capacity to pay principal and interest.

6. PREFERRED STOCK

An S&P preferred stock rating is an assessment of the capacity and willingness
of an issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the bond rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.

The preferred stock ratings are based on the following considerations:

1. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.

A-5
<PAGE> 67

2. Nature of, and provisions of, the issue.

3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.

<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a
high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as
for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more
susceptible to the adverse effects of changes in circumstances
and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' are regarded, on
B balance, as predominantly speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. 'BB'
indicates the lowest degree of speculation and 'CCC' the highest
degree of speculation. While such issues will likely have some
quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
CC The rating 'CC' is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments, but that is
currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer
in default on debt instruments.
PLUS (+) or MINUS (-): To provide more detailed indications of
preferred stock quality, the ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P
does not rate a particular type of obligation as a matter of
policy.
</TABLE>

A preferred stock rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the Issuer, and obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information.

A-6
<PAGE> 68

The ratings may be changed, suspended, or withdrawn as a result of changes in,
or unavailability of, such information.

MOODY'S INVESTORS SERVICE

MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:

1. LONG-TERM DEBT

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in 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.

A-7
<PAGE> 69

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.

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

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

Should no rating be assigned, among other reasons, it may be one of the
following:

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

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

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

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

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

2. SHORT-TERM DEBT

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.

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

PRIME-1:

Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:

--Leading market positions in well-established industries.

--High rates of return on funds employed.

--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

A-8
<PAGE> 70

--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

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

PRIME-2:

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

PRIME-3:

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

NOT PRIME:

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

3. PREFERRED STOCK

Preferred stock rating symbols and their definitions are as follows:

aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.

aa: An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.

a: An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.

baa: An issue which is rated "baa" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.

ba: An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very

A-9
<PAGE> 71

moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.

b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

caa: An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.

ca: An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.

c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from aa through b in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.

A-10
<PAGE> 72

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344
VAN KAMPEN MERRITT
HIGH YIELD FUND
One Parkview Plaza

Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza

Oakbrook Terrace, IL 60181

Distributor

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza

Oakbrook Terrace, IL 60181

Transfer Agent

STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001

Kansas City, MO 64141-6001

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713

Boston, MA 02105

Attn: Van Kampen Merritt Funds

Legal Counsel

SKADDEN, ARPS, SLATE, MEAGHER
& FLOM
333 West Wacker Drive

Chicago, IL 60606

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive

Chicago, IL 60601

<PAGE> 73

Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time such
amendment to the registration statement becomes effective. This statement
of additional information shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.

SUBJECT TO COMPLETION--DATED APRIL 28, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT HIGH YIELD FUND

Van Kampen Merritt High Yield Fund (the "Fund") is organized as a separate
diversified sub-trust of Van Kampen Merritt Trust, a Massachusetts business
trust (the "Trust"). The Trust is an open-end management investment company,
commonly known as a mutual fund. The Fund's primary investment objective is to
provide a high level of current income. As a secondary objective the Fund seeks
capital appreciation. The Fund will attempt to achieve its investment objectives
through investment primarily in a diversified portfolio of medium and lower
grade domestic corporate debt securities. There is no assurance that the Fund
will achieve its investment objective. The Fund is a mutual fund whose portfolio
is advised by Van Kampen American Capital Investment Advisory Corp. (the
"Adviser").

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling 1-800-225-2222, ext. 6504. This Statement of Additional Information
incorporates by reference the entire Prospectus.

The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be obtained
from the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Officers and Trustees................................................................. B-13
Legal Counsel......................................................................... B-16
Investment Advisory and Other Services................................................ B-16
Portfolio Transactions and Brokerage Allocation....................................... B-18
Tax Status of the Fund................................................................ B-19
The Distributor....................................................................... B-19
Performance Information............................................................... B-20
Unaudited Financial Statements........................................................ B-23
Notes to Unaudited Financial Statements............................................... B-31
Independent Auditors' Report.......................................................... B-34
Audited Financial Statements.......................................................... B-35
Notes to Audited Financial Statements................................................. B-43
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

B-1
<PAGE> 74

THE FUND AND THE TRUST

The Fund is a separate diversified sub-trust of Van Kampen Merritt Trust (the
"Trust") an open-end management investment company, commonly known as a mutual
fund. The Trust is an unincorporated business trust established under the laws
of the Commonwealth of Massachusetts by a Declaration of Trust dated March 14,
1986. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. At present, the Fund, Van
Kampen Merritt Short-Term Global Income Fund, Van Kampen Merritt Adjustable Rate
U.S. Government Fund, Van Kampen Merritt Strategic Income Fund and Van Kampen
Merritt Emerging Markets Income Fund are the only sub-trusts of the Trust,
although other sub-trusts may be organized and offered in the future. The Trust
and each of its sub-trusts, including the Fund, will be treated as separate
corporations for Federal income tax purposes.

Each share represents an equal proportionate interest in the assets of the
sub-trust with each other share in such sub-trust and no interest in any other
sub-trust. No sub-trust is subject to the liabilities of any other sub-trust.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its sub-trusts, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
sub-trusts and indemnifies shareholders against any such liability. Although
shareholders of an unincorporated business trust established under Massachusetts
law may, under certain limited circumstances, be held personally liable for the
obligations of the trust as though they were general partners, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange rights
other than those described in the Prospectus. The Trust does not contemplate
holding regular meetings of shareholders to elect Trustees or otherwise.
However, the holders of 10% or more of the outstanding shares may by written
request require a meeting to consider the removal of Trustees by a vote of a
majority of the shares present and voting at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the Investment Company Act of 1940 (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.

Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms as part, each such statement
being qualified in all respects by such reference.

INVESTMENT POLICIES AND RESTRICTIONS

The primary investment objective of the Fund is to provide high current
income. As a secondary objective the Fund seeks capital appreciation. The Fund
will attempt to achieve its investment objectives through investment primarily
in a diversified portfolio of medium and lower grade domestic corporate debt
securities. There is no assurance that such objective will be achieved. The Fund
may invest in debt securities rated between BBB and D (inclusive) by Standard &
Poor's Ratings Group ("S&P"), Baa and C (inclusive) by Moody's Investor Services
("Moody's"), comparably rated short-term debt securities and unrated debt
securities determined by the Fund's investment adviser to be of comparable
quality. The Fund may also invest up to 35% of its assets in foreign government
and corporate debt securities of similar quality. The securities in which the
Fund invests generally will have a higher degree of individual credit and market
risk and as a result their prices may be more volatile as compared to higher
rated securities, which may cause the Fund's net asset

B-2
<PAGE> 75

value to be more volatile than the net asset value of a portfolio of higher
rated securities. The net asset value of the Fund may also increase or decrease
depending on changes in interest rates and other factors affecting credit
markets.

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or, if, as a
result, the Fund would hold more than 10% of the outstanding voting
securities of an issuer; except, that up to 25% of the Fund's total assets
may be invested without regard to such limitations.

2. Invest more than 25% of its assets in a single industry. (Neither the U.S.
Government nor any of its agencies or instrumentalities will be considered
an industry for purposes of this restriction.)

3. Borrow money, except for temporary purposes from banks or in reverse
repurchase transactions as described in the Statement of Additional
Information and then in amounts not in excess of 5% of the total asset
value of the Fund, or mortgage, pledge, or hypothecate any assets except
in connection with a borrowing and in amounts not in excess of 10% of the
total asset value of the Fund. Borrowings may not be made for investment
leverage, but only to enable the Fund to satisfy redemption requests where
liquidation of portfolio securities is considered disadvantageous or
inconvenient. In this connection, the Fund will not purchase portfolio
securities during any period that such borrowings exceed 5% of the total
asset value of the Fund. Notwithstanding this investment restriction, the
Fund may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.

4. Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph 1
above, may enter into repurchase agreements, and may lend its portfolio
securities against collateral consisting of cash or of securities issued
or guaranteed by the U.S. Government or its agencies, which collateral is
equal at all times to at least 100% of the value of the securities loaned,
including accrued interest.

5. Sell any securities "short", unless at all times when a short position is
open the Fund owns an equal amount of the securities or of securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.

6. Write, purchase, or sell puts, calls or combinations thereof, or purchase
or sell interest rate futures contracts or related options, except that
the Fund may write covered call options with respect to its portfolio
securities and enter into closing purchase transactions with respect to
such options, to a maximum of 25% of its net assets and except that the
Fund may invest in hedging instruments as described in the Prospectus and
the Statement of Additional Information from time to time.

7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

8. Make investments for the purpose of exercising control or management.

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in money market funds so long as the Fund
does not own more than 3% of the outstanding voting stock of any money
market fund or securities of any money market fund aggregating in value
more than 5% of the total assets of the Fund.

10. Invest in interests in oil, gas, or other mineral exploration or
development programs.

11. Purchase or sell real estate, commodities, or commodity contracts, except
for investments in hedging instruments as described in the Prospectus and
this Statement of Additional Information from time to time.

The Fund may not change any of these investment restrictions nor any other
fundamental policy without the approval of the lesser of (i) more than 50% of
the Fund's outstanding shares or (ii) 67% of the Fund's shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
present in person or

B-3
<PAGE> 76

by proxy. As long as the percentage restrictions described above are satisfied
at the time of the investment or borrowing, the Fund will be considered to have
abided by those restrictions even if, at a later time, a change in values or net
assets causes an increase or decrease in percentage beyond that allowed.

From time to time the Fund may commit to more stringent restrictions in order
to be able to offer its shares to residents in particular states. In this
connection the Fund has committed that it will not invest assets of the Fund in
securities of companies which have a record of less than three years continuous
operation. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the Fund has
come into existence as the result of a merger, consolidation, reorganization or
the purchase of substantially all of the assets of such predecessor company or
companies, partnership or individual enterprise. The Fund may revoke any such
commitments at any time so long as it thereafter ceases to offer its shares in
the state or states involved.

The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid. The Fund's policy
with respect to investment in illiquid and restricted securities is not a
fundamental policy and may be changed by the Board of Trustees, in consultation
with the adviser, without obtaining shareholder approval.

ADDITIONAL INVESTMENT CONSIDERATIONS

MEDIUM AND LOWER GRADE DEBT SECURITIES

Discussion concerning the special risk factors of the Fund's investments in
medium and lower grade debt securities appears in the Prospectus under the
heading "Investment Objective and Policies--Special Risk Considerations
Regarding Medium and Lower Grade Debt Securities." Other corporate debt
securities which may also be acquired by the Fund include preferred stocks and
all types of debt obligations having varying terms with respect to security or
credit support, subordination, purchase price, interest payments and maturity.
Such obligations may include, for example, bonds, debentures, notes, mortgage-
or other asset-backed instruments, equipment lease or trust participation
certificates, conditional sales contracts, commercial paper and obligations
issued or guaranteed by the United States government or any of its political
subdivisions, agencies or instrumentalities (including obligations, such as
repurchase agreements, secured by such instruments). Mortgage-backed securities
are securities that directly or indirectly represent a participation in, or are
secured and payable from, mortgage loans secured by real property. The Fund will
not invest in mortgage-backed residual interests. Asset-backed securities have
structural characteristics similar to mortgage-backed securities, but have
underlying assets, such as accounts receivable, that are not mortgage loans or
interests in mortgage loans. Participation certificates are issued by obligors
to finance the acquisition of equipment and facilities and may represent
participations in a lease, an installment purchase contract or a conditional
sales contract. Most debt securities in which the Fund will invest will bear
interest at fixed rates. However, the Fund reserves the right to invest without
limitation in corporate debt securities that have variable rates of interest or
involve equity features, such as contingent interest or participation based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are

B-4
<PAGE> 77

based on the borrower's attainment of specified levels of revenues, sales or
profits and thus enable the holder of the security to share in the potential
success of the venture). Corporate debt securities consisting of preferred
stocks may have cumulative or non-cumulative dividend rights. To the extent the
Fund invests in non-cumulative preferred stocks, the Fund's ability to achieve
its investment objective of high current income may be affected adversely. In
connection with its investments in corporate debt securities, the Fund also may
invest in equity securities, including warrants and common stocks. No more than
5% of the Fund's assets will be invested in such equity securities. The Fund
also may invest in convertible securities, zero coupon securities and
payment-in-kind securities.

OTHER INVESTMENT STRATEGIES

The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and currency exchange rates), to manage the effective maturity or duration
of securities or portfolios or to enhance potential gain. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.

STRATEGIC TRANSACTIONS. In the course of pursuing these investment strategies,
the Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
interest rate indices and other financial instruments, purchase and sell
financial futures contracts, enter into various interest rate transactions such
as swaps, caps, floors or collars, and enter into various currency transactions
such as currency forward contracts, currency futures contracts, currency swaps
or options on currency or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position as a temporary substitute for
purchasing or selling particular securities. The Fund may sell options on
securities the Fund owns or has the right to purchase without additional
payments, up to a maximum of 25% of the Fund's net assets, for non-hedging
purposes. Any or all of these investment techniques may be used at any time and
there is no particular strategy that dictates the use of one technique rather
than another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.

B-5
<PAGE> 78

the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.

GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, to the extent the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.

The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

B-6
<PAGE> 79

options, which generally have standardized terms and performance mechanics, all
the terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guaranties and security, are set by negotiation of the
parties. The Fund will only enter into OTC options that have a buy-back
provision permitting the Fund to require the Counterparty to buy back the option
at a formula price within seven days. The Fund expects generally to enter into
OTC options that have cash settlement provisions, although it is not required to
do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank in
New York as "primary dealers", broker dealers, domestic or foreign banks or
other financial institutions which have received a short-term credit rating of
A-1 from S&P or P-1 from Moody's or any equivalent rating from any other
nationally recognized statistical rating organization ("NRSRO"). The staff of
the SEC currently takes the position that the amount of the Fund's obligation
pursuant to an OTC option is illiquid, and is subject to the Fund's limitation
on investing no more than 10% of its assets in illiquid instruments.

If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

The Fund may purchase and sell for hedging purposes call options on U.S.
Treasury and agency securities, foreign sovereign debt, mortgage-backed
securities, corporate debt securities and foreign debt securities that are
traded on U.S. and foreign securities exchanges and in the over-the-counter
markets and related futures on such securities other than futures on individual
corporate debt securities. All calls sold by the Fund must be "covered" (i.e.,
the Fund must own the securities or futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security and may require the Fund to hold a
security which it might otherwise have sold. In selling calls on securities not
owned by the Fund, the Fund may be required to acquire the underlying security
at a disadvantageous price in order to satisfy its obligation with respect to
the call option. The Fund may sell options on securities the Fund owns or has
the right to purchase without additional payments, up to a maximum of 25% of the
Fund's net assets, for non-hedging purposes.

The Fund may purchase and sell for hedging purposes put options that relate to
U.S. Government Securities, Mortgage-Backed Securities, corporate debt
securities, foreign sovereign debt and foreign debt securities (whether or not
it holds the above securities in its portfolio) or futures on such securities
other than futures on individual corporate debt and individual equity
securities. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.

GENERAL CHARACTERISTICS OF FUTURES. The Fund may purchase and sell financial
futures contracts or purchase put and call options on such futures as a hedge
against anticipated interest rate, currency market changes, for duration
management and for risk management purposes. Futures generally are bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract.

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Commission and will be entered into only for bona fide hedging, risk management
(including duration management) or other portfolio management purposes.
Typically, maintaining a futures contract or selling an option thereon requires
the Fund to deposit with a financial intermediary as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 5% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited thereafter on a daily basis as the mark to market
value of the contract fluctuates. The purchase of options on financial futures
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potential subsequent variation
margin) for the resulting futures position just as it would for any position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position will be
offset prior to settlement and that delivery will not occur.

The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures and options thereon are
described below.

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and, in so doing can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser.

The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.

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time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency other than with respect to proxy hedging as described below.

The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which Fund expects to
have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in Austrian schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars, hedging involves some of the same
risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and any combination
of futures, options and currency transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.

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with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

The Fund may enter into swaps, caps, floors or collars on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or an amount of
cash or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by the
Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.

Except when the Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in

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that currency equal to the Fund's obligations or to segregate liquid high grade
assets equal to the amount of the Fund's obligation.

OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, OCC issued and exchange listed index options,
swaps, caps, floors and collars will generally provide for cash settlement. As a
result, with respect to these instruments the Fund will only segregate an amount
of assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a put, or the in-the-money
amount in the case of a call. In addition, when the Fund sells a call option on
an index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. Other OCC issued and exchange listed
options sold by the Fund other than those above generally settle with physical
delivery, and the Fund will segregate an amount of assets equal to the full
value of the option. OTC options settling with physical delivery, if any, will
be treated the same as other options settling with physical delivery.

In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.

With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.

The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company. See "Tax Status" in the Prospectus.

REPURCHASE AGREEMENTS

The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved the Fund's Board of Trustees. The Adviser
will monitor the creditworthiness of such parties, under the general supervision
of the Board of Trustees. In the event of a default or a bankruptcy by a seller,
the Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer the loss.

REVERSE REPURCHASE AGREEMENTS

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Commission (the "SEC") require either that securities sold by the Fund under a
reverse repurchase agreement be segregated pending repurchase or that the
proceeds be segregated on the Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.

During the time a reverse repurchase agreement is outstanding, the Fund will
maintain a segregated custodial account containing cash or U.S. Government
obligations having a value equal to the repurchase price under such reverse
repurchase agreement. Any investment gains made by the Fund with monies borrowed
through reverse repurchase agreements will cause the net asset value of the
Fund's shares to rise faster than would be the case if the Fund had not engaged
in such borrowings. On the other hand, if the investment performance resulting
from the investment of borrowings obtained through reverse repurchase agreements
fails to cover the cost of such borrowings to the Fund, the net asset value of
the Fund will decrease faster than would otherwise be the case.

Reverse repurchase agreements will be considered borrowings by the Fund and as
such would be subject to the restrictions on borrowings described under
"Investment Policies and Restrictions" in this Statement of Additional
Information. The Fund will enter into reverse repurchase agreements only with
commercial banks whose deposits are insured by the Federal Deposit Insurance
Corporation and whose assets exceed $500 million or broker-dealers who are
registered with the SEC. In determining whether to enter into a reverse
repurchase agreement with a bank or broker-dealer, the Fund will take into
account the credit-worthiness of such party and will monitor such
credit-worthiness on an ongoing basis.

BORROWING

The Fund may borrow up to 5% of the value of its assets from a bank, or
through reverse repurchase agreements with broker-dealers or banks meeting the
same qualifications as set forth above under "Repurchase Agreements." The Fund
will use such borrowings only for temporary emergency purposes such as paying
for unexpectedly heavy redemptions.

SECURITIES LENDING

Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations that are equal to at least the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the Fund continues to receive the income on the loaned securities while
at the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice, or by
the Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Fund could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Adviser to be creditworthy and when the income which can be earned from
such loans justifies the attendant risks. Upon termination of the loan, the
borrower is required to return the securities to the Fund. Any gain or loss in
the market price during the loan period would inure to the Fund. The
creditworthiness of firms to which the Fund lends its portfolio securities will
be monitored on an ongoing basis by the investment adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Board of Trustees
of the Fund.

When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned

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securities. The Fund may pay reasonable finders', administrative and custodial
fees in connection with a loan of its securities.

"WHEN-ISSUED" AND "DELAYED DELIVERY" SECURITIES

From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis--i.e., delivery and
payment can take place a month or more after the date of the transactions. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction and thereafter reflect the value,
each day, of such security in determining the net asset value of the Fund. At
the time of delivery of the securities, the value may be more or less than the
purchase price. The Fund will also establish a segregated account with the
Fund's custodian bank in which it will continuously maintain cash, U.S.
Government Securities or other liquid high-grade debt portfolio securities equal
in value to commitments for such when-issued or delayed delivery securities;
subject to this requirement, the Fund may purchase securities on such basis
without limit. An increase in the percentage of the Fund's assets committed to
the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value. The investment adviser
does not believe that the Fund's net asset value or income will be adversely
affected by the Fund's purchase of securities on such basis.

OFFICERS AND TRUSTEES

The officers and trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with Van Kampen American Capital Investment Advisory Corp., the Fund's
investment adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
the Fund's distributor, Van Kampen American Capital, Inc., or VK/AC Holding,
Inc., are as follows:

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc., and Van Kampen American Capital Management, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

R. CRAIG KENNEDY, Trustee
Dennis Trading Group Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President, Chief Executive Officer, Director and member of
the Investment Committee of the Joyce Foundation, a private foundation.

PHILIP P. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February 1989, Former Managing Director and Manager of Municipal
Bond Department, W. H. Newbold's Son & Co.

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<PAGE> 86

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company

JEROME L. ROBINSON, Trustee
115 River Road, Edgewater, New Jersey 07020
President of Robinson Technical Products Corporation, a processor and
distributor of welding alloys, supplies and equipment.
Director of Pacesetter Software, a software programming company
specializing in white collar productivity.
Director and majority shareholder Hilarius Haarlem B.V., Haarlem, Holland,
a manufacturer and distributor of welding alloys.

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom

PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.

RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.

Executive Vice President, General Counsel and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

First Vice President, Deputy General Counsel and Secretary, Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

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<PAGE> 87

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Asset
Management, Inc., Van Kampen American Capital Investment Advisory Corp.,
Van Kampen American Capital Management, Inc. and Van Kampen American
Capital Distributors, Inc.

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ---------------

* Interested persons of the Fund as defined in the 1940 Act.

Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser, and each of the foregoing officers of the Fund holds the
same positions with each of the investment companies advised by the Adviser.

The compensation of the officers and Trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
Trustees. During the next year, the Fund expects to pay Trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors, or
Van Kampen American Capital, Inc., $2,500 annually and $250 per meeting of the
Board of Trustees, plus expenses. Under the Fund's retirement plan, trustees who
are not affiliated with the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc., have at least ten years of service
and retire at or after attaining the age of 60, are eligible to receive a
retirement benefit equal to the annual retainer for each of the ten years
following such trustee's retirement. Under certain conditions, reduced benefits
are available for early retirement. Under the Fund's deferred compensation plan,
a trustee who is not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. can elect to defer
receipt of all or a portion of the trustee's fees earned by such trustee until
such trustee's retirement. The deferred compensation earns a rate of return
determined by reference to the Fund or other Van Kampen Merritt mutual funds
advised by the Adviser as selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other Van Kampen Merritt
mutual funds advised by the Adviser in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
NAME REGISTRANT(2) EXPENSES(3) RETIREMENT(4) PAID TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 14,849 $0 $2,500 $ 62,362
Philip G. Gaughan.............. 13,757 0 2,500 63,250
Donald C. Miller............... 18,172 0 2,500 62,178
Jack A. Nelson................. 18,228 0 2,500 62,362
Jerome L. Robinson............. 18,198 0 2,500 58,475
Wayne W. Whalen................ 4,078 0 2,500 49,875
</TABLE>

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

(1) Messrs. Merritt and McDonnell, Trustees of the Registrant during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Registrant.

B-15
<PAGE> 88

(2) The Registrant is Van Kampen Merritt Trust (the "Trust") which currently is
comprised of 5 sub-trusts, including the Fund. The amounts shown in this
column are accumulated from the Aggregate Compensation of each of these 5
sub-trusts during such sub-trusts' 1994 fiscal year. Beginning in October
1994, each Trustee, except Messrs. Gaughan and Whalen, began deferring his
entire aggregate compensation. The total combined amount of deferred
compensation (including interest) accrued with respect to each Trustee from
the Fund Complex (as defined herein) as of December 31, 1994 is as follows:
Mr. Kennedy $14,737; Mr. Miller $14,553; Mr. Nelson $14,737 and Mr. Robinson
$13,725.

(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant. As of
December 31, 1994 fiscal year, no amounts had been accrued for retirement
benefits because such amounts were considered to be immaterial to the net
assets of the Registrant at such time. The Registrant will accrue amounts
for retirement benefits by the end of fiscal year 1995.

(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund, retires at or after attaining the age of 60 and the annual retainer in
the year prior to the Trustee's retirement is $2,500. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.

(5) The Fund Complex consists of 20 mutual funds advised by the Adviser that
have the same members on each funds' Board of Trustees. The amounts shown in
this column are accumulated from the Aggregate Compensation of each of these
20 mutual funds in the Fund Complex during the calendar year ended December
31, 1994. The Adviser also serves as investment adviser for other investment
companies; however, with the exception of Messrs. Merritt, McDonnell and
Whalen, the Trustees are not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Adviser, Mr. Whalen received Total Compensation of $161,850 during the
calendar year ended December 31, 1994.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

As of April 13, 1995, the Trustees and officers as a group owned less than 1%
of the Shares of the Fund.

The authorized stock of the Fund currently consists of an unlimited number of
shares of beneficial interest, without par value.

To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Kathleen G. McRae, 4048 Taylor Road,
Chesapeake, VA 23321-5510, 9%; A. Donald Gilden and Gary M. Sidell Trustee,
U/W/O Paul L. Strassberg, 765 Robin Road, Amherst, NY 14228-1045, 5%; Jim
Osherow, 4196 Derrwood Dr., Akron, OH 44333-1134, 5%; First Incorporate, 105
South Parkway, Columbus, NE 68601-4505, 6%; Prudential Securities FBO Doris
Maceroni, Michael Maceroni, Richard Maceroni, Christine Correll and Laura
Trombley, Sterling Heights, MI 48313, 5%; and Elwyn J. Remington Trustee, UA DTD
11-21-89, Elwyn J. Remington Rev. Trust, 1504 1st Avenue, Antigo, WI 54409-1101,
11%.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987

B-16
<PAGE> 89

transacted business under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn is a wholly-owned subsidiary of VK/AC
Holding, Inc.

VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of stock options, the
Fund owns or would own 5% or more of the common stock of VK/AC Holding, Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold, or sell
and the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as Trustees and officers of the Fund if duly elected to such positions.

The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.

The Adviser's activities are subject to the review and supervision of the
Fund's Trustees to whom the Adviser renders periodic reports of the Fund's
investment activities.

The investment advisory agreement was approved by the shareholders of the Fund
at a shareholders meeting held on January 14, 1993, and will remain in effect
from year to year if specifically approved by the Fund's Trustees or the Fund's
shareholders and by the Fund's independent Trustees in compliance with the
requirements of the 1940 Act. The agreement may be terminated without penalty
upon 60 days written notice by either party and will automatically terminate in
the event of assignment.

The Adviser has undertaken to reimburse the Fund for annual expenses of the
Fund which exceed the most stringent limit prescribed by any State in which the
Fund's shares are offered for sale. Currently, the most stringent limit in any
State would require such reimbursement to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes and other expenses which may be
excludable under applicable state law) exceed in any fiscal year 2 1/2% of, the
average annual net assets of the Fund up to $30 million, 2% of the average
annual net assets of the Fund of the next $70 million and 1 1/2% of the
remaining average annual net assets of the Fund. In addition to making any
required reimbursements, the Adviser may in its discretion, but is not obligated
to, waive all or any portion of its fee or assume all or any portion of the
expenses of the Fund.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized advisory
expenses of $2,069,670, $1,739,911 and $1,584,195, respectively.

OTHER AGREEMENTS.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with Van Kampen
American Capital Distributors, Inc. (the "Distributors"), the Fund receives
support services for shareholders, including the handling of all written and
telephonic communications, except initial order entry and other distribution
related communications. Upon entering into such agreement, the Fund realized a
reduction in the fee which would

B-17
<PAGE> 90

have been paid to the Transfer Agent if the Transfer Agent had provided such
services. Payment by the Fund for such services is made on cost basis for the
employment of the personnel and the equipment necessary to render the support
services. The Fund, and the other Van Kampen Merritt mutual funds distributed by
the Distributor, share such costs proportionately among themselves based upon
their respective net asset values.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $114,700, $94,600 and $81,700, respectively, representing the
Distributor's cost of providing certain support services.

FUND ACCOUNTING AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen Merritt mutual funds
distributed by the Distributor in the cost of providing such services, with 25%
of such costs shared proportionately based on the number of outstanding classes
of securities per fund and with the remaining 75% of such cost being paid by the
Fund and such other funds based proportionally on their respective net assets.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $9,000, $5,100 and $5,800, respectively, representing the
Adviser's cost of providing certain accounting services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. It is expected that Van Kampen American
Capital, Inc. can render such legal services on a more cost effective basis than
other providers of such services. Payment by the Fund for such services is made
on a cost basis for the employment of personnel as well as the overhead and the
equipment necessary to render such services. The Fund, and the other Van Kampen
Merritt mutual funds from whom the Adviser acts as investment adviser, share one
half (50%) of such costs equally. The remaining one half (50%) of such costs are
allocated to specific funds based on specific time allocations, or in the event
services are attributable only to types of funds (i.e. closed-end or open-end),
the relative amount of time spent on each type of fund and then further
allocated between funds of that type based upon their respective net asset
values.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $12,600, $11,000 and $1,200, respectively, representing Van
Kampen American Capital, Inc.'s cost of providing legal services.

CUSTODIAN AND INDEPENDENT AUDITORS

State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.

The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the investment Adviser. Since statistical and
other research information is only supplementary to the research efforts of the
Adviser to the Fund and

B-18
<PAGE> 91

still must be analyzed and reviewed by its staff, the receipt of research
information is not expected to materially reduce its expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission, (or, if the broker's profit is part of the cost of the security,
will have to pay a higher price for the security) than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Adviser, the amount of
additional commission or increased cost is reasonable in relation to the value
of such services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Fund's Adviser are considered at or about
the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.

While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Fund.

The Board of Trustees has adopted certain policies incorporating the standards
of Rule 17e-1 issued by the Securities and Exchange Commission under the 1940
Act which requires that the commissions paid to the Distributor and other
affiliates of the Fund must be reasonable and fair compared to the commissions,
fees or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time. The rule and procedures also contain review
requirements and require the Adviser to furnish reports to the Board of Trustees
and to maintain records in connection with such reviews. After consideration of
all factors deemed relevant, the Board of Trustees will consider from time to
time whether the advisory fee will be reduced by all or a portion of the
brokerage commission given to affiliated brokers.

TAX STATUS OF THE FUND

The Trust and each of its sub-trusts, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund will be subject
to tax if it fails to distribute net capital gains, or if its annual
distributions, as a percentage of its income, are less than the distributions
required by tax laws.

THE DISTRIBUTOR

Shares of the Fund are offered continuously through the Distributor, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers and brokers,
and is

B-19
<PAGE> 92

obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan are
sometimes referred to herein as the "Plans." The Plans provide that the Fund may
spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."

Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a sub-trust, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.

For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $646,904, $179,333 and $9,643 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $587,241 and $44,181 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $34,437 and $324 for advertising expenses,
and $46,015 and $9,228 for compensation of the Distributor's sales personnel for
the Class A Shares and Class B Shares, respectively.

PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period; yield is computed by first dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum offering price) per share of such class on the last
day of such period. The Fund's net investment

B-20
<PAGE> 93

income per share is determined by taking the interest attributable to a given
class of shares earned by the Fund during the period, subtracting the expenses
attributable to a given class of shares accrued for the period (net of any
reimbursements), and dividing the result by the average daily number of shares
of each class outstanding during the period that were entitled to receive
dividends. The yield calculation formula assumes net investment income is earned
and reinvested at a constant rate and annualized at the end of a six month
period. Yield will be computed separately for each class of shares. Class B
Shares redeemed during the first six years after their issuance and Class C
Shares redeemed during the first year after their issuance may be subject to a
contingent deferred sales charge in a maximum amount equal to 4.00% and 1.00%,
respectively, of the lesser of the then current net asset value of the shares
redeemed or their initial purchase price from the Fund. Yield quotations do not
reflect the imposition of a contingent deferred sales charge, and if any such
contingent deferred sales charge imposed at the time of redemption were
reflected, it would reduce the performance quoted.

The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum sales charge, if any) at the beginning of
the period, annualizing the increase or decrease over the specified period with
respect to such initial investment and expressing the result as a percentage.
Average compounded total return will be computed separately for each class of
shares.

Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, deducting the
maximum sales charge, if any, determining the value of all subsequent reinvested
distributions, and dividing the net change in the value of the investment as of
the end of the period by the amount of the initial investment and expressing the
result as a percentage. Non-standardized total return will be calculated
separately for each class of shares. Non-standardized total return calculations
do not reflect the imposition of a contingent deferred sales charge, and if any
such contingent deferred sales charge with respect to the CDSC imposed at the
time of redemption were reflected, it would reduce the performance quoted.

CLASS A SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 8.58%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 10.09%.

The Fund's average total returns for Class A Shares for (i) the one year
period ended June 30, 1994 was (1.86%), (ii) the five year period ended June 30,
1994 was 6.55% and (iii) the approximately 96 month period since the
commencement of investment operations through June 30, 1994 was 7.52%.

The Fund's cumulative non-standardized total return for Class A Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 87.31%.

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 8.21%. In determining the Fund's

B-21
<PAGE> 94

net investment income for a stated 30-day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's distribution
rate for the 30-day period ending June 30, 1994 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") for Class B
Shares was 9.73%.

The Fund's average total return for Class B Shares for (i) the one year period
ended June 30, 1994 was (1.61%) and (ii) the approximately 14 month period since
May 17, 1993, the commencement of distribution for Class B Shares of the Fund,
through June 30, 1994 was 1.62%.

The Fund's cumulative non-standardized total return for Class B Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 5.45%.

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 8.20%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 9.73%.

The Fund's average total returns for Class C Shares for (i) the approximately
11 month period since August 13, 1993, the commencement of distribution, through
June 30, 1994 was 0.47%.

The Fund's cumulative non-standardized total return for Class C Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 1.37%.

B-22
<PAGE> 95

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Portfolio of Investments
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

4,500 G I Holdings Inc. .......................... B+ Ba3 * 10/01/98 2,745,000
5,000 Huntsman Corp. ............................. BB- B1 11.000 04/15/04 5,200,000
500 NL Industries Inc. ......................... B+ B1 11.750 10/15/03 502,500
4,700 Rexene Corp. ............................... B+ B1 11.750 12/01/04 4,805,750
----------
19,349,250
----------
Containers, Packaging & Glass 11.1%
2,250 Anchor Glass Container Corp. ............... B+ Ba3 10.250 6/30/02 2,182,500
2,750 Anchor Glass Container Corp. ............... B B2 9.875 12/15/08 2,406,250
1,900 Indah Kiat International Finance Co. B V ... BB Ba3 11.875 6/15/02 1,852,500
5,000 Malette Inc. ............................... BB- Ba3 12.250 7/15/04 5,062,500
2,750 Owens Illinois Inc. ........................ BB Ba3 11.000 12/01/03 2,860,000
4,200 S.D. Warren Co. ............................ B+ B1 12.000 12/15/04 4,305,000
6,080 Silgan Holdings Inc. <F2> .................. B- B3 0/13.250 12/15/02 5,168,000
5,400 Sola Group Ltd. <F2> ....................... B B1 6.00/9.675 12/15/03 4,131,000
3,600 Stone Container Corp. ...................... B B1 9.875 2/01/01 3,402,000
----------
31,369,750
----------
</TABLE>

See Notes to Financial Statements

B-23
<PAGE> 96

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

Diversified/Conglomerate Manufacturing 2.6%
$ 3,400 Chatwins Group Inc. Var. Rate Cpn. ............ B- B2 13.000% 5/01/03 $ 2,924,000
3,750 Jordan Industries Inc. ........................ B+ B3 10.375 8/01/03 3,337,500
2,000 Jordan Industries Inc. <F2> ................... B- Caa 0/11.750 8/01/05 1,020,000
------------
7,281,500
------------
Diversified/Conglomerate Service 2.7%
300 Borg Warner Security Corp. .................... B B2 9.125 5/01/03 262,500
4,500 Card Establishment Services Inc. .............. B B2 10.000 10/01/03 4,680,000
2,500 Comdata Network Inc. .......................... B- B3 13.250 12/15/02 2,693,750
------------
7,636,250
------------
Ecological 2.1%
2,460 Envirosource Inc. ............................. B- B3 9.750 6/15/03 2,140,200
4,500 Envirotest Systems Corp. ...................... B+ B1 9.125 3/15/01 3,735,000
------------
5,875,200
------------
Electronics 0.2%
595 Anacomp Inc. .................................. CCC+ B3 15.000 11/01/00 592,025
------------
Farming & Agriculture 1.6%
5,000 Trans Resources Inc. .......................... B- B2 11.875 7/01/02 4,550,000
------------
Government 1.0%
2,650 Argentina (Fed. Republic of) Var. Rate Cpn. ... NR B2 4.250 3/31/23 1,132,875
3,672 Brazil (Fed. Republic of) <F4> ................ NR NR 8.000 4/15/14 1,748,790
------------
2,881,665
------------
Grocery 0.3%
400 Pathmark Stores Inc. .......................... B B3 11.625 6/15/02 386,000
400 Ralphs Grocery Co. ............................ B B2 10.250 7/15/02 388,000
------------
774,000
------------
Healthcare & Education 2.5%
2,300 Healthtrust Inc. The Hospital Co. ............. B B1 8.750 3/15/05 2,219,500
300 Jackson County <F3> ........................... NR NR 13.000 11/01/96 60,000
4,750 Ornda Healthcorp .............................. B- B2 11.375 8/15/04 4,868,750
------------
7,148,250
------------
Home & Office Furnishings 1.0%
3,000 Health O Meter Inc. ........................... B- B3 13.000 8/15/02 2,700,000
------------

Hotel, Motel, Inns & Gaming 6.0%
3,500 Aztar Corp. ................................... B B2 13.750 10/01/04 3,552,500
2,500 Casino America Inc. ........................... B B1 11.500 11/15/01 2,075,000
2,100 Claridge Hotel & Casino Corp. ................. B B2 11.750 2/01/02 1,365,000
3,000 GB Property Funding Corp. ..................... B+ B2 10.875 1/15/04 2,460,000
</TABLE>

See Notes to Financial Statements

B-24
<PAGE> 97

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

Hotel, Motel, Inns & Gaming (Continued)
$ 750 Station Casinos Inc. ......................... B B2 9.625% 6/01/03 $ 628,125
6,000 Trump Plaza Funding Inc. ..................... B B3 10.875 6/15/01 4,530,000
3,499 Trump Taj Mahal Funding Inc. <F4> ............ NR Caa 11.350 11/15/99 2,326,997
------------
16,937,622
------------
Insurance 2.2%
2,750 Americo Life Inc. ............................ BB+ Ba2 9.250 6/01/05 2,337,500
3,650 Nacolah Holding Corp. ........................ BB- B1 9.500 12/01/03 3,230,250
300 Orion Capital Corp. .......................... BBB Ba1 9.125 9/01/02 296,250
500 Reliance Group Holdings Inc. ................. BB- B1 9.000 11/15/00 452,500
------------
6,316,500
------------
Leisure 1.9%
500 AMC Entertainment Inc. ....................... BB- B1 11.875 8/01/00 527,500
1,000 AMC Entertainment Inc. ....................... B B3 12.625 8/01/02 1,065,000
3,630 Ballys Health & Tennis Corp. ................. B+ B3 13.000 1/15/03 2,740,650
1,200 Plitt Theatres Inc. .......................... B B3 10.875 6/15/04 1,116,000
------------
5,449,150
------------
Mining, Steel, Iron & Non-Precious Metal 5.5%
2,500 Armco Inc. ................................... B B2 9.375 11/01/00 2,250,000
5,000 Carbide/Graphite Group Inc. .................. B+ B3 11.500 9/01/03 5,087,500
3,700 Easco Corp. .................................. B B1 10.000 3/15/01 3,441,000
5,200 Northwestern Steel & Wire Co. ................ B B1 9.500 6/15/01 4,784,000
------------
15,562,500
------------
Oil & Gas 6.1%
3,000 Clark R & M Holdings Inc. .................... B+ B1 * 2/15/00 1,710,000
4,000 Global Marine Inc. ........................... B+ B1 12.750 12/15/99 4,280,000
5,000 Maxus Energy Corp. ........................... BB- B1 9.875 10/15/02 4,437,500
500 Petroleum Heat & Power Inc. .................. B+ B2 10.125 4/01/03 457,500
3,500 Petroleum Heat & Power Inc. .................. B+ B2 9.375 2/01/06 2,992,500
3,500 Plains Resources Inc. ........................ B- B3 12.000 10/01/99 3,395,000
------------
17,272,500
------------
Personal/Food 1.2%
3,625 Flagstar Corp. ............................... B B2 10.750 9/15/01 3,389,375
------------
Personal & Non-Durable 2.4%
4,450 Playtex Family Products Corp. ................ B B3 9.000 12/15/03 3,871,500
3,350 Revlon Consumer Products Corp. ............... B B2 9.375 4/01/01 2,998,250
------------
6,869,750
------------
</TABLE>

See Notes to Financial Statements

B-25
<PAGE> 98

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Printing, Publishing & Broadcasting 7.6%
$ 2,340 American Telecasting Inc. <F2> .......... CCC+ Caa 0/12.500% 6/15/04 $ 1,053,000
2,000 Century Communications Corp. ............ BB- Ba3 9.750 2/15/02 1,920,000
3,650 Echostar Communications Corp. <F2> ...... B- Caa 0/12.875 6/01/04 1,888,875
2,500 Insight Communications Co. L.P. <F2> .... B- Caa 8.25/11.25 3/01/00 2,375,000
4,000 Storer Communications Inc. .............. B+ B1 10.000 5/15/03 3,820,000
4,000 Viacom International Inc. ............... B+ B2 10.250 9/15/01 4,120,000
3,650 Webcraft Technologies Inc. .............. B B3 9.375 2/15/02 3,175,500
3,150 Young Broadcasting Inc. ................. B B2 11.750 11/15/04 3,205,125
------------
21,557,500
------------
Rail & Shipping 0.4%
1,100 Trism Inc. .............................. B B2 10.750 12/15/00 1,039,500
------------
Retail 3.3%
1,800 Florist Transworld Delivery ............. B- B3 14.000 12/15/99 1,800,000
2,750 Hosiery Corp. America Inc. .............. B- B3 13.750 8/01/02 2,695,000
5,000 Waban Inc. .............................. BB- Ba3 11.000 5/15/04 4,850,000
------------
9,345,000
------------
Telecommunications 2.8%
3,650 Mobile Telecommunication Technology ..... BB- B2 13.500 12/15/02 3,704,750
5,600 Pricellular Wireless Corp. <F2> ......... CCC+ Caa 0/14.000 11/15/01 3,710,000
400 Rogers Cantel Mobile Inc. ............... BB Ba3 10.750 11/01/01 406,000
------------
7,820,750
------------
</TABLE>

See Notes to Financial Statements

B-26
<PAGE> 99

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

Textiles 1.3%
$ 3,600 Florsheim Shoe Co. ......... B+ B1 12.750% 9/01/02 $ 3,546,000
---------------
Utilities 2.0%
500 Kenetech Corp. ............. BB- B3 12.750 12/15/02 532,500
5,000 Midland Funding Corp. II ... B- B2 11.750 7/23/05 4,650,000
500 Toledo Edison Co. .......... B+ Ba3 8.700 9/01/02 442,500
---------------
5,625,000
---------------
Total Corporate Bonds 80.4%................................................. 227,453,912
---------------
Equities 0.0%
American Telecasting Inc. (11,700 common stock warrants) .................. - 0 -
CAP Gaming (5,000 common stock warrants) .................................. 12,500
Casino America Inc. (5,873 common stock warrants) ......................... 17,620
Chatwins Group Inc. (2,400 common stock warrants) ......................... 9,600
Purity Supreme Inc. (5,198 common stock warrants) ......................... - 0 -
---------------
Total Equities............................................................. 39,720
---------------
Total Long-Term Investments 80.4%
(Cost $237,829,172) <F1>................................................... 227,493,632
Repurchase Agreement 20.6%
UBS Securities , U.S. T-Note, $61,725,000 par, 6.75% coupon, due 05/31/99,
dated 12/30/94, to be sold on 01/03/95 at $58,358,261 ..................... 58,321,000
Liabilities in Excess of Other Assets -1.0%................................ (2,783,116)
---------------
Net Assets 100%............................................................ $ 283,031,516
---------------
*Zero coupon bond

<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is $237,829,172; the aggregate
gross unrealized appreciation is $2,168,918 and the aggregate gross unrealized depreciation is
$12,504,458, resulting in net unrealized depreciation of $10,335,540.
<F2>Security is a "step-up" bond where the coupon increases or steps up at a predetermined date.
<F3>Currently is a non-income producing security.
<F4>Payment-in-kind security.
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 100

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $237,829,172) <F1>....................................... $ 227,493,632
Short-Term Investments <F1>................................................................. 58,321,000
Cash........................................................................................ 35,107
Receivables:
Interest.................................................................................... 5,457,452
Investments Sold............................................................................ 2,760,156
Fund Shares Sold............................................................................ 706,603
Other....................................................................................... 58,886
----------------
Total Assets................................................................................ 294,832,836
----------------
Liabilities:
Payables:
Investments Purchased....................................................................... 8,949,476
Income Distributions ....................................................................... 1,672,396
Fund Shares Repurchased..................................................................... 509,144
Investment Advisory Fee <F2>................................................................ 178,667
Accrued Expenses............................................................................ 491,637
----------------
Total Liabilities........................................................................... 11,801,320
----------------
Net Assets.................................................................................. $ 283,031,516
----------------
Net Assets Consist of:
Paid in Surplus <F3>........................................................................ $ 406,760,104
Accumulated Distributions in Excess of Net Investment Income <F1>........................... (4,158,472)
Net Unrealized Depreciation on Investments.................................................. (10,335,540)
Accumulated Net Realized Loss on Investments................................................ (109,234,576)
----------------
Net Assets.................................................................................. $ 283,031,516
----------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $239,021,385 and
26,557,239 shares of beneficial interest issued and outstanding) <F3>....................... $ 9.00
Maximum sales charge (4.65%* of offering price)............................................. .44
----------------
Maximum offering price to public............................................................ $ 9.44
----------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $42,430,736 and
4,714,259 shares of beneficial interest issued and outstanding) <F3>........................ $ 9.00
----------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,578,315 and
175,267 shares of beneficial interest issued and outstanding) <F3>.......................... $ 9.01
----------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,080 and
120 shares of beneficial interest issued and outstanding) <F3>.............................. $ 9.00
----------------
*On sales of $100,000 or more, the sales charge will be reduced. Effective January 16, 1995,
the maximum sales charge was changed to 4.75%.
</TABLE>

See Notes to Financial Statements

B-28
<PAGE> 101

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest................................................................................................ $ 14,724,249
Accretion of Discount................................................................................... 305,154
Other................................................................................................... 86,250
--------------
Total Income............................................................................................ 15,115,653
--------------
Expenses:
Investment Advisory Fee <F2>............................................................................ 1,093,715
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $325,499, $193,154, $10,681
and $2, respectively) <F5> .......................................................................... 529,336
Shareholder Services ................................................................................... 272,571
Legal <F2>.............................................................................................. 78,377
Trustees Fees and Expenses <F2>......................................................................... 11,875
Other................................................................................................... 131,016
--------------
Total Expenses.......................................................................................... 2,116,890
--------------
Net Investment Income................................................................................... $ 12,998,763
--------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales..................................................................................... $ 170,433,696
Cost of Securities Sold................................................................................. (186,958,773)
--------------
Net Realized Loss on Investments ....................................................................... (16,525,077)
--------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................................................................. (9,599,697)
End of the Period....................................................................................... (10,335,540)
--------------
Net Unrealized Depreciation on Investments During the Period............................................ (735,843)
--------------
Net Realized and Unrealized Loss on Investments......................................................... $ (17,260,920)
--------------
Net Decrease in Net Assets from Operations.............................................................. $ (4,262,157)
--------------
</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 102

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.............................................. $ 12,998,763 $ 24,154,826
Net Realized Gain/Loss on Investments.............................. (16,525,077) 722,946
Net Unrealized Depreciation on Investments During the Period....... (735,843) (18,485,429)
----------------- ---------------
Change in Net Assets from Operations .............................. (4,262,157) 6,392,343
----------------- ---------------
Distributions from Net Investment Income*.......................... (12,998,763) (24,154,826)
Distributions in Excess of Net Investment Income* <F1>............. (2,723,368) (1,176,275)
----------------- ---------------
Distributions from and in Excess of Net Investment Income*......... (15,722,131) (25,331,101)
Return of Capital Distribution* <F1>............................... -0- (2,807,769)
----------------- ---------------
Total Distributions................................................ (15,722,131) (28,138,870)
----------------- ---------------
Net Change in Net Assets from Investment Activities................ (19,984,288) (21,746,527)
----------------- ---------------
From Capital Transactions <F3>:
Proceeds from Shares Sold.......................................... 32,028,934 114,607,347
Net Asset Value of Shares Issued Through Dividend Reinvestment..... 5,715,833 9,509,394
Cost of Shares Repurchased......................................... (30,806,777) (60,437,772)
----------------- ---------------
Net Change in Net Assets from Capital Transactions................. 6,937,990 63,678,969
----------------- ---------------
Total Increase/Decrease in Net Assets.............................. (13,046,298) 41,932,442
Net Assets:
Beginning of the Period............................................ 296,077,814 254,145,372
----------------- ---------------
End of the Period (Including undistributed net investment income of
$(4,158,472) and $(1,435,104), respectively) ...................... $ 283,031,516 $ 296,077,814
----------------- ---------------
</TABLE>

Six Months Ended Year Ended
*Distributions by Class December 31, 1994 June 30, 1994
- -------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares...................... $ (13,689,643) $ (23,837,532)
Class B Shares...................... (1,926,479) (1,416,951)
Class C Shares...................... (105,950) (76,590)
Class D Shares...................... (59) (28)
----------------- ----------------
$ (15,722,131) $ (25,331,101)
----------------- ----------------
Return of Capital Distribution:
Class A Shares...................... $ -0- $ (2,558,430)
Class B Shares...................... -0- (238,038)
Class C Shares...................... -0- (11,294)
Class D Shares...................... -0- (7)
----------------- ----------------
$ -0- $ (2,807,769)
----------------- ----------------
</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 103

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

1.Significant Accounting Policies
Van Kampen Merritt High Yield Fund (the "Fund") was organized as a sub-trust of
Van Kampen Merritt Trust, a Massachusetts business trust (the "Trust"), on March
14, 1986, and is registered as a diversified open- end management investment
company under the Investment Company Act of 1940, as amended. The Fund commenced
distribution of its Class B, C and D shares on May 17, 1993, August 13, 1993,
and March 14, 1994, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A.Security Valuation-Investments are stated at value using market quotations or,
if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.

B.Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain in a segregated account with its custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.

C.Investment Income-Interest income is recorded on an accrual basis. Dividend
income is recorded on the ex-dividend date. Bond discount is amortized over the
expected life of each applicable security.

D.Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $92,709,499. Of this amount, $7,717,782, $54,898,321, and
$30,093,396 will expire on June 30, 1998, 1999, and 2000, respectively. Net
realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.

E.Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
Due to inherent differences in the recognition of interest income under
generally accepted accounting principles and federal income tax purposes, for
those securities which the Fund has placed on non-accrual status, the amount of
distributable net investment income may differ between book and federal income
tax purposes for a particular period. These differences are temporary in nature,
but may result in book basis distributions in excess of net investment income
for certain periods.
For tax purposes, the determination of a return of capital distribution is made
at the end of the Fund's fiscal year. Therefore, while it is likely that a
portion of the Fund's distributions will ultimately be characterized as a return
of capital for tax purposes, no such designation has been made for the six
months ended December 31, 1994.

B-31
<PAGE> 104

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

2.Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------
<S> <C>
First $500 million... .75 of 1%
Over $500 million.... .65 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $83,300 representing Van Kampen American Capital Distributors,
Inc.'s or it's affiliates' ("VKAC") cost of providing accounting, legal and
certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 100 shares each of Classes B, C and D,
respectively.

3.Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $358,071,336,
$46,901,336, $1,786,197 and $1,235 for Class A, B, C and D shares, respectively.
For the six months ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,691,066 $ 15,678,012
Class B....................... 1,689,930 15,707,325
Class C....................... 69,903 643,597
Class D....................... -0- -0-
------------ ----------------
Total Sales................... 3,450,899 $ 32,028,934
------------ ----------------
Dividend Reinvestment:
Class A....................... 540,577 $ 4,986,628
Class B....................... 74,421 685,071
Class C....................... 4,788 44,129
Class D....................... 1 5
------------ ----------------
Total Dividend Reinvestment... 619,787 $ 5,715,833
------------ ----------------
Repurchases:
Class A....................... (2,709,950) $ (25,084,038)
Class B....................... (492,477) (4,554,738)
Class C....................... (127,575) (1,168,001)
Class D....................... -0- -0-
------------ ----------------
Total Repurchases............. (3,330,002) $ (30,806,777)
</TABLE>

B-32
<PAGE> 105

Van Kampen Merritt High Yield Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

At June 30, 1994, paid in surplus aggregated $362,490,734, $35,063,678,
$2,266,472 and $1,230 for Class A, B, C and D shares, respectively. For the
year ended June 30, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 7,494,392 $ 76,173,279
Class B....................... 3,442,369 35,264,417
Class C....................... 314,495 3,168,418
Class D....................... 120 1,233
------------ ----------------
Total Sales................... 11,251,376 $ 114,607,347
------------ ----------------
Dividend Reinvestment:
Class A....................... 872,209 $ 8,866,612
Class B....................... 58,361 585,228
Class C....................... 5,663 57,550
Class D....................... -0- 4
------------ ----------------
Total Dividend Reinvestment... 936,233 $ 9,509,394
------------ ----------------
Repurchases:
Class A....................... (5,555,631) $ (56,294,993)
Class B....................... (317,140) (3,194,577)
Class C....................... (92,006) (948,202)
Class D....................... -0- -0-
------------ ----------------
Total Repurchases............. (5,964,777) $ (60,437,772)
------------ ----------------
</TABLE>

Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.

<TABLE>
Contingent Deferred
Sales Charge
<CAPTION>
Year of Redemption Class B Class C Class D
- ----------------------------------------------------
<S> <C> <C> <C>
First ................... 4.00% 1.00% 0.75%
Second .................. 3.75% None None
Third ................... 3.50% None None
Fourth .................. 2.50% None None
Fifth ................... 1.50% None None
Sixth ................... 1.00% None None
Seventh and Thereafter .. None None None
</TABLE>

For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$53,000 and CDSC on the redeemed shares of Classes B, C and D of approximately
$88,000. Sales charges do not represent expenses of the Fund.

4.Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $153,131,337
and $186,958,773, respectively.

5.Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A and Class D shares
and 1.00% each for Class B and Class C shares are accrued daily. Included in
these fees for the six months ended December 31, 1994, are payments to VKAC of
approximately $177,800.

B-33
<PAGE> 106

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt High Yield Fund:

We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt High Yield Fund (the "Fund"), including the
portfolio of investments, as of June 30,1994, and the related state-
ment of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods presented. These finan-
cial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of June 30,1994, by
correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt High Yield Fund as of June 30,
1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented,
in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
August 23,1994

B-34
<PAGE> 107

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds
Aerospace & Defense 1.3%
$ 2,000 Fairchild Corp..................................... B - B3 12.250% 03/15/96 $ 1,995,000
1,000 Fairchild Corp..................................... B - B3 12.000 10/15/01 945,000
1,000 Fairchild Industries Inc........................... B B2 12.250 02/01/99 990,000
------------
3,930,000
------------
Automobile 0.9%
2,700 JPS Automotive Prods Corp.......................... B B2 11.125 06/15/01 2,713,500
------------
Banking 1.7%
500 Chrysler Financial Corp............................ BBB + A3 10.340 05/15/08 530,598
5,000 Imperial Credit Industries Inc..................... B B1 9.750 01/15/04 4,425,000
------------
4,955,598
------------
Beverage, Food & Tobacco 2.8%
3,000 Kemmerer Bottling Group Inc........................ B - B3 10.875 06/01/00 3,015,000
5,000 Pilgrims Pride Corp................................ B - B3 10.875 08/01/03 4,750,000
750 RJR Nabisco Inc.................................... BBB - Baa3 8.625 12/01/02 653,606
------------
8,418,606
------------
Buildings & Real Estate 5.4%
9,000 Building Materials Corp. <F1> <F2>................. BB B1 0/11.750 07/01/04 5,085,000
5,000 Doman Inds Ltd..................................... BB - Ba3 8.750 03/15/04 4,550,000
4,000 NVR Inc............................................ B B2 11.000 04/15/03 3,940,000
750 Standard Pacific Corp.............................. BB Ba2 10.500 03/01/00 750,000
400 Toll Corp.......................................... B + Ba3 10.500 03/15/02 404,000
500 Toll Corp.......................................... B + Ba3 9.500 03/15/03 480,000
750 USG Corp........................................... BB - B1 10.250 12/15/02 753,750
------------
15,962,750
------------
Chemicals, Plastics & Rubber 3.0%
2,000 Foamex L P......................................... B B1 11.250 10/01/02 2,040,000
5,000 Huntsman Corp...................................... BB - B1 11.000 04/15/04 5,100,000
1,300 Methanex Corp...................................... BB Ba3 8.875 11/15/01 1,283,750
500 NL Inds Inc........................................ B B1 11.750 10/15/03 515,625
------------
8,939,375
------------
Containers, Packaging & Glass 5.0%
2,250 Anchor Glass Container Corp........................ B + Ba3 10.250 06/30/02 2,261,250
2,750 Anchor Glass Container Corp........................ B B2 9.875 12/15/08 2,578,125
750 Owens Illinois Inc................................. BB Ba3 11.000 12/01/03 796,875
6,080 Silgan Hldgs Inc. <F2>............................ B - B3 0/13.250 12/15/02 4,879,200
5,400 Sola Group Ltd..................................... B B1 6.000 12/15/03 4,212,000
------------
14,727,450
------------
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 108

<TABLE>
<CAPTION>
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Diversified/Conglomerate Manufacturing 3.0%
$ 3,400 Chatwins Group Inc................................. B - NR 13.000% 05/01/03 $ 2,992,000
1,900 Jordan Industries Inc.............................. B + B3 10.375 06/01/03 1,852,500
2,000 Jordan Industries Inc.<F2>......................... B - Caa 0/11.750 08/01/05 1,180,000
5,000 Talley Inds Inc. <F2>.............................. B - B2 0/12.250 10/15/05 2,950,000
------------
8,974,500
------------
Diversified/Conglomerate Service 0.7%
300 Borg Warner Security Corp.......................... B B2 9.125 05/01/03 282,000
1,750 Card Establishment Services Inc.................... B B2 10.000 10/01/03 1,680,000
------------
1,962,000
------------
Ecological 3.6%
2.460 Envirosource Inc................................... B - B3 9.750 06/15/03 2,238,600
4,500 Envirotest Systems Corp............................ B B2 9.625 04/01/03 4,241,250
4,100 Mid American Waste Systems Inc..................... B B3 12.250 02/15/03 4,110,250
------------
10,590,100
------------
Electronics 0.4%
1,000 Ampex Group Inc. <F4>.............................. NR NR 13.250 11/15/96 85,000
8,000 Ampex Group Inc. <F4>.............................. NR NR 13.250 08/01/99 80,000
1,000 Anacomp Inc........................................ CCC + B3 15.000 11/01/00 1,125,000
------------
1,290,000
------------
Farming & Agriculture 1.6%
5,000 Trans Resources Inc................................ B - B2 11.875 07/01/02 4,650,000
------------
Grocery 2.7%
3,000 Grand Union Co..................................... B - B3 12.250 07/15/02 2,940,000
400 Pathmark Stores Inc................................ B B3 11.625 06/15/02 410,000
3,250 Pathmark Stores Inc. <F2>.......................... B B3 0/10.750 11/01/03 1,730,625
400 Ralphs Grocery Co.................................. B B2 10.250 07/15/02 398,000
2,640 Stater Brothers Inc................................ B+ B3 11.000 03/01/01 2,620,200
------------
8,098,825
------------
Healthcare & Education 3.8%
400 American Medical Intl Inc.......................... BB - Ba2 11.000 10/15/00 424,000
5,000 Continental Medical Systems Inc.................... B B2 10.375 04/01/03 4,700,000
5,500 Integrated Health Services Inc..................... B - B2 10.750 07/15/04 5,520,625
300 Jackson County <F4>................................ NR NR 13.000 11/01/96 60,000
400 Mediplex Group Inc................................. B - B2 11.750 10/01/02 427,000
------------
11,131,625
------------
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 109

<TABLE>
<CAPTION>
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity Market Value

- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hotel, Motel, Inns & Gaming 6.8%
$ 5,000 Casino America Inc................................. B B1 11.500% 11/15/01 $ 4,793,000
5,000 Claridge Hotel & Casino Corp....................... B B2 11.750 02/01/02 4,050,000
5,000 GB Property Funding Corp........................... B + B2 10.875 01/15/04 4,025,000
750 Station Casinos Inc................................ B B2 9.625 06/01/03 686,250
6,000 Trump Plaza Funding Inc............................ B B3 10.875 06/15/01 4,980,000
2,014 Trump Taj Mahal Funding Inc. <F5>.................. NR Caa 11.350 11/15/99 1,641,612
------------
20,175,862
------------
Insurance 2.1%
2,750 Americo Life Inc................................... BB + Ba2 9.250 06/01/05 2,502,500
400 Integon Corp....................................... BBB NR 8.000 08/15/99 392,124
2,750 Nacolah Hldg Corp.................................. BB - B1 9.500 12/01/03 2,516,250
300 Orion Capital Corp................................. BBB Baa2 9.125 09/01/02 308,250
500 Reliance Group Hldgs Inc........................... BB + Ba3 9.000 11/15/00 455,000
------------
6,174,124
------------
Leisure 3.0%
1,500 AMC Entertainment Inc.............................. BB - B1 11.875 08/01/00 1,620,000
1,000 AMC Entertainment Inc.............................. B B3 12.625 08/01/02 1,113,750
5,050 Ballys Health & Tennis Corp........................ B + B3 13.000 01/15/03 4,444,000
1,800 Plitt Theatres Inc................................. B B3 10.875 06/15/04 1,813,500
8,991,250
------------
Machinery 1.3%
4,000 Joy Technologies Inc............................... B B1 10.250 09/01/03 3,820,000
------------
Mining, Steel, Iron & Non-Precious Metals 7.8%
5,000 Carbide/Graphite Group Inc......................... B + B3 11.500 09/01/03 5,137,500
3,700 Easco Corp. <F3>................................... B B1 10.000 03/15/01 3,644,500
5,000 Kaiser Aluminum & Chemical Corp.................... B - B2 12.750 02/01/03 5,100,000
250 Koppers Inds Inc................................... BB - B1 8.500 02/01/04 225,625
5,200 Northwestern Steel & Wire Co....................... B B1 9.500 06/15/01 4,992,000
2,000 Pace Industries Inc................................ CCC + B1 10.625 12/01/02 1,890,000
2,000 Sheffield Steel Corp............................... B - Caa 12.000 11/01/01 2,045,000
------------
23,034,625
------------
Oil & Gas 8.2%
3,000 Clark R & M Hldgs Inc.............................. B + B1 * 02/15/00 1,620,000
3,000 Ferrell Gas Inc.................................... B B2 11.625 12/15/03 3,375,000
3,000 Global Marine Inc.................................. B + B1 12.750 12/15/99 3,255,000
5,000 Maxus Energy Corp.................................. BB - B1 9.875 10/15/02 4,812,500
500 Petroleum Heat & Power Inc......................... B + B2 10.125 04/01/03 476,250
3,500 Petroleum Heat & Power Inc......................... B + B2 9.375 02/01/06 3,220,000
3,500 Plains Resources Inc............................... B - B3 12.000 10/01/99 3,543,750
4,000 Trident NGL Inc.................................... B + B1 10.250 04/15/03 3,820,000
------------
24,122,500
------------
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 110

<TABLE>
<CAPTION>
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Personal/Food 1.6%
$ 5,000 Flagstar Corp...................................... B B1 10.750% 09/15/01 $ 4,837,500
------------
Personal & Non-Durable 1.5%
250 Revlon Consumer Prods Corp......................... B B2 9.500 06/01/99 228,750
5,000 Revlon Consumer Prods Corp......................... B NR 9.375 04/01/01 4,300,000
------------
4,528,750
------------
Printing, Publishing & Broadcasting 5.5%
8,500 American Telecasting Inc........................... CCC + Caa 12.500 06/15/04 4,462,500
10,000 Echostar Communications Corp. <F2>................. B - Caa 0/12.675 06/01/04 5,325,000
2,000 Insight Communications Co. L P..................... B - Caa 8.250 03/01/00 1,920,000
5,000 Webcraft Technologies Inc.......................... B B3 9.375 02/15/02 4,600,000
------------
16,307,500
------------
Rail & Shipping 1.0%
3,000 Trism Inc......................................... B B2 10.750 12/15/00 3,007,500
------------
Retail 3.5%
250 Eckerd Jack Corp.................................. B B2 11.125 05/01/01 251,875
250 Eckerd Jack Corp.................................. B B2 9.250 02/15/04 236,875
750 General Host Corp................................. B - B1 11.500 02/15/02 724,688
750 Hook Superx Inc................................... BB - Ba3 10.125 06/01/02 785,625
2,750 Orchard Supply.................................... B B2 9.375 02/15/02 2,523,125
750 Service Merchandise............................... BB - Ba3 9.000 12/15/04 684,375
5,000 Waban Inc......................................... BB - Ba3 11.000 05/15/04 5,012,500
------------
10,219,063
------------
Telecommunications 4.8%
3,176 Comcast Cellular Corp............................. B+ B2 * 03/05/00 1,905,600
2,500 Comdata Network Inc............................... B - B3 13.250 12/15/02 2,781,250
7,500 Mobilemedia Communications <F2>................... CCC + B3 0/10.500 12/01/03 4,500,000
7,000 Panamsat L P/Panamsat Cap Corp. <F2>.............. B - B3 0/11.375 08/01/03 4,515,000
400 Rogers Cantel Mobile Inc.......................... BB Ba3 10.750 11/01/01 418,000
------------
14,119,850
------------
</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 111

<TABLE>
<CAPTION>
<S> <C>
Total Corporate Bonds 86.6%.......................................................................................... 256,425,884
------------
Equities 1.1%
CAP Gaming (5,000 common stock warrants).......................................................................... 12,500
Chatwins Group Inc. (2,400 common stock warrants)................................................................... 9,600
Lady Luck Gaming Corp. (78,382 common shares) <F3> <F4>............................................................. 587,865
Purity Supreme Inc. (5,198 common stock warrants)................................................................... 0
Supermarkets General Hldgs Corp. (90,000 preferred shares).......................................................... 2,655,000
------------
Total Equities....................................................................................................... 3,264,965
------------
Total Long. Term Investments 87.7%
(Cost $269,290,546) <F1>............................................................................................ 259,690,849
Repurchase Agreement 12.5%
UBS Securities, U.S. T-Note, $37,245,000 par, 6.50% coupon,
due 05/15/97, dated 06/30/94, to be sold on 07/01/94 at $36,838,297.................................................. 36,834,000
Liabilities in Excess of Other Assets -0.2%.......................................................................... (447,035)
------------
Net Assets 100%......................................................................................................$296,077,814
------------
*Zero coupon bond
<FN>
<F1> At June 30,1994, cost for federal income tax purposes is $269,290,546; the aggregate gross unrealized
appreciation is $2,359,260 and the aggregate gross unrealized depreciation is $11,958,957, resulting in
net unrealized depreciation of $9,599,697.
<F2> Currently is a zero coupon bond which will convert to a coupon paying bond at a predetermined date.
<F3> Currently is a restricted security.
<F4> Currently is a non-income producing security.
<F5> Payment-in-Kind security.
</TABLE>

See Notes to Financial Statements

B-39
<PAGE> 112

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at Market Value (Cost $269,290,546) (Note 1)......................................................... 259,690,849
Short-Term Investments (Note 1)................................................................................... 36,834,000
Cash.............................................................................................................. 145,459
Receivables:
Investments Sold................................................................................................. 12,720,331
Interest......................................................................................................... 6,243,038
Fund Shares Sold................................................................................................. 539,079
Other............................................................................................................. 68,909
------------
Total Assets..................................................................................................... 316,241,665
------------
Liabilities:
Payables:
Investments Purchased............................................................................................ 12,401,879
Fund Shares Repurchased.......................................................................................... 5,467,372
Income Distributions............................................................................................. 1,649,287
Investment Advisory Fee (Note 2)................................................................................. 183,205
Accrued Expenses.................................................................................................. 462,108
------------
Total Liabilities................................................................................................ 20,163,851
------------
Net Assets........................................................................................................ $296,077,814
------------
Net Assets Consist of:
Paid in Surplus (Note 3).......................................................................................... $399,822,114
Accumulated Distributions in Excess of Net Investment Income (Note 1)............................................. (1,435,104)
Net Unrealized Depreciation on Investments........................................................................ (9,599,697)
Accumulated Net Realized Loss on Investments...................................................................... (92,709,499)
------------
Net Assets........................................................................................................ $296,077,814
------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $260,697,553 and
27,035,544 shares of beneficial interest issued and outstanding) (Note 3)........................................ $ 9.64
Maximum sales charge (4.65%* of offering price).................................................................. .47
------------
Maximum offering price to public................................................................................. $ 10.11
------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $33,179,072 and
3,442,385 shares of beneficial interest issued and outstanding) (Note 3)......................................... $ 9.64
------------
Class C Shares:
Net asset value and offering price per share (based on net assets of $2,200,031 and
228,152 shares of beneficial interest issued and outstanding) (Note 3)........................................... $ 9.64
------------
Class D Shares:
Net asset value and offering price per share (based on net assets of $1,158 and
120 shares of beneficial interest issued and outstanding) (Note 3)............................................... $ 9.65
------------
*On sales of $100,000 or more, the offering price will be reduced.
</TABLE>

See Notes to Financial Statements

B-40
<PAGE> 113

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest.......................................................................................................... $ 26,591,758
Dividends......................................................................................................... 688,048
Accretion of Discount............................................................................................. 561,279
Other............................................................................................................. 97,085
-------------
Total Income..................................................................................................... 27,938,170
-------------
Expenses:
Investment Advisory Fee (Note 2).................................................................................. 2,069,670
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $646,904, $179,333, $9,643 and $1,
respectively) (Note 5)........................................................................................... 835,881
Shareholder Services.............................................................................................. 449,506
Legal (Note 2).................................................................................................... 108,080
Trustees Fees and Expenses (Note 2)............................................................................... 21,480
Other............................................................................................................. 298,727
-------------
Total Expenses................................................................................................... 3,783,344
-------------
Net Investment Income............................................................................................. $ 24,154,826
-------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................................................. $ 516,095,842
Cost of Securities Sold.......................................................................................... (515,372,896)
-------------
Net Realized Gain on Investments (Including realized loss on closed
option and futures transactions of $648,335 and $2,166,397, respectively)....................................... 722,946
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................................................... 8,885,732
End of the Period................................................................................................ (9,599,697)
-------------
Net Unrealized Depreciation on Investments During the Period...................................................... (18,485,429)
-------------
Net Realized and Unrealized Loss on Investments................................................................... $(17,762,483)
-------------
Net Increase in Net Assets from Operations........................................................................ $ 6,392,343
-------------
</TABLE>

See Notes to Financial Statements

B-41
<PAGE> 114

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended June 30, 1994 and 1993
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1994 June 30, 1993
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.......................................................................... $ 24,154,826 $ 25,872,777
Net Realized Gain on Investments............................................................... 722,946 14,397,363
Net Unrealized Depreciation on Investments During the Period................................... (18,485,429) (1,061,543)
-------------- -------------
Change in Net Assets from Operations........................................................... 6,392,343 39,208,617
-------------- -------------
Distributions from Net Investment Income....................................................... (24,154,826) (25,872,777)
Distributions in Excess of Net Investment Income* (Note 1)..................................... (1,176,275) (190,798)
-------------- -------------
Distributions from and in Excess of Net Investment Income*..................................... (25,331,101) (26,063,575)
Return of Capital Distribution*................................................................ (2,807,769) (1,684,384)
-------------- -------------
Total Distributions........................................................................... (28,138,870) (27,747,959)
-------------- -------------
Net Change in Net Assets from Investment Activities............................................ (21,746,527) 11,460,658
-------------- -------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold...................................................................... 114,607,347 38,512,814
Net Asset Value of Shares Issued Through Dividend Reinvestment................................. 9,509,394 8,971,632
Cost of Shares Repurchased..................................................................... (60,437,772) (26,158,654)
-------------- -------------
Net Change in Net Assets from Capital Transactions............................................. 63,678,969 21,325,792
-------------- -------------
Total Increase in Net Assets................................................................... 41,932,442 32,786,450
Net Assets:
Beginning of the Period........................................................................ 254,145,372 221,358,922
-------------- -------------
End of the Period (Including undistributed net investment income of $(1,435,104) and
$(258,829), respectively)..................................................................... $ 296,077,814 $ 254,145,372
-------------- -------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1994 June 30, 1993
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares................................................. $ (23,837,532) $ (26,046,664)
Class B Shares................................................. (1,416,951) (16,911)
Class C Shares................................................. (76,590) -0-
Class D Shares................................................. (28) -0-
--------------- --------------
$ (25,331,101) $ (26,063,575)
--------------- --------------
Return of Capital Distribution:
Class A Shares................................................. $ (2,558,430) $ (1,682,103)
Class B Shares................................................. (238,038) (2,281)
Class C Shares................................................. (11,294) -0-
Class D Shares................................................. (7) -0-
--------------- --------------
$ (2,807,769) $ (1,684,384)
--------------- --------------
</TABLE>

See Notes to Financial Statements

B-42
<PAGE> 115

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- -------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt High Yield Fund (the "Fund") was organized
as a sub-trust of Van Kampen Merritt Trust, a Massachusetts busi-
ness trust (the "Trust"), on March 14,1986, and is registered as a
diversified open-end management investment company under the
Investment Company Act of 1940, as amended. On May 17,1993,
the Fund commenced distribution of Class B shares. The distribution
of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on
March 7,1994, commenced on August 13,1993. The distribution of
the Fund's fourth class of shares, Class D shares, commenced on
March 14, 1994.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation-Investments are stated at value using
market quotations or, if such valuations are not available, estimates
obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established in
good faith by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized
cost.

B. Security Transactions-Security transactions are recorded
on a trade date basis. Realized gains and losses are determined on
an identified cost basis. The Fund may purchase and sell securities
on a "when issued" and "delayed delivery" basis, with settlement to
occur at a later date. The value of the security so purchased is sub-
ject to market fluctuations during this period. The Fund will maintain
in a segregated account with its custodian assets having an aggre-
gate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made. At
June 30,1994, there were no when issued or delayed delivery
purchase commitments.

C. Investment Income-Interest income is recorded on an
accrual basis. Dividend income is recorded on the ex-dividend date.
Original issue discount is amortized over the expected life of each
applicable security.

D. Currency Transactions-Assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the mean of the
quoted bid and asked prices of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were acquired or
sold. Income and expenses are translated at rates of exchange
prevailing when accrued. For financial reporting purposes, realized
gains/losses on foreign currency translation are included in income as
foreign currency transactions. Unrealized appreciation/depreciation on
investments includes the results of both foreign currency exchange
rate changes and fluctuations in the market value of securities during
the period.

E. Federal Income Taxes-It is the Fund's policy to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of
its taxable income to its shareholders. Therefore, no provision for
federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax
laws which allow it to carry a realized capital loss forward for eight
years following the year of the loss and offset such losses against
any future realized capital gains. At June 30,1994, the Fund had
an accumulated capital loss carryforward for tax purposes of
$92,709,499. Of this amount $7,717,782, $54,898,321, and
$30,093,396 will expire on June 30,1998,1999, and 2000, respec-
tively. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of post October 31 losses
which are not recognized for tax purposes until the first day of the
following fiscal year.

F. Distribution of Income and Gains-The Fund declares
daily and pays monthly dividends from net investment income. Net
realized gains, if any, are distributed annually. Distributions from net
realized gains for book purposes may include short-term capital gains,
which are included as ordinary income for tax purposes. Due to
inherent differences in the recognition of interest income under
generally accepted accounting principles and federal income tax pur-
poses, for those securities which the Fund has placed on non-accrual
status, the amount of distributable net investment income may differ
between book and federal income tax purposes for a particular
period. These differences are temporary in nature, but may result in
book basis distributions in excess of net investment income for cer-
tain periods.

During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distribu-
tions by Investment Companies." Accordingly, permanent book and
tax basis differences relating to shareholder distributions totaling
$965,645 have been reclassified from accumulated net realized
gain/loss on investments to Class A share paid in surplus. Net

B-43
<PAGE> 116

Van Kampen Merritt High Yield Fund
- -------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- -------------------------------------------------------------------------

investment income, net realized gain/loss, and net assets were not
affected by this change.

G. Options and Futures Transactions-Premiums received
from call options written are recorded as deferred credits. The posi-
tion is marked to market daily with any difference between the options'
current market value and premiums received recorded as an unrealized
gain or loss. If the options are not exercised, premiums received are
realized as a gain at expiration date. If the position is closed prior to
expiration, a gain or loss is realized based on premiums received less
the cost of the closing transaction. When options are exercised,
premiums received are added to the proceeds from the sale of the
underlying securities and a gain or loss is realized accordingly. These
same principles apply to the sale of put options.

Futures contracts are marked to market daily with fluctuations in
value settled daily in cash through a margin account. Gains or losses
are realized at the time the position is closed out or the contract expires.

2. Investment Advisory Agreement and Other Transactions
with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, Van
Kampen Merritt Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- -----------------------------------------------------------------------
<S> <C>
First $500 million......................................... .75 of 1%
Over $500 million.......................................... .65 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate,
Meagher & Flom, counsel to the Fund, of which a trustee of the
Fund is an affiliated person.

For the year ended June 30,1994, the Fund recognized
expenses of approximately $136,000 representing Van Kampen
Merritt's or the Adviser's cost of providing accounting, legal and
certain shareholder services to the Fund.

Certain officers and trustees of the Fund are also officers and
directors of the Adviser and Van Kampen Merritt. The Fund does not
compensate its officers or trustees who are officers of the Adviser or
Van Kampen Merritt.

At June 30,1994, Van Kampen Merritt owned 100 shares each
of Classes B, C and D, respectively.

3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes
A, B, C and D. There are an unlimited number of shares of each
class without par value authorized. At June 30,1994, paid in surplus
aggregated $362,490,734, $35,063,678, $2,266,472 and $1,230 for
Class A, B, C and D shares, respectively. For the year ended
June 30,1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. $ 7,494,392 $ 76,173,279
Class B.................................. 3,442,369 35,264,417
Class C.................................. 314,495 3,168,418
Class D.................................. 120 1,233
------------ ------------
Total Sales................................ $ 11,251,376 $ 114,607,347
------------ -------------
Dividend Reinvestment:
Class A.................................. $ 872,209 $ 8,866,612
Class B.................................. 58,361 585,228
Class C.................................. 5,663 57,550
Class D.................................. 0 4
------------ -------------
Total Dividend Reinvestment................ $ 936,233 $ 9,509,394
------------ -------------
Repurchases:
Class A.................................. $ (5,555,631) $(56,294,993)
Class B.................................. (317,140) (3,194,577)
Class C.................................. (92,006) (948,202)
Class D.................................. 0 0
------------ -------------
Total Repurchases.......................... $ (5,964,777) $(60,437,772)
------------ -------------
</TABLE>

B-44
<PAGE> 117

At June 30,1993, paid in surplus aggregated $335,338,621 and
$2,646,648 for Classes A and B, respectively. For the year ended
June 30,1993, transactions were as follows:
<TABLE>
<CAPTION>

Shares Value
- --------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................... 3,568,546 $ 35,850,604
Class B........................... 260,078 2,662,210
------------ --------------
Total Sales........................ 3,828,624 $ 38,512,814
------------ --------------
Dividend Reinvestment:
Class A........................... 892,026 $ 8,964,579
Class B........................... 680 7,053
------------ --------------
Total Dividend Reinvestment........ 892,706 $ 8,971,632
------------ --------------
Repurchases:
Class A........................... (2,604,914) $ (26,138,320)
Class B........................... (1,963) (20,334)
------------ --------------
Total Repurchases.................. (2,606,877) $ (26,158,654)
------------ --------------
</TABLE>

Class B, C and D shares are offered without a front end
sales charge, but are subject to a contingent deferred sales charge
(CDSC). The CDSC will be imposed on most redemptions made
within six years of the purchase for Class B and one year of the
purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective
deferred sales arrangements, including higher distribution and service
fees and incremental transfer agency costs.

Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- --------------------------------------------------------------------
<S> <C> <C> <C>
First............................... 4.00% 1.00% 0.75%
Second.............................. 3.75% None None
Third............................... 3.50% None None
Fourth.............................. 2.50% None None
Fifth............................... 1.50% None None
Sixth............................... 1.00% None None
Seventh and Thereafter.............. None None None
</TABLE>

For the year ended June 30,1994, Van Kampen Merritt, as
Distributor for the Fund, received net commissions on sales of the
Fund's Class A shares of approximately $188,000 and CDSC on the
redeemed shares of Classes B, C and D of approximately $82,000.
Sales charges do not represent expenses of the Fund.

On June 3,1994, the Fund acquired all of the net assets of the
Skyline Fund Monthly Income Portfolio ("SFMIP"), through a tax free
reorganization approved by SFMIP shareholders on June 3,1994.
The Fund issued 1,847,330 Class A shares, valued at $17,919,103
in exchange for SFMIP net assets. These shares are included in com-
mon share sales for the current period. Combined net assets on the
date of the acquisition were $293,968,076.

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities,
excluding short-term notes, for the year ended June 30,1994, were
$550,996,735 and $514,216,059, respectively.

Transactions in options for the year ended June 30,1994, were
as follows:

Contracts Premium
- --------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30,1993.............. 2,400 $ (669,600)
Options Written and Purchased (Net)...... 20,150 (7,360,964)
Options Terminated in Closing
Transactions (Net)....................... (22,550) 8,030,564
-------- -------------
Outstanding at June 30,1994.............. -0- $ -0-
-------- -------------
</TABLE>

5. Distribution and Service Plans

Annual fees under the Plans of up to .30% each for Class A
and Class D shares and 1.00% each for Class B and Class C
shares are accrued daily. Included in these fees for the year ended
June 30,1994, are payments to Van Kampen Merritt of approximately
$225,000.

B-45
<PAGE> 118

Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These Securities
may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any State.

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

VAN KAMPEN MERRITT
SHORT-TERM GLOBAL INCOME FUND

Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is a separate
non-diversified sub-trust of the Van Kampen Merritt Trust, an open-end
management investment company commonly known as a mutual fund. The Fund's
investment objective is to seek a high level of current income, consistent with
prudent investment risk.

The Fund seeks to achieve its investment objective by investing in a global
portfolio of high-quality debt securities denominated in various currencies and
multi-national currency units and having remaining maturities of not more than
three years. The portfolio consists of high quality debt securities issued or
guaranteed by foreign governments or supranational organizations or their
agencies, instrumentalities, or subdivisions, high-quality debt securities
issued by corporations, high quality certificates of deposit or bankers
acceptances issued or guaranteed by large U.S. or foreign banks, high-quality
commercial paper and debt securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities. Investments in securities denominated in
currencies other than the U.S. dollar involve foreign currency exchange risks.
The Fund intends to engage in strategic transactions to seek to reduce or
eliminate such risks.

The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. The net asset value and yield of the Fund will fluctuate
depending on market conditions and other factors. This Prospectus sets forth
information that a prospective investor should know before investing in the
Fund. Please read it carefully and retain it for future reference. The address
of the Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its
telephone number is 1-800-225-2222, ext. 6504.
(Continued on next page.)
------------------

A Statement of Additional Information, dated April 30, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling 1-800-225-2222, ext. 6504 or, for Telecommunication
Device for the Deaf, 1-800-772-8889.

------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 119

(Continued from previous page.)

The Fund currently offers three classes of shares (the "Alternative Sales
Arrangements") which may be purchased at a price equal to their net asset value
per share, plus sales charges which, at the election of the investor, may be
imposed (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and the Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangement, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares six years after the end of the calendar month in which
the investor's order to purchase was accepted, in the circumstances and subject
to the qualifications described in this Prospectus. See "Purchasing Shares of
the Fund."

2
<PAGE> 120

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Shareholder Transaction Expenses..................................... 8
Annual Fund Operating Expenses and Example........................... 9
Financial Highlights................................................. 11
The Fund............................................................. 13
Investment Objective and Policies.................................... 13
Investment Practices................................................. 19
Purchasing Shares Of the Fund........................................ 24
Distributions from the Fund.......................................... 34
Redemption of Shares................................................. 35
Net Asset Value...................................................... 38
Investment Advisory Services......................................... 39
Portfolio Transactions and Brokerage Allocation...................... 41
The Distribution and Service Plans................................... 41
Tax Status........................................................... 43
Shareholder Programs................................................. 47
Investments by Tax-Sheltered Retirement Plans........................ 51
Fund Performance..................................................... 52
Shareholder Services................................................. 54
Description of Shares of the Fund.................................... 54
Shareholder Reports and Inquiries.................................... 55
Additional Information............................................... 55
</TABLE>

3
<PAGE> 121

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

THE FUND Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is a
separate non-diversified sub-trust of the Van Kampen Merritt Trust, an open-end
management investment company organized as a Massachusetts business trust. See
"The Fund."

INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to seek a
high level of current income, consistent with prudent investment risk. The Fund
seeks to achieve its investment objective by investing in a global portfolio of
high-quality debt securities denominated in various currencies and
multi-national currency units and having remaining maturities of not more than
three years. In normal circumstances, at least 65% of the Fund's total assets
will be invested in obligations of or issued by issuers located in at least
three different countries, one of which may be the United States. The Fund is
designed for the investor who seeks a higher yield than a money market fund and
less fluctuation in net asset value than a longer-term global bond fund. High
quality debt securities and securities with remaining maturities of less than
three years generally have lower yields than comparable securities of lower
quality and with longer maturities. There is no assurance that the fund will
achieve its investment objective. See "Investment Objective and Policies."

The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of the
purchase ("Class A Shares") or (ii) on a contingent deferred basis (Class A
Share accounts over $1 million, "Class B Shares" and "Class C Shares." Class B
Shares and "Class C Shares" sometimes are referred to herein collectively as
CDSC Shares. Class A Share accounts over $1,000,000 or otherwise subject to a
contingent deferred sales charge ("CDSC"), Class B Shares and Class C Shares
sometimes are referred to herein collectively as CDSC Shares.

The minimum initial investment with respect to the Class A Shares, Class B
Shares and Class C Shares is $1,000. The minimum subsequent investment with
respect to each class of shares is $100.

Class A Shares. Class A Shares are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.30% of the
Fund's average daily net assets attributable to

4
<PAGE> 122

the Class A Shares. Certain purchases of Class A Shares qualify for reduced or
no initial sales charges and may be subject to a contingent deferred sales
charge.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within three years of
purchase. Class B Shares are subject to a contingent deferred sales charge equal
to 3.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after purchase,
and reduced each year thereafter. Class B Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 1.00% of the
Fund's average daily net assets attributable to the Class B Shares. Class B
Shares automatically will convert to Class A Shares six years after the end of
the calendar month in which the investor's order to purchase was accepted, in
the circumstances and subject to the qualifications described in this
Prospectus.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for the Fund. The
annual advisory fee for the Fund is 0.55% of average daily net assets. See
"Investment Advisory Services."

DISTRIBUTIONS FROM THE FUND Distributions from net investment income will be
declared daily and paid monthly; net realized capital gains, if any, will be
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."

REDEMPTION Class A Shares may be redeemed at net asset value, without charge
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the anniversary of the expiration of the CDSC
period applicable to the respective class of CDSC Shares will not be subject to
a deferred sales charge. The Fund may require the redemption of shares if the
value of an account is $500 or less. See "Redemption of Shares."

RISK FACTORS AND SPECIAL CONSIDERATIONS As a global fund, the Fund may invest
in United States and foreign securities. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange

5
<PAGE> 123

controls or other foreign or United States governmental laws or restrictions
applicable to such investments. Since the Fund may invest in securities
denominated or quoted in currencies other than the United States dollar, changes
in foreign currency exchange rates may affect the value of investments in the
Fund's portfolio and the accrued income and unrealized appreciation or
depreciation of investments. Changes in foreign currency exchange rates relative
to the U.S. dollar will affect the U.S. dollar value of the Fund's assets
denominated in that currency and the Fund's yield on such assets. Foreign
currency exchange rates are determined by forces of supply and demand on the
foreign exchange markets. These forces are, in turn, affected by the
international balance of payments and other economic and financial conditions,
government intervention, speculation, and other factors. Moreover, individual
foreign economies may differ favorably or unfavorably from the United States
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments
position.

With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in such countries.
There may be less publicly available information about a foreign financial
instrument than about an United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments made by the Fund may be subject to foreign withholding
taxes, which would reduce the Fund's total return on such investments and the
amounts available for distribution by the Fund to its shareholders. For any
taxable year that more than 50% of the Fund's total assets at the close of such
year consist of stock or securities of foreign corporations and that the Fund
otherwise qualifies for and makes an election, the amount of foreign taxes paid
by the Fund that can be treated as foreign income taxes for United States
federal income tax purposes would be included in the income of its shareholders
and (subject to certain limitations) shareholders would be entitled to credit
their portions of these amounts against their United States federal income tax
due, if any, or to deduct their portions of these amounts from their United
States taxable income, if any. See "Tax Status." Most foreign financial markets,
while growing in volume, have, for the most part, substantially less volume than
United States markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic companies.
Foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Fund are not invested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in the value of
the portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Costs associated
with transactions in foreign securities, including custodial costs and foreign
brokerage commissions, are generally higher than with transactions in United
States securities. In addition, the Fund incurs costs in connection with
conversions between

6
<PAGE> 124

various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.

The net asset value of the Fund's shares will be affected by changes in the
general level of interest rates. When interest rates decline, the value of a
portfolio of fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio of fixed income securities can be
expected to decline.

In normal circumstances, and as a matter of fundamental policy, the Fund
"concentrates" at least 25% of its assets in obligations of or issued by
domestic and foreign companies engaged in the banking industry, including bank
holding companies. Due to the Fund's investment policy with respect to
investments in such industry, the Fund will have greater exposure to the risk
factors which are characteristic of such investments. In particular, the value
of and investment return on the Fund's shares will be affected by economic or
regulatory developments in or related to such industry. Sustained increases in
interest rates can adversely affect the availability and cost of funds for
lending activities, and a deterioration in general economic conditions could
increase the exposure to credit losses. This industry is also subject to the
effects of: the concentration of loan portfolios in particular businesses such
as real estate, energy, agriculture or high technology-related companies;
national and local regulation; and competition within such industry. In
addition, the Fund's investments in commercial banks located in several foreign
countries are subject to additional risks due to the combination in such banks
of commercial banking and diversified securities activities.

The Fund intends to engage in strategic transactions with all or a portion of
its portfolio investments through transactions in forward currency contracts,
options on foreign currencies, foreign currency swap contracts, financial
futures contracts and options on such financial futures contracts and through
the use of "cross hedges." Successful investments in such transactions are
subject to the Adviser's ability to predict correctly movements in the relevant
markets. Certain of such transactions may be illiquid.

The Fund may invest in commercial paper and certificates of deposit which are
indexed to certain specific foreign currency exchange rates. The terms of such
commercial paper or certificates of deposit provide that their principal amount
is adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. Such commercial paper and certificates of deposit entail the risk
of loss of principal.

The Fund is a "non-diversified" investment company, which means the Fund may,
subject to the requirements for qualification as a regulated investment company
for federal income tax purposes, invest more than 5% of the value of its total
assets in the securities of a single issuer. Because the Fund, as a
non-diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company, an investment in the Fund may, in
certain circumstances, present greater risk to an investor than an investment in
a diversified company.

The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.

7
<PAGE> 125

- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of the
offering price).................... 3.25%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price)............................. None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of the
then current net asset value or the
original purchase price on
redemption proceeds)............... None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.00%
Year 3--1.00%
After--None
Redemption fees (as a percentage of
amount redeemed)................... None None None
Exchange fees........................ None None None
</TABLE>

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

(1) Reduced on investments of $25,000 or more.

(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on certain redemptions made within one year of the purchase.

8
<PAGE> 126

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees (as a percentage of average daily net
assets)............................................. 0.55% 0.55% 0.55%
12b-1 fees(1) (as a percentage of average
daily net assets)................................... 0.30% 1.00% 1.00%
Other expenses (as a percentage of average daily
net assets)......................................... 0.34% 0.46% 0.46%
Total expenses (as a percentage of average daily
net assets)......................................... 1.19% 2.01% 2.01%
</TABLE>

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

(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund to the selling broker as compensation for ongoing services
rendered to investors. With respect to each class of shares, amounts in
excess of 0.25%, if any, represent an asset based sales charge. The asset
based sales charge with respect to Class C Shares includes 0.75% (as a
percentage of net asset value) paid to investors' broker-dealers as sales
compensation.

9
<PAGE> 127

EXAMPLE:

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (i) an operating expense
ratio of 1.19% for Class A Shares, 2.01% for
Class B Shares and 2.01% for Class C Shares,
(ii) a 5% annual return and (iii) redemption at
the end of each period:
Class A Shares................................ $ 44 $ 69 $ 96 $ 172
Class B Shares................................ 50 73 108 193
Class C Shares................................ 30 63 108 234
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares................................ $ 44 $ 69 $ 96 $ 172
Class B Shares................................ 20 63 108 193
Class C Shares................................ 20 63 108 234
</TABLE>

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above, carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion to
Class A Shares. Class B Shares acquired through the exchange privilege are
subject to the deferred sales charge schedule relating to the Class B Shares of
the Fund from which the purchase of Class B Shares was originally made.
Accordingly, future expenses as projected could be higher than those determined
in the above table if the investor's Class B Shares were exchanged from a fund
with a higher contingent deferred sales charge. THE INFORMATION CONTAINED IN THE
ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more
complete description of such costs and expenses, see "Investment Advisory
Services" and "The Distribution and Service Plans."

10
<PAGE> 128

The following schedule presents financial highlights for each of one Class A
Share, one Class B Share and one Class C Share of the Fund outstanding
throughout the periods indicated. The financial highlights have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, for each of the
periods unless otherwise indicated, and their report thereon appears in the
Fund's related Statement of Additional Information. This information should be
read in conjunction with the financial statements and related notes thereto
included in the Statement of Additional Information.

<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------
SEPTEMBER 28, 1990
SIX MONTHS (COMMENCEMENT
ENDED YEAR ENDED JUNE 30 INVESTMENT
DECEMBER 31, ------------------------------- OPERATIONS) TO
1994 1994 1993 1992 JUNE 30, 1991
------------ ------- ------- ------- ------------------
(UNAUDITED)

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................. $ 8.15 $ 9.11 $ 9.65 $ 9.49 $ 9.70
-------- ------- ------- ------- ------
Net Investment Income.............. .19 .28 .59 .69 .86
Net Realized and Unrealized
Gain/Loss on Investments and
Foreign Currency................. (.21) (.58) (.34) .34 (.39)
-------- ------- ------- ------- ------
Total from Investment
Operations......................... (.02) (.30) .25 1.03 .47
-------- ------- ------- ------- ------
Less:
Distributions from and in Excess of
Net Investment Income............ .32 .35 .79 .87 .68
Return of Capital Distribution
(Note 1)......................... .00 .31 .00 .00 .00
-------- ------- ------- ------- ------
Total Distributions................. .32 .66 .79 .87 .68
-------- ------- ------- ------- ------
Net Asset Value, End of Period...... $ 7.81 $ 8.15 $ 9.11 $ 9.65 $ 9.49
======== ======= ======= ======= ======
Total Return (Non-annualized)....... (.21%) (3.61%) 2.86% 11.35% 4.97%
Net Assets at End of Period (In
millions).......................... $ 98.2 $ 147.7 $ 205.9 $ 205.1 $ 85.4
Ratio of Expenses to Average Net
Assets (Annualized)................ 1.19% 1.13% 1.14% 1.32% 1.57%
Ratio of Net Investment Income to
Average Net Assets (Annualized).... 6.21% 3.65% 6.49% 8.05% 13.82%
Portfolio Turnover.................. 121.10% 259.10% 141.22% 64.87% 77.89%
</TABLE>

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

Note 1 - For tax purposes, the determination of a return of capital distribution
is made at the end of the Fund's fiscal year. Therefore, while it is likely that
a portion of the Fund's distributions will ultimately be characterized as a
return of capital for tax purposes, no such designation has been made for the
six months ended December 31, 1994.

See Financial Statements and Notes Thereto

11
<PAGE> 129

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

FINANCIAL HIGHLIGHTS -- CONTINUED

(for one share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
---------------------------------------------------- -------------------------------
SIX MONTHS JULY 22, 1991 SIX MONTHS AUGUST 13, 1993
ENDED YEAR ENDED JUNE 30 (COMMENCEMENT ENDED (COMMENCEMENT
DECEMBER 31, ------------------ OF DISTRIBUTION) DECEMBER 31, OF DISTRIBUTION)
1994 1994 1993 TO JUNE 30, 1992 1994 TO JUNE 30, 1994
------------ ------- ------- ---------------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period.................. $ 8.15 $ 9.10 $ 9.65 $ 9.43 $ 8.16 $ 9.24
-------- ------- ------- -------- -------- --------
Net Investment Income...... .15 .23 .55 .78 .22 .33
Net Realized and Unrealized
Gain/Loss on Investments
and Foreign Currency..... (.20) (.59) (.37) .19 (.27) (.89)
Total from Investment
Operations................. (.05) (.36) .18 .97 (.05) (.56)
-------- ------- ------- -------- -------- --------
Less:
Distributions from and in
Excess of Net Investment
Income................... .29 .32 .73 .75 .29 .27
Return of Capital
Distribution (Note 1).... .00 .27 .00 .00 .00 .25
-------- ------- ------- -------- -------- --------
Total Distributions......... .29 .59 .73 .75 .29 .52
-------- ------- ------- -------- -------- --------
Net Asset Value, End of
Period..................... $ 7.81 $ 8.15 $ 9.10 $ 9.65 $ 7.82 $ 8.16
======== ======= ======= ======== ======== ========
Total Return
(Non-annualized)........... (.62%) (4.22%) 2.02% 10.47% (.62%) (6.32%)
Net Assets at End of Period
(In millions).............. $ 185.3 $ 271.8 $ 393.1 $ 241.7 $ 0.2 $ 0.2
Ratio of Expenses to Average
Net Assets (Annualized).... 2.01% 1.85% 1.85% 2.08% 2.01% 1.84%
Ratio of Net Investment
Income to Average Net
Assets (Annualized)........ 5.43% 2.91% 5.82% 8.54% 5.43% 3.01%
Portfolio Turnover.......... 121.10% 259.10% 141.22% 64.87% 121.10% 259.10%
</TABLE>

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

See Financial Statements and Notes Thereto

12
<PAGE> 130

- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------

Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is a mutual
fund, which pools shareholders' money to seek to achieve a specified investment
objective. In technical terms, the Fund is a separate non-diversified sub-trust
of Van Kampen Merritt Trust (the "Trust"), which is an open-end management
investment company organized as a Massachusetts business trust. Mutual funds
sell their shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows investors to pool their money with that of
other investors in order to obtain professional investment management. Mutual
funds generally make it possible for investors to obtain greater diversification
of their investments and to simplify their recordkeeping.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. ("the Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

The Fund's investment objective is to seek a high level of current income,
consistent with prudent investment risk. The Fund seeks to achieve its
investment objective by investing in a global portfolio of high-quality debt
securities denominated in various currencies and multi-national currency units
and having remaining maturities of not more than three years. The Fund's
investment objective is fundamental and, as such, cannot be changed without the
approval of the holders of a majority (defined as the lesser of (i) 67 percent
of the voting securities present at a meeting of shareholders, if the holders of
more than 50 percent of the outstanding voting securities are present or
represented by proxy at such meeting, or (ii) more than 50 percent of the
outstanding voting securities) of the Fund's outstanding shares. The Fund is
designed for the investor who seeks a higher yield than a money market fund and
less fluctuation in net asset value than a longer-term global bond fund. High
quality debt securities and securities with remaining maturities of less than
three years generally have lower yields than comparable securities of lower
quality and with longer maturities. There can be no assurance that the Fund will
achieve its investment objective.

The Fund invests in debt securities denominated in multi-national currency
units and in the currencies of countries whose governments are considered stable
by the Adviser and whose currency is convertible into U.S. dollars. Such
currencies currently include, among others, the Australian Dollar, Austrian
Schilling, British Pound Sterling, Canadian Dollar, Dutch Guilder, European
Currency Unit ("ECU"), French Franc, German Mark, Italian Lira, Japanese Yen,
New Zealand Dollar, Spanish Peseta, Swedish Krona and Swiss Franc. In 1992,
non-dollar fixed income securities (i.e., those denominated in a currency other
than the U.S. dollar) comprised more than 50% of the global fixed-income market.
An issuer of debt securities purchased by the Fund may be domiciled in a country
other than the country in whose currency the instrument is denominated.

13
<PAGE> 131

The Fund seeks to minimize credit risk by limiting its portfolio investments
to high-quality debt securities. Accordingly, the Fund may only invest in: (i)
obligations issued or guaranteed by foreign governments or supranational
organizations or their agencies, instrumentalities or subdivisions and that are
rated, at the time of investment, at least AA by Standard & Poor's Ratings Group
("S&P") or at least Aa by Moody's Investors Services, Inc. ("Moody's") or
similarly rated by another comparable rating service as determined by the
Adviser subject to the review of the Board of Trustees ("High Quality Ratings")
or, if unrated, determined by the Adviser to be of comparable quality; (ii)
corporate debt securities having at least one High Quality Rating, at the time
of investment, or if unrated, determined by the Adviser to be of comparable
quality; (iii) certificates of deposit and bankers' acceptances issued or
guaranteed by, or time deposits maintained at, banks (including foreign branches
of U.S. banks or U.S. or foreign branches of foreign banks) having total assets
of more than $500 million and determined by the Adviser to be of high quality;
(iv) commercial paper rated, at the time of investment, A-1 by S&P, Prime-1 by
Moody's or similarly rated by another comparable rating service as determined by
the Adviser subject to the review of the Board of Trustees or, if not rated,
issued by U.S. or foreign companies having outstanding debt securities rated at
least A by S&P or Moody's or similarly rated by another comparable rating
service, or determined by the Adviser to be of comparable quality; and (v) debt
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.

In pursuing its investment objective, the Fund seeks to minimize fluctuations
in net asset value as a result of changes in market rates of interest by
investing only in shorter-term debt securities having remaining maturities of
not more than three years. The net asset value of the Fund's shares will change
as the general level of interest rates fluctuate. When interest rates decline,
the value of a portfolio primarily invested in debt securities can be expected
to rise. Conversely, when interest rates rise, the value of a portfolio
primarily invested in debt securities can be expected to decline. However,
shorter- term securities generally are less sensitive to changes in value as a
result of fluctuations in market rates of interest than are longer-term
securities, and it is expected that the net asset value of the Fund's shares
will fluctuate as a result of changes in market rates of interest less than that
of a longer-term global bond fund. The Fund's net asset value may fluctuate as a
result of changes in foreign exchange rates, independent of fluctuations in
market rates of interest, although as described herein the Fund intends to
engage in foreign currency hedging transactions to seek to minimize such
fluctuations. Normally, a high proportion of the Fund's portfolio consists of
money market instruments. The Adviser actively manages the Fund's portfolio,
allocating portfolio assets among various types of U.S. and foreign debt
securities and adjusting the Fund's exposure to each currency based on the
Adviser's perception of the most favorable markets and issuers. In this regard,
the percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with the Adviser's
assessment of the relative yield and appreciation potential of such securities
and the relationship of a country's currency to the U.S. dollar. Fundamental
economic strength, credit quality, and interest rate trends are the principal
factors considered by the Adviser in determining to increase or decrease the
emphasis placed upon a particular industry sector within the Fund's

14
<PAGE> 132

investment portfolio. The Fund will not invest more than 25% of its total assets
in debt securities denominated in a single currency other than the U.S. dollar.

From time to time the returns available on short-term debt instruments
denominated in the currencies of certain foreign countries may be more
attractive than the corresponding returns available on U.S. dollar denominated
short-term debt instruments. However, the attractive returns which may from time
to time be available from certain short-term foreign currency denominated debt
instruments can be adversely affected by changes in currency exchange rates. The
Fund will receive much of its income and gains, if any, in currencies other than
U.S. dollars, although the Fund will make distributions in U.S. dollars. A
reduction in the value of such foreign currencies relative to the value of the
U.S. dollar would adversely affect the dollar value of the net assets (including
accrued income and unrealized appreciation or depreciation of investments) of
the Fund. The Fund will seek to maintain a portfolio of investments that is, in
the aggregate, relatively neutral to fluctuations in the value of the U.S.
dollar relative to the currencies of major industrialized nations. In addition,
the Fund intends to engage in hedging and risk management transactions in
instruments such as forward currency contracts, options on foreign currencies,
foreign currency swap agreements, financial futures contracts and options
thereon. There can be no assurance that the Fund will not be adversely affected
by fluctuations in currency exchange rates and such hedging and risk management
transactions entail risks. See "Investment Practices."

The Fund may invest without limitation in commercial paper and certificates of
deposit which are indexed to certain specific foreign currency exchange rates.
The terms of such commercial paper or certificates of deposit provide that the
principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect fluctuations in the exchange rate between two currencies
while the obligation is outstanding, depending on the terms of the specific
security. The Fund will purchase such commercial paper or certificates of
deposit with the currency in which it is denominated and, at maturity, will
receive interest and principal payments thereon in that currency, but the amount
of principal payable by the issuer at maturity will vary in proportion to the
change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
While such commercial paper and certificates of deposit entail the risk of loss
of principal, the potential for realizing gains as a result of changes in
foreign currency exchange rates enables the Fund to hedge (or cross-hedge)
against a decline in the U.S. dollar value of investments denominated in foreign
currencies while providing an attractive money market rate of return. The Fund
will purchase such commercial paper and certificates of deposit for hedging
purposes only, not for speculation. The staff of the Securities and Exchange
Commission (the "SEC") is currently considering whether the Fund's purchase of
this type of commercial paper and certificates of deposit would result in the
issuance of a "senior security" within the meaning of the Investment Company
Act. The Fund believes that such investments do not involve the creation of such
a senior security, but nevertheless undertakes, pending the resolution of this
issue by the staff, to establish a segregated account with respect to its
investments in this type of commercial paper and certificates of deposit and to
maintain in such account cash not available for investment or U.S. government
securities or other liquid high quality

15
<PAGE> 133

debt securities having a value equal to the aggregate principal amount of
outstanding commercial paper and certificates of deposit of this type.

In normal circumstances, and as a matter of fundamental policy, the Fund
"concentrates" at least 25% of its assets in obligations of or issued by
domestic and foreign companies engaged in the banking industry, including bank
holding companies. However, for temporary purposes when as determined by the
Adviser business or financial conditions warrant, the Fund may invest less than
25% of its assets in such industry. Due to the Fund's investment policy with
respect to investments in this industry, the Fund will have greater exposure to
the risk factors which are characteristic of such investments. In particular,
the value of and investment return on the Fund's shares will be affected by
economic or regulatory developments in or related to this industry. Sustained
increases in interest rates can adversely affect the availability and cost of
funds for lending activities, and a deterioration in general economic conditions
could increase the exposure to credit losses. The industry is also subject to
the effects of: the concentration of loan portfolios in particular businesses
such as real estate, energy, agriculture or high technology-related companies;
national and local regulation; and competition within the industry. In addition,
the Fund's investments in commercial banks located in several foreign countries
are subject to additional risks due to the combination in such banks of
commercial banking and diversified securities activities. As discussed above,
however, the Fund will seek to minimize its exposure to such risks by investing
only in debt securities which are determined to be of high quality.

The Fund may invest in debt securities issued by supranational organizations
such as the World Bank, which was chartered to finance development projects in
developing member countries, and the Asian Development Bank, which is an
international development bank established to lend funds, promote investment and
provide technical assistance to member nations in the Asian and Pacific regions.
Supranational entities do not have taxing authority and are therefore dependent
on their members' support in order to meet interest and principal payments.

The Fund may invest in debt securities denominated in the ECU, which is a
"basket" consisting of specified amounts of the currencies of certain of the
twelve member states of the European Economic Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community to reflect changes in relative values of the underlying
currencies. The Fund's Adviser does not believe that such adjustments will
adversely affect holders of ECU-denominated obligations or the marketability of
such securities. European supranationals, in particular, issue ECU-denominated
obligations.

As a global fund, the Fund may invest in United States and foreign securities.
It is a policy of the Fund that, in normal circumstances, the Fund's assets will
be invested in obligations of or issued by issuers located in at least three
different countries, one of which may be the United States. Investments in
securities of foreign entities and securities denominated in foreign currencies
involve risks not typically involved in domestic investment, including
fluctuations in foreign exchange rates, future foreign political and economic
developments, and the possible imposition of exchange controls or other foreign

16
<PAGE> 134

or United States governmental laws or restrictions applicable to such
investments. Since the Fund may invest in securities denominated or quoted in
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
accrued income and unrealized appreciation or depreciation of investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's assets denominated in that currency
and the Fund's yield on such assets. Foreign currency exchange rates are
determined by forces of supply and demand on the foreign exchange markets. These
forces are, in turn, affected by the international balance of payments and other
economic and financial conditions, government intervention, speculation, and
other factors. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments position.

With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign financial
instrument than about a United States instrument, and foreign entities may not
be subject to accounting, auditing and financial reporting standards and
requirements comparable to those of United States entities. In addition, certain
foreign investments made by the Fund may be subject to foreign withholding
taxes, which would reduce the Fund's total return on such investments and the
amounts available for distributions by the Fund to its shareholders. For any
taxable year that more than 50% of the Fund's total assets at the close of such
year consist of stock or securities in foreign corporations and that the Fund
otherwise qualifies for and makes an election, the amount of foreign taxes paid
by the Fund that can be treated as foreign income taxes for United States
federal income tax purposes would be included in the income of its shareholders
and (subject to certain limitations) shareholders would be entitled to credit
their portion of these amounts against their United States federal income tax
due, if any, or to deduct their portions of these amounts from their United
States taxable income, if any. See "Tax Status." Foreign financial markets,
while growing in volume, have, for the most part, substantially less volume than
United States markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic companies.
The foreign markets also have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are not invested and no return is earned
thereon. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States

17
<PAGE> 135

securities. In addition, the Fund will incur costs in connection with
conversions between various currencies. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.

The Fund may invest in debt securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. Such securities may include
either direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes or bonds) or securities issued or guaranteed by agencies or
instrumentalities of the U.S. government (such as Federal Home Loan Bank
securities and Federal National Mortgage Association securities). Of the
obligations issued or guaranteed by agencies or instrumentalities of the U.S.
government, some are backed by the full faith and credit of the U.S. government
and others are backed only by the rights of the issuer to borrow from the U.S.
Treasury.

The Fund has a fundamental policy which states that it may not purchase any
security which is restricted as to disposition under federal securities laws or
by contract or which is not readily marketable or is illiquid, if immediately
after such purchase more than 10% of the Fund's assets (taken at market value)
would be invested in such securities. The following are presently subject to
such policy: (a) direct placements or other securities which are subject to
legal or contractual restrictions on resale or for which there is no readily
available market (e.g., trading in the security is suspended or, in the case of
unlisted securities, market makers do not exist or will not entertain bids or
offers), (b) certain options purchased by the Fund over-the-counter on
securities other than U.S. government securities and the cover for options
written by the Fund over the counter, and (c) repurchase agreements not
terminable within seven days. See "Investment Practices," below.

The Fund is a "non-diversified" investment company, which means the Fund is
not limited in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"), which will relieve
the Fund of any liability for federal income tax to the extent its earnings are
distributed to shareholders. See "Tax Status." To so qualify, among other
requirements, the Fund will limit its investments so that, at the close of each
quarter of the taxable year (i) at least 50% of the market value of the Fund's
total assets will be invested in cash, cash items, U.S. government securities
and other securities that are, for purposes of this requirement, limited in
respect of a single issuer to an amount not greater in market value than 5% of
the market value of its total assets and to not more than 10% of the outstanding
voting securities of a single issuer and (ii) not more than 25% of the market
value of the Fund's total assets will be invested in the securities (other than
U.S. government securities or the securities of other regulated investment
companies) of a single issuer or any two or more issuers that the Fund controls
and that are determined to be engaged in the same or similar trades or
businesses or related trades or businesses. Because the Fund, as a
non-diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company, an investment in the

18
<PAGE> 136

Fund may, under certain circumstances, present greater risk to an investor than
an investment in a diversified company.

- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------

19
<PAGE> 137

use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.

The Fund may engage in currency transactions in order to hedge the value of
currencies against fluctuations in relative value. Currency transactions include
forward currency contracts, exchange listed currency futures, exchange listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap. The Fund may enter
into currency transactions with persons rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser. The
Fund's dealings in forward currency contracts and other currency transactions
such as futures, options, options on futures and swaps will be limited to
hedging involving either specific transactions or portfolio positions. The Fund
will not enter into a transaction to hedge currency exposure to an extent
greater, after netting all transactions intended to wholly or partially offset
other transactions, than the aggregate market value (at the time of entering
into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to proxy hedging as described below.

The Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Fund has or in which Fund expects to have
portfolio exposure. To attempt to reduce the effect of currency fluctuations on
the value of existing or anticipated holdings

20
<PAGE> 138

of portfolio securities, the Fund also may engage in proxy hedging. Proxy
hedging is often used when the currency to which the Fund's portfolio is exposed
is difficult to hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes in value are
generally considered to be linked to a currency or currencies in which some or
all of the Fund's portfolio securities are or are expected to be denominated,
and to buy U.S. dollars. The amount of the contract would not exceed the value
of the Fund's securities denominated in linked currencies. For example, if the
Adviser considers the Austrian schilling to be linked to the German deutschemark
(the "D-mark"), the Fund holds securities denominated in Austrian schillings and
the Adviser believes that the value of schillings will decline against the U.S.
dollar, the Adviser may enter into a contract to sell D-marks and buy dollars.
Proxy hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
If the Fund enters into a currency hedging transaction, the Fund will comply
with the asset segregation requirements described below.

Currency transactions are subject to some risks different from other
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to the Fund if it is unable to
deliver or receive currency or funds in settlement of obligations and could also
cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.

When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.

21
<PAGE> 139

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on securities in connection with such purchase
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the securities at delivery may be more or less than their purchase price, and
yields generally available on comparable securities when delivery occurs may be
higher or lower than yields on the securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or high-grade portfolio securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. The Fund
will make commitments to purchase securities on such basis only with the
intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objective and
policies and not for the purposes of investment leverage.

LENDING OF PORTFOLIO HOLDINGS. The Fund has a fundamental policy which states
that the Fund may not make loans, except to the extent the obligations the Fund
may invest in are considered to be loans, through loans of portfolio securities
or the acquisition of securities subject to repurchase agreements. Consistent
therewith, the Fund may seek to increase its income by lending financial
instruments in its portfolio in accordance with present regulatory policies,
including those of the Board of Governors of the Federal Reserve System and the
SEC. Such loans may be made, without limit, to brokers, dealers, banks or other
recognized institutional borrowers of financial instruments and are required to
be secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the

22
<PAGE> 140

financial instruments loaned at any time on five days' notice. For the duration
of a loan, the Fund would continue to receive the equivalent of the interest
paid by the issuer on the financial instruments loaned and also would receive
compensation from the investment of the collateral. The Fund would not have the
right to vote any financial instruments having voting rights during the
existence of the loan, but the Fund could call the loan in anticipation of an
important vote to be taken among holders of the financial instruments or in
anticipation of the giving or withholding of their consent on a material matter
affecting the financial instruments. As with other extensions of credit, risks
of delay in recovery or even loss of rights in the collateral exist should the
borrower of the financial instruments fail financially. However, the loans would
be made only to firms deemed by the Adviser to be of good standing and when, in
the judgment of the Adviser, the consideration which can be earned currently
from loans of this type justifies the attendant risk. The creditworthiness of
firms to which the Fund lends its portfolio holdings will be monitored on an
ongoing basis by the Adviser pursuant to procedures adopted and reviewed, on an
ongoing basis, by the Board of Trustees of the Fund. No specific limitation
exists as to the percentage of the Fund's assets which the Fund may lend.

OTHER PRACTICES. The Fund has a fundamental policy which states that it may
not borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage, pledge,
or hypothecate any assets except in connection with a borrowing and in amounts
not in excess of 10% of the

23
<PAGE> 141

total asset value of the Fund. Borrowings may not be made for investment
leverage, but only to enable the Fund to satisfy redemption requests where
liquidation of portfolio securities is considered disadvantageous or
inconvenient. In this connection, the Fund will not purchase portfolio
securities during any period that such borrowings, including the Fund's
commitments pursuant to reverse repurchase agreements, exceed 5% of the total
asset value of the Fund (after giving effect to the amount borrowed).
Notwithstanding this policy, the Fund may enter into when issued and delayed
delivery transactions as described in this Prospectus.

PORTFOLIO TURNOVER. The Fund may engage in active short-term trading to
benefit from yield disparities among different issuers of securities, to seek
short-term profits during periods of fluctuating interest rates, or for other
reasons. Such trading will increase the Fund's rate of turnover and the
incidence of short-term capital gain taxable as ordinary income. Management
anticipates that the annual portfolio turnover in the Fund will not be in excess
of 200%. Portfolio turnover is calculated by dividing the lesser of purchases or
sales of portfolio securities by the monthly average value of the securities in
the portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less are excluded
from such calculation. A high rate of portfolio turnover involves
correspondingly greater expenses than a lower rate, which expenses must be borne
by the Fund and its shareholders. High portfolio turnover also may result in the
realization of substantial net short-term capital gains. The Fund's ability to
engage in active short-term trading may be limited by the general requirements
for qualification as a regulated investment company for federal tax purposes
that less than 30% of the annual gross income of the Fund be derived from the
sale or disposition of securities and certain other assets held by the Fund for
less than three months. See "Tax Status."

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund has designated three classes of shares for sale to the public on a
continuous basis through Van Kampen American Capital Distributors, Inc. ("the
Distributor"), as principal underwriter, which is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Shares are also offered through members of the
National Association of Securities Dealers, Inc. ("NASD") who are acting as
securities dealers ("dealers") and NASD members or eligible non-NASD members who
are acting as brokers or agents for investors ("brokers"). The Fund reserves the
right to suspend or terminate the continuous public offering at any time and
without prior notice.

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<PAGE> 142

ALTERNATIVE SALES ARRANGEMENTS

The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1,000,000
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each of the Class A Shares, the
Class B Shares and the Class C Shares is $1,000. The minimum subsequent
investment with respect to each class of shares is $100. It is presently the
policy of the Distributor of each class of shares, not to accept any order for
Class B Shares or Class C Shares in an amount of $1,000,000 or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Shares
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
Shares. If such an investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B Shares, the
investor may wish to acquire Class C Shares (discussed below). Investors who
intend to hold their shares for a significantly long time may not wish to
continue to bear the ongoing distribution and service expenses of Class C Shares
which, in the aggregate, eventually would exceed the aggregate amount of the
initial sales charge and distribution and service

25
<PAGE> 143

expenses applicable to Class A Shares irrespective of the fact that a CDSC would
eventually not apply to a redemption of such Class C Shares.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, service fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee, service fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Net Asset Value."

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) SEC registration fees incurred by a class of shares; (iv) the expense of
administrative personnel and services as required to support the shareholders of
a specific class; (v) Trustees' fees or expense incurred as a result of issues
relating to one class of shares; (vi) accounting expenses relating solely to one
class of shares; and (vii) any other incremental expenses subsequently
identified that should be properly allocated to one or more classes of shares
that shall be approved by the SEC pursuant to an amended exemptive order. All
such expenses incurred by a class will be borne on a pro rata basis by the
outstanding shares of such class. All allocations of administrative expenses to
a particular class of shares will be limited to the extent necessary to preserve
the Fund's qualification as a regulated investment company under the Code.

The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
securities broker, dealer or financial intermediary or with the Distributor plus
any applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Fund by such broker, dealer or financial intermediary prior to such time in
order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Fund to receive a purchase order prior to such time

26
<PAGE> 144

must be settled between the investor and the broker, dealer or financial
intermediary submitting the order. The public offering price is equal to the net
asset value plus a sales charge which is a variable percentage of the offering
price depending upon the amount of the sale. Investors will be entitled to begin
receiving dividends on such shares on the next business day after the Fund
receives good funds for such order. See "Net Asset Value."

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediaries at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. These programs will not change the price
an investor will pay for shares or the amount that a Fund will receive from such
sale.

INITIAL SALES CHARGE ALTERNATIVE.

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an initial sales charge which is a variable percentage of
the offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between an investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial

27
<PAGE> 145

intermediaries who receive more than 90% or more of the sales charge may be
deemed to be "underwriters" as that term is defined in the Securities Act of the
1933.

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ---------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Less than $25,000............................. 3.25% 3.36% 3.00%
$25,000 but less than $250,000................ 2.75 2.83 2.50
$250,000 but less than $500,000............... 1.75 1.78 1.50
$500,000 but less than $1,000,000............. 1.50 1.52 1.25
$1,000,000 or more............................ * * *
</TABLE>

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

* No sales charge is payable at the time of purchase on investments of
$1,000,000 or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one year
of the purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1% on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2 million and
0.08% on the excess over $5 million. See "Purchasing Shares Of The
Fund -- Deferred Sales Charge Alternatives" for additional information with
respect to contingent deferred sales charges.

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
sales charges through a combination of investments, rights of accumulation or a
letter of intent (even if an investor is not currently making an investment of a
size that normally would qualify for a quantity discount).

Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit- sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company Act.

28
<PAGE> 146

1. Combination of Investments. Purchases of Class A Shares of the Fund, or
shares of other Van Kampen Merritt funds distributed by the Distributor subject
to an initial sales charge ("ISC Shares"), which are made at any one time by
"any person" may be combined to receive a quantity discount.

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares, "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor agree to
refund the appropriate portion of their respective concessions to the Fund, the
sales charge on an investor's previous purchases made within 90 days may be
adjusted to the reduced sales charge under the Letter of Intent, and the
refunded concession will be used to purchase Class A Shares of the designated
Fund or ISC Shares at the public offering price next determined after receipt of
such monies. Each investment made after signing the Letter of Intent will be
entitled to the sales charge applicable to the total investment indicated in the
Letter of Intent. If an investor does not complete the necessary purchases under
the Letter of Intent within 13 months from the date of the first purchase
included thereunder, the sales charge will be adjusted upward, corresponding to
the amount actually purchased.

When an investor signs a Letter of Intent, Class A Shares of the Fund
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these Class A Shares cannot be sold or redeemed
until the Letter of Intent is satisfied or the additional sales charges have
been paid. If the total purchases made under the Letter of Intent, less
redemptions, equal or exceed the amount specified in the Letter of Intent, these
Class A Shares will no longer be restricted. If the total purchases, less
redemptions, exceed the amount so specified, and qualify an investor for a
further quantity discount, the Distributor and the investor's securities broker,
dealer or financial intermediary will, upon request, remit their respective
portions of the sales concession and with that amount, purchase additional Class
A Shares of the Fund for the investor's account at the next determined public
offering price. If an investor does not complete the necessary purchases under
the Letter of Intent, the sales charges will be adjusted upward and if, after
written notice, the investor does not pay the increased sales charge, sufficient
restricted Class A Shares will be redeemed to pay such charge.

29
<PAGE> 147

1. Unit Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund or ISC Shares with no minimum initial or subsequent investment
requirement, and with a lower initial sales charge if the administrator of an
investor's unit investment trust program meets certain uniform criteria relating
to cost savings by the Fund and the Distributor. The total initial sales charge
for all investments made from unit trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the broker, dealer or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their securities broker, dealer, financial
intermediary or the Distributor.

The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

(b) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment

30
<PAGE> 148

subadviser to any such fund or an affiliate of such subadviser; and such
persons' families and their beneficial accounts.

(d) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The
Fund -- Initial Sales Charge Alternative -- Quantity Discounts," during
the 13 month period commencing with the first investment pursuant hereto
equals at least $1 million. The Distributor may pay such entities through
which purchases are made an amount up to 0.50% of the amount invested,
over a twelve month period following such transaction.

(g) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sale charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares and Class C Shares.
The public offering price of a CDSC Share is equal to the net asset value per
share without the imposition of a sales charge at the time of purchase. CDSC
Shares are sold without an initial sales charge so that the Fund may invest the
full amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and other financial intermediaries participating in the
continuous public offering of the CDSC Shares out of its own assets, and not out
of the assets of the Fund, at a percentage rate of the dollar value of the CDSC
Shares purchased from the Fund by such brokers, dealers and financial
intermediaries, which percentage rate will be equal to (i) 1.00% with respect to
Class A Shares in an amount of $1 million or more; (ii) 3.00% with respect to
Class B Shares and (iii) 1.00% with respect to Class C Shares. Such compensation
will not change the price an investor will pay for CDSC Shares or the amount
that the Fund will receive from such sale. Sales compensation

31
<PAGE> 149

with respect to Class A Shares subject to a CDSC is set forth under "Purchasing
Shares of the Fund -- Initial Sales Charge Alternative."

CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
amount of the contingent deferred sales charge will vary depending on (i) the
class of CDSC Shares to which such shares belong and (ii) the number of years
from the time of payment for the purchase of the CDSC Shares until the time of
their redemption. The charge will be assessed on an amount equal to the lesser
of the then current market value or the original purchase price of the CDSC
Shares being redeemed. Accordingly, no sales charge will be imposed on increases
in net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchase of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.

In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares of the Fund in the shareholder's
account, that have converted from Class B Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value per share since
the time of purchase.

To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) at $10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 2.00% (the applicable rate in the second year after
purchase).

32
<PAGE> 150

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1,000,000 or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.

CLASS B SHARES. Class B Shares redeemed within three years of purchase
generally will be subject to a contingent deferred sales charge at the rates set
forth below, charged as a percentage of the dollar amount subject thereto:

The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Program. See
"Shareholder Programs -- Systematic Withdrawal Program".

CONVERSION FEATURE. Six years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher aggregate distribution and service fees applicable to
Class B Shares. The purpose of the conversion feature is to relieve the holders
of Class B Shares that have been outstanding for a period of time sufficient for
the Distributor to have been compensated for distribution expenses related to
the Class B Shares from most of the burden of such distribution and service
expenses.

33
<PAGE> 151

sub-account also will convert to Class A Shares. The holding period applicable
to Class B Shares acquired through the use of the exchange privilege (discussed
below) shall be the holding period applicable to a Class B Share of such Fund
acquired other than through use of the exchange privilege. For purposes of
calculating the holding period applicable to a Class B Share of the Fund prior
to conversion, a Class B Share of the Fund issued in connection with an exercise
of the exchange privilege, or a series of exchanges, shall be deemed to have
been issued on the date on which the investor's order to purchase the exchanged
Class B Share was accepted or, in the case of a series of exchanges, when the
investor's order to purchase the original Class B Share was accepted.

The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution and service fees and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.

- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------

The Fund's present policy,which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or a portion
of net investment income of the Fund attributable to each class of shares. Net
investment income consists of all interest income, dividends, other ordinary
income earned by the Fund on its portfolio assets and net short-term capital
gains, less all expenses of the Fund attributable to the class of shares in
question. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed to the extent permitted by
applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.

34
<PAGE> 152

Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Shareholders wishing to utilize this service
should complete the appropriate information under the "Distributions" section of
the accompanying account application or available from State Street Bank and
Trust Company, c/o National Financial Data Services, Van Kampen Merritt Funds,
P.O. Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent"). After the
Transfer Agent receives this completed form, distribution checks will be sent to
the bank or other person so designated by such shareholder.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund automatically will
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the same class
valued at net asset value, without a sales charge, unless a shareholder elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.

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REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed by a particular fund, the class designation of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
the signature(s) must be guaranteed by a member firm of a principal stock
exchange or by a commercial bank or trust company which is a member of the
Federal Deposit Insurance Corporation, a credit union or a savings association.
The guarantee must state the words "Signature Guaranteed" along with the name of
the granting institution. Shareholders should verify with the institution that
it is an eligible guarantor prior to signing. A guarantee from a notary public
is not acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Sixth Floor, Kansas
City, MO 64105-1807. Shareholders will receive the net asset value per share
next computed after the Transfer Agent receives the redemption request and
certificates (if any) in proper form. Any applicable contingent deferred sales
charge with respect to CDSC Shares redeemed will be deducted from the redemption
proceeds prior to transmittal of such proceeds to the shareholder.

TELEPHONE REDEMPTIONS. Investors may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For

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<PAGE> 153

inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889. There is a $500 minimum and a $1,000,000 maximum per request if
the redemption proceeds are to be mailed to the investor. If the redemption
proceeds are to be wired to a bank there is a minimum of $5,000 and a $1,000,000
maximum per request. Prior to redeeming shares by telephone the "Expedited
Telephone Redemption" section of either the Account Application or Expedited
Telephone Redemption and Exchange Request Form (the "Authorization") must be
completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange
or by a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association, unless
the Authorization is completed at the time an account is originally established.
The guarantee must state the words "Signature Guaranteed" along with the name of
the granting institution. Shareholders should verify with the institution that
it is an eligible guarantor prior to signing. A guarantee from a notary public
is not acceptable. A redemption requested by telephone will be processed at the
net asset value next determined after receipt of the request. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder. The proceeds will then be made payable to the registered
shareowner(s) and mailed to the address registered on the account or wired to a
bank, as requested on the Authorizations. Investors cannot redeem shares by
telephone if certificates are held for those shares. This service is not
available with respect to shares held in an Individual Retirement Account for
which State Street Bank and Trust Company Acts as custodian. In addition, this
service is not available with respect to shares purchased by check until 15 days
after purchase.

By establishing the telephone redemption service, an investor authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide, on a recorded line, the name on the account, a social
security or tax identification number and such additional information as may be
included in the Authorization. An investor agrees that no such person will be
liable for any loss, liability, cost or expense arising out of any request
reasonably believed to be genuine, including any fraudulent or unauthorized
request. This service may be amended or terminated at any time by the Transfer
Agent or the Fund. If an investor is unable to reach the Fund by telephone, he
or she may redeem shares pursuant to the procedures set forth above under the
caption "Written Redemption Request." During periods of extreme economic or
market changes, it may be difficult for investors to reach the Fund by telephone
and to effect telephone redemptions.

REDEMPTION THROUGH DEALERS. Investors may sell shares (whether in certificate
or book-entry form) through their securities dealer, who will transmit the
request to the Distributor. Shareholders will receive the net asset value next
determined after an investor

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<PAGE> 154

places the sell order. Any applicable contingent deferred sales charge with
respect to CDSC Shares redeemed will be deducted from the redemption proceeds
prior to transmittal of such proceeds to the shareholder. It is the
responsibility of the shareholder's broker, dealer or financial intermediary to
transmit the redemption order to the Distributor. Because the Fund generally
will determine net asset value once each business day as of the close of
business, sell orders placed through an investor's broker, dealer or financial
intermediary must be transmitted to the Distributor by such broker, dealer or
financial intermediary prior to such time in order for the investor's order to
be fulfilled on the basis of the net asset value to be determined that day. Any
change in the redemption price due to the failure of the Distributor to receive
a sell order prior to such time must be settled between the investor and the
broker, dealer or financial intermediary submitting the order. The Fund does not
charge for this transaction (other than any contingent deferred sales charge
applicable to CDSC Shares). Shareholders must submit a written redemption
request in proper form to their securities dealer within five business days
after calling the dealer with the sell order. The request should indicate the
number of shares to be redeemed, the class designation of such shares, identify
the account number and the order or confirmation number assigned to the trade,
and be signed by the investor exactly as the shares are registered. If the
amount of the redemption exceeds $50,000 or if the redemption will be sent to an
address other than the address of record, signature(s) must be guaranteed by a
member firm of a principal stock exchange or by a commercial bank or trust
company which is a member of the Federal Deposit Insurance Corporation, a credit
union or savings association. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. If certificates are held for
the shares being redeemed, such certificates must be sent endorsed for transfer
or accompanied by an endorsed stock power. Certificates should be sent by
registered mail to State Street Bank and Trust Company, c/o National Financial
Data Services, Van Kampen Merritt Funds, 1004 Baltimore Avenue, Sixth Floor,
Kansas City, MO 64105-1807. Shareholders whose shares are held in an Individual
Retirement Account (IRA) for which State Street Bank and Trust Company acts as
custodian may not sell their shares through securities dealers.

In cases of disability, the CDSC on Class B Shares will be waived where the
disabled person is either an individual shareholder or owns the shares as a
joint tenant with right of

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<PAGE> 155

survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the CDSC on Class B Shares applies to a total or
partial redemption, but only to redemptions of shares held at the time of the
initial determination of disability.

GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charges)
ordinarily will be mailed to investors or their dealer, as the case may be,
within seven calendar days after a redemption request or repurchase order and
stock certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the investor within one business day. If any
shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.

- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different classes of
shares may differ.

Securities and other portfolio investments traded in the OTC or interbank
market are valued at the last available bid price or yield equivalents obtained
from one or more dealers in the OTC or interbank market prior to the time of
valuation. When the Fund

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<PAGE> 156

writes a call option, the amount of the premium received is recorded on the
books of the Fund as an asset and an equivalent liability. The amount of the
liability is subsequently valued to reflect the current market value of the
option written, based on the last asked price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the average of the
last asked price as obtained from one or more dealers. Options purchased by the
Fund are valued at their last bid price in the case of exchange-traded options
or in the case of options traded in the OTC market, the average of the last bid
price as obtained from two or more dealers. Portfolio securities which are
traded on stock exchanges are valued at the last sale price on the principal
market on which such securities are traded, as of the close of business on the
day the securities are being valued or, lacking any sales, at the last available
bid price. Short-term securities with maturities of less than 60 days are valued
at amortized cost when amortized cost is determined in good faith by or under
the direction of the Board of Trustees of the Trust to be representative of the
fair value at which it is expected such securities may be resold. Other
investments, including futures contracts and related options, are stated at
market value or otherwise at the fair value at which it is expected they may be
resold, as determined in good faith by or under the direction of the Board of
Trustees of the Trust, of which the Fund is a sub-trust. Any assets or
liabilities expressed in terms of foreign currencies are translated into United
States dollars at the prevailing market rates as obtained from one or more
dealers.

Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Trustees of the Trust. Such valuations and procedures will be reviewed
periodically by the Trustees.

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INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

Van Kampen Americal Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, Inc. VK/AC Holding, Inc. is controlled, through
an ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. C & D L.P. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. The general partners of C
& D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A.

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<PAGE> 157

Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe
and Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. and its subsidiaries (some of whom are officers or
trustees of the Fund) own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of such options, no
officer or trustee of the Fund owns or would own 5% or more of the common stock
of VK/AC Holding, Inc. The address of the Adviser is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
sub-trust. Subject to the Trustees' authority, the Adviser and the officers of
the Fund will supervise and implement the Fund's investment activities and will
be responsible for overall management of the Fund's business affairs. The Fund
will pay the Adviser an annual fee equal to 0.55% of the average daily net
assets of the Fund.

Under its investment advisory agreement with the Adviser dated February 17,
1993, and approved by shareholders of the Fund at a meeting held on January 14,
1993, the Fund has agreed to assume and pay the charges and expenses of the
Fund's operations, including: the compensation of the Trustees (other than those
who are affiliated persons, as defined in the Investment Company Act, of the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc.), the charges and expenses of independent accountants, legal
counsel, any transfer or dividend disbursing agent and the custodian (including
fees for safekeeping of securities); costs of calculating net asset value; costs
of acquiring and disposing of portfolio securities; interest (if any) on
obligations incurred by the Fund; costs of share certificates; membership dues
in the Investment Company Institute or any similar organization; reports and
notices to shareholders; costs of registering shares of the Fund under the
federal securities laws; miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies, excluding state securities
registration expenses.

The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Codes permit trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.

PORTFOLIO MANAGEMENT. Thomas J. Slefinger is a First Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since the Fund's commencement of investment operations. Mr.
Slefinger has been employed by the Adviser since 1989. Prior to 1989, Mr.
Slefinger served as Director of Fixed Income Investments at Midwest Financial
Investment Management Company in Chicago, where he was responsible for fixed
income policy, strategy and the development and management of a family of fixed
income funds.

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<PAGE> 158

The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The U.S. securities in
which the Fund invests are traded principally in the over-the-counter market. In
the over-the-counter market, securities generally are traded on a net basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the price,
a fixed amount of compensation for the managers, underwriters and dealers. The
Fund may also purchase certain money market instruments directly from an issuer,
in which case no commissions or discounts are paid. Purchases and sales of bonds
on a stock exchange are effected through brokers who charge a commission for
their services.

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<PAGE> 159

distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."

Class C Shares. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays financial intermediaries in connection with the distribution of
the Class C Shares up to 0.75% of the Fund's average daily net assets
attributable to Class C Shares maintained in the Fund more than one year by such
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of the 0.75% not paid to such financial intermediaries or the amount
of the Distributor's actual distribution related expense attributable to the
Class C Shares. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class C Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by financial intermediaries and in
connection with the maintenance of such shareholders' accounts.

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<PAGE> 160

The Distributor's actual expenses with respect to a class of CDSC Shares for
any given year may exceed the amounts payable to the Distributor with respect to
such class of CDSC Shares under the Distribution Plan, the Service Plan and
payments received pursuant to the contingent deferred sales charge. In such
event, with respect to any such class of CDSC Shares, any unreimbursed expenses
will be carried forward and paid by the Fund (up to the amount of the actual
expenses incurred) in future years so long as such Distribution Plan is in
effect. Except as mandated by applicable law, the Fund does not impose any limit
with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1994, there were $363,876
and $314 of unreimbursed distribution expenses with respect to Class B Shares
and Class C Shares respectively, representing 0.13% and 0.00% of the Fund's
total net assets. If the Distribution Plan was terminated or not continued, the
Fund would not be contractually obligated to pay the Distributor for any
expenses not previously reimbursed by the Fund or recovered through contingent
deferred sales charges.

Because the Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts of the Trust. The Distributor will
endeavor to allocate such expenses among such funds in an equitable manner. The
Distributor will not use the proceeds from the contingent deferred sales charge
applicable to a particular class of CDSC Shares to defray distribution related
expenses attributable to any other class of CDSC Shares. Various federal and
state laws prohibit national banks and some state-chartered commercial banks
from underwriting or dealing in the Fund's shares. In addition, state securities
laws on this issue may differ from the interpretations of federal law, and banks
and financial institutions may be required to register as dealers pursuant to
state law. In the unlikely event that a court were to find that these laws
prevent such banks from providing such services described above, the Fund would
seek alternate providers and expects that shareholders would not experience any
disadvantage.

- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------

TAXATION OF THE FUND

The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company, the
Fund must comply with certain requirements of the Code relating to, among other
things, the source of its income and the diversification of its assets. Included
among such requirements is the requirement that the Fund must derive at least
90% of its gross income from dividends,

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<PAGE> 161

interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks, securities or foreign currencies or other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stocks, securities or
currencies. For purposes of this requirement, the Treasury Department is
authorized to issue (but has not yet issued) regulations excluding from
qualifying income foreign currency gains that are not directly related to a
regulated investment company's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities). The
Fund expects that all of its foreign currency gains will be directly related to
its principal business of investing in securities.

If the Fund qualifies as a regulated investment company and distributes to its
shareholders at least 90% of its net investment income (which includes net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses) in each year, it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the distribution requirement. The Fund
will not be subject to federal income tax on any net capital gains distributed
to its shareholders. As a Massachusetts business trust, the Fund will not be
subject to any excise or income taxes in Massachusetts as long as it qualifies
as a regulated investment company for federal income tax purposes.

In order to avoid a 4% excise tax the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income for such year and
at least 98% of its capital gains net income (the latter of which is computed on
the basis of the one-year period ending on October 31 of such year), plus any
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gains net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.

If the Fund failed to satisfy the 90% distribution requirement or otherwise
failed to qualify as a regulated investment company in any taxable year, the
Fund would be taxed as an ordinary corporation on all of its taxable income
(even if such income were distributed to its shareholders) and all distributions
out of earnings and profits would be taxed to shareholders as ordinary income.
To qualify again as a regulated investment company in a subsequent year the Fund
would be required to distribute to shareholders its earnings and profits
attributable to non-regulated investment company years (less any interest charge
described below) and may be required to pay an interest charge on 50% of such
amount. In addition, if the Fund failed to qualify as a regulated investment
company for its first taxable year or if immediately after qualifying as a
regulated investment company for any taxable year, it failed to qualify for a
period greater than one taxable year, the Fund would be required to recognize
any net built-in gains (the excess of aggregate gains over aggregate losses that
would have been realized if it had been liquidated) in order to qualify as a
regulated investment company in a subsequent year.

Some of the Fund's investment practices, including those involving certain
risk management transactions and foreign currency transactions, may be subject
to special

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<PAGE> 162

provisions of the Code that, among other things, defer the use of certain losses
of the Fund and affect the holding period of the securities held by the Fund and
the character of the gains or losses realized by the Fund. These provisions may
also require the Fund to mark-to-market some of the positions in its portfolio
(i.e., treat them as if they were closed out), which may cause the Fund to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements for avoiding federal
income and excise taxes. Thus, these provisions could affect the amount, timing
and character of distributions to shareholders. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.

The Fund's ability to liquidate portfolio securities may be limited by the
requirement for qualification as a regulated investment company that the Fund
derive less than 30% of its annual gross income from the sale or disposition of
any of the following assets held for less than three months: (i) stocks or
securities; (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies); (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies), but only if
such currencies (or such options, futures or forward contracts) are not directly
related to the Fund's principal business of investing in stock or securities (or
options and futures with respect to stocks or securities).

DISTRIBUTIONS

Distributions of the Fund's net investment income are taxable to shareholders
as ordinary income, whether paid in cash or reinvested in additional shares.
Distributions of the Fund's net capital gains ("capital gain dividends"), if
any, are taxable to a shareholder as long-term capital gains regardless of the
length of time the shares have been held by such holder. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of
the shares held by the shareholders and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such shareholders (assuming
such shares are held as a capital asset).

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid during January of the
following year, will be treated as having been distributed by the Fund and
received by the shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as having been paid by the Fund
(except for purposes of the 4% excise tax) during such taxable year. In such
case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution is actually made.

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<PAGE> 163

income tax purposes as receiving a distribution in an amount equal to the fair
market value of the shares received, determined as of the distribution date.

FOREIGN TAXES

It is expected that a portion of the interest earned by the Fund from non-U.S.
resident issuers and in certain circumstances gains realized by the Fund will be
subject to foreign withholding taxes. The tax rate to which such interest and
gains will be subject will vary depending on the country or countries having
taxing jurisdiction over a particular non-U.S. resident issuer and may be
affected by the existence of an income tax treaty with the United States. If
more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stocks or securities of "foreign corporations," the
Fund may elect and currently intends to elect, for United States federal income
tax purposes, to treat any foreign taxes paid by the Fund that can be treated as
foreign income taxes under United States federal income tax principles as paid
by its shareholders. The Fund expects that it will be able to treat some, but
not necessarily all, of the foreign taxes it will have to pay as foreign income
taxes for United States federal income tax purposes. In addition, the Fund
currently intends to treat investments in securities that are issued by, or that
are treated under relevant United States federal income tax principles as issued
by, foreign governments as not constituting securities of "foreign corporations"
for purposes of meeting the 50% test described above. Accordingly, the Fund may
not qualify for this election in all of its taxable years. For any year that the
Fund so qualifies and makes such an election, the amount of foreign taxes paid
by the Fund that can be treated as foreign income taxes for United States
federal income tax purposes would be included in the income of its shareholders
(in addition to other taxable dividends received) and (subject to certain
limitations) shareholders would be entitled to credit their portions of these
amounts against their United States federal income tax due, if any, or to deduct
their portions from their United States taxable income, if any. A shareholder
who does not itemize deductions may not claim a deduction for foreign taxes. The
Fund will notify each shareholder within 60 days after the close of the Fund's
taxable year as to whether the foreign income taxes paid by the Fund will
qualify for "pass-through" treatment for that year and, if so, such notification
will designate (i) each shareholder's pro rata portion of the foreign income
taxes paid and (ii) the portion of distributions that represents income derived
from foreign sources.

Generally, a foreign tax credit is subject to the limitation that it may not
exceed the shareholder's United States tax (before the credit) attributable to
the shareholder's total taxable income from foreign sources. For this purpose,
the shareholder's proportionate share of dividends paid by the Fund that
represent income derived from foreign sources will be treated as foreign source
income. The Fund's gains and losses from the sale of securities and certain
currency gains and losses generally will be treated as derived from United
States sources. The limitation on the foreign tax credit applies separately to
specific categories of foreign source income, including "passive income," a
category that includes the portion of dividends received from the Fund that
qualifies as foreign source income. The foregoing limitation may prevent a
shareholder from claiming a credit for the full amount of his proportionate
share of the foreign income taxes paid by the Fund.

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<PAGE> 164

SALE OF SHARES

Redeeming shareholders will recognize gain or loss in an amount equal to the
difference between the basis in their redeemed shares and the amount received.
If such shares are held as a capital asset, the gain or loss will be a capital
gain or loss and will be long-term if such shares have been held for more than
one year. Any loss realized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gains dividends received with respect to such shares.

GENERAL

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to State Street Bank and Trust Company, c/o National Financial Data
Services, P.O. Box 419001, Kansas City, MO 64141-6001, Attn: Van Kampen Merritt
Funds, requesting an "affidavit of loss" and obtain a Surety Bond in a form
acceptable to the Transfer Agent. On the date the letter is received the
Transfer Agent will calculate no more than 2.00% of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, such shareholder's dividends
are being reinvested, a requested dollar amount may be paid from such account to
any person monthly, quarterly, semiannually or annually. The minimum amount that
may be withdrawn each period is $50; withdrawals will be made on the seventh
business day of the month in which they are scheduled to occur. Depending upon
the size of the payments requested and the fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the amounts in such account. If an investor acquires
additional shares of the Fund after joining the Systematic Withdrawal Program,
the investor must inform the Fund if he or she wants the new shares to be
subject to the Systematic Withdrawal Program by telephoning the Fund at
1-800-341-2911.

47
<PAGE> 165

Class B Shares on the date the investor elects to participate in the Systematic
Withdrawal Program. The Fund will waive the contingent deferred sales charge
applicable to Class B Shares redeemed pursuant to the Fund's Systematic
Withdrawal Program.

It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because an investor will be paying a sales charge, or will become
subject to a contingent deferred sales charge, in order to purchase shares at
the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, the Fund will not knowingly permit an
investor to make additional investments in shares of less than $5,000 if at the
same time such investor is making systematic withdrawals at a rate greater than
the distribution being paid on such investor's shares. The Fund reserves the
right to amend or terminate the systematic withdrawal program on thirty days'
notice, and an investor may withdraw from the program at any time.

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares of
other Van Kampen Merritt mutual funds distributed by the Distributor that offer
an exchange privilege. Under the exchange privilege, the Fund offers to exchange
its Class A Shares for ISC Shares on the basis of relative net asset value per
share. Any ISC Shares exchanged into the Fund that have been charged a sales
load lower than the sales load applicable to Class A Shares of the Fund will be
charged the applicable sales load differential upon exchange. ISC Shares of the
Van Kampen Merritt Money Market Fund and Van Kampen Merritt Tax Free Money Fund
which have not previously been charged a sales load (except for shares purchased
via the reinvestment option) will be charged the applicable sales load upon
exchange into the Fund.

Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distribution ("New Class B Shares") on the basis
of relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be subject to the deferred sales charge schedule
relating to the Class B Shares of the fund from which the purchase of Class B
Shares was originally made.

48
<PAGE> 166

requesting the exchange. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889. The exchange will be processed at the net asset
value next determined after receipt of such request. By utilizing the telephone
exchange service, a shareholder authorizes the Fund or the Transfer Agent to act
upon the instructions of any person by telephone to exchange shares from any
account for which such service has been authorized to any identically registered
account(s) with any Van Kampen Merritt fund distributed by the Distributor that
offers an exchange privilege. The Fund, the Distributor, the Transfer Agent and
NFDS seek to employ procedures reasonably believed to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring a
person attempting to exchange shares by telephone to provide, on a recorded
line, the name on the account, a social security or tax identification number
and such additional information as may be deemed necessary or appropriate. An
investor agrees that no such person will be liable for any loss, liability, cost
or expense arising out of any request reasonably believed to be genuine,
including any fraudulent or unauthorized request. This service may be amended or
terminated at any time by the Transfer Agent or the Fund. If a shareholder has
certificates for any shares being exchanged, such certificates must be
surrendered prior to the exchange in the same manner as in redemption of such
shares. See "Redemption of Shares--Telephone Redemptions." Any shares exchanged
between the Fund and any of the other funds will begin earning dividends on the
next business day after the exchange is effected. Before effecting an exchange,
shareholders in the Fund should obtain and read a current prospectus of the fund
into which the exchange is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH
OTHER FUNDS AS ARE LEGALLY FOR SALE IN THEIR STATE.

An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes, and depending upon the circumstances, a
short- or long-term capital gain or loss may be realized.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).

49
<PAGE> 167

proceeds of such redemption. Once enrolled in the ACH plan, a shareholder may
terminate participation at any time by writing the Transfer Agent.

2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.

3. Dividend Diversification. Monthly distributions and any net long-term
capital gain distributions to a shareholder's account may be invested upon the
election of the shareholder in the same class of shares of any other Van Kampen
Merritt mutual fund distributed by the Distributor at the then current net asset
value, WITHOUT A SALES CHARGE, upon election by a shareholder. This election may
be made on the account application, by written notice to the Transfer Agent or
by calling the Fund directly at 1-800-341-2911 during the hours of 7:00 a.m. to
7:00 p.m. Central Standard Time. For inquiries through Telecommunications Device
for the Deaf (TDD) dial 1-800-772-8889. In order to qualify for this privilege,
a shareholder must have established an account in the other mutual fund prior to
electing this privilege. This privilege may be modified or terminated by the
Fund at any time.

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
account application or the EASESM application which is available from the
Transfer Agent, the Fund, such shareholder's broker or dealer or the
Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASESM program, a shareholder may
change the monthly amount or terminate participation at any time by writing the
Transfer Agent. Shareholders in the EASESM program will receive a confirmation
of these transactions from the Fund monthly, and their regular bank account
statements will show the debit transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the account application in performing such services by
either withdrawing funds for deposit in the Fund pursuant to the EASESM Plan or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election and/or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, Within 120 days, repurchase Class A Shares of the Fund, or
shares of other

50
<PAGE> 168

Van Kampen Merritt mutual funds distributed by the Distributor, in an amount of
at least $500 and not exceeding the redemption proceeds received, at a purchase
price equal to the net asset value next determined after the reinstatement
request is received by the Transfer Agent or the Distributor. A Class C
Shareholder who has redeemed shares of the Fund may repurchase Class C Shares of
the Fund, or shares of other Van Kampen Merritt mutual funds distributed by the
Distributor with credit given for any contingent deferred sales charge paid upon
such redemption.

Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:

- Individual Retirement Accounts (IRA's) for individuals.

- Simplified Employee Pension Plans (SEP's) for employees.

- Qualified plans for self-employed individuals.

- Qualified corporate pension and profit-sharing plans for employees.

The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment,
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan is $250.

IRA's are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax-qualified employer plan may
deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's spouse is an active
participant in a tax-qualified employer plan, the IRA deduction is phased out
above certain income levels. Individuals may, however, make non-deductible
contributions to their IRA up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions.

All contributions to an IRA made to the Fund through a broker must be settled
by April 15 in any year in order to be deemed a valid contribution for the
preceding year. Contributions made directly to the Fund via the mail must be
postmarked by April 15 in any year in order to be deemed a valid contribution
for the preceding year. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2. A request for

51
<PAGE> 169

distributions from an IRA for which State Street Bank and Trust Company acts as
custodian must be made in writing.

Shares of the Fund may also be purchased by all types of employer sponsored
tax-qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through securities brokers,
dealers, financial intermediaries, the Fund, or the Distributor for employers
(including individuals) who desire to start or amend a retirement plan. The form
of this standardized plan has been determined to be "qualified" under the
Internal Revenue Code. An employer may use this prototype to establish a profit
sharing plan, a money purchase pension plan or both for its eligible employees.
The cost for the use of the prototype plan is $50, and there are no annual fees.
The adopting employer determines within the prescribed limits the eligibility
standards, rate of contributions and other significant provisions of the
prototype plan. The Distributor, as sponsor of this prototype plan, reserves the
right to amend such plan from time to time to assure its continued qualification
under the Internal Revenue Code or for other reasons. Employers adopting this
prototype plan will be bound by such amendments.

Investors considering establishing a retirement plan or purchasing shares of
the Fund in connection with a retirement plan should consult with their attorney
or tax advisor with respect to plan requirements and tax aspects pertaining to
them.

- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------

The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and is computed by dividing the Fund's
net

52
<PAGE> 170

investment income per share of a given class earned during such period by the
Fund's maximum offering price (including, with respect to the Class A Shares,
the maximum initial sales charge) per share of such class on the last day of
such period. The Fund's net investment income per share is determined by taking
the interest attributable to a given class of shares earned by the Fund during
the period, subtracting the expenses attributable to such class of shares
accrued for the period (net of any reimbursements), and dividing the result by
the average daily number of the shares of such class outstanding during the
period that were entitled to receive dividends. The yield calculation formula
assumes net investment income is earned and reinvested at a constant rate and
annualized at the end of a six month period. Yield will be computed separately
for each class of the Fund's shares. Class B Shares redeemed during the first
three years after their issuance may be subject to a contingent deferred sales
charge in a maximum amount equal to 3% of the lesser of the then current net
asset value of the shares redeemed or their initial purchase price from the
Fund. Yield quotations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge imposed at the
time of redemption were reflected, it would reduce the performance quoted.

The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum initial sales charge, if any) at the
beginning of the period, annualizing the increase or decrease over the specified
period with respect to such initial investment and expressing the result as a
percentage. Average compounded total return will be computed separately for each
class of shares.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, deducting the
maximum initial sales charge, if any, determining the value of all subsequent
reinvested distributions, and dividing the net change in the value of the
investment as of the end of the period by the amount of the initial investment
and expressing the result as a percentage. Non-standardized total return will be
calculated separately for each class of shares. Non-standardized total return
calculations do not reflect the imposition of a contingent deferred sales
charge, and if any such contingent deferred sales charge with respect to the
CDSC Shares imposed at the time of redemption were reflected, it would reduce
the performance quoted.

53
<PAGE> 171

if any, distributed for a specified period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.

From time to time the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time sales materials and advertisements for the Fund
may include hypothetical information.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Fund, an account will be opened for each shareholder on the Fund's books and
shareholders will receive a confirmation of the opening of the account.
Shareholders will receive monthly statements giving details of all activity in
their account and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal income tax
purposes will be provided at the end of the year. Such statements will present
separately information with respect to each class of the Fund's shares. It is
expected that the transfer agency costs attributable to the Class B Shares and
Class C Shares will be higher than the transfer agency costs attributable to the
Class A Shares.

- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund is a sub-trust of the Van Kampen Merritt Trust, a Massachusetts
business trust organized March 19, 1986 (the "Trust"). Shares of the Trust
entitle their holders to one vote per share; however, separate votes are taken
by each sub-trust on matters affecting an individual sub-trust.

54
<PAGE> 172

all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of shares. Each class of share is equal as to earnings, assets and voting
privileges, except as noted above, and each class bears the expenses related to
the distribution of its shares. There are no conversion, preemptive or other
subscription rights, except with respect to the conversion of Class B Shares
into Class A Shares as described above. In the event of liquidation, each of the
shares of the Fund is entitled to its portion of all of the Fund's net assets
after all debt and expenses of the Fund have been paid. Since Class B Shares and
Class C Shares pay higher distribution expenses, the liquidation proceeds to
Class B Shareholders and Class C Shareholders are likely to be lower than to
other shareholders.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

Shareholder inquiries should be directed to Van Kampen Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn: Correspondence. Its
telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD) dial 1-800-
772-8889.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.

55
<PAGE> 173

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344

VAN KAMPEN MERRITT
SHORT-TERM
GLOBAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Distributor

VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Transfer Agent

STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt Funds

Legal Counsel

SKADDEN, ARPS, SLATE, MEAGHER
& FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 174

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT SHORT-TERM GLOBAL INCOME FUND

Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is a
non-diversified separate sub-trust of an open-end management investment company.
The Fund's investment objective is to seek a high level of current income,
consistent with prudent investment risk.

The Fund seeks to achieve its investment objective by investing in a global
portfolio of high-quality debt securities denominated in various currencies and
multi-national currency units and having remaining maturities of not more than
three years. The portfolio will consist of debt securities issued by foreign
governments or supranational organizations or their agencies, instrumentalities
or subdivisions, high-quality debt securities issued by corporations,
certificates of deposit or bankers acceptances issued or guaranteed by large
U.S. or foreign banks, high-quality commercial paper and debt securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities.
Investments in securities denominated in currencies other than the U.S. dollar
involve foreign currency exchange risks. The Fund may engage in hedging and risk
management transactions to seek to reduce or eliminate such risks.

The Fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term global
bond fund. There is no assurance that the Fund will achieve its investment
objective. The Fund is a separate sub-trust of Van Kampen Merritt Trust, a
Massachusetts business trust (the "Trust"). The Fund's portfolio is managed by
Van Kampen American Capital Investment Advisory Corp. (the "Adviser").

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling 1-800-225-2222, ext. 6504. This Statement of Additional Information
incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................. B-2
Investment Policies and Restrictions................................................... B-2
Additional Investment Considerations................................................... B-4
Description of Securities Ratings...................................................... B-11
Officers and Trustees.................................................................. B-16
Legal Counsel.......................................................................... B-19
Investment Advisory and Other Services................................................. B-19
Portfolio Transactions and Brokerage Allocation........................................ B-22
Tax Status of the Fund................................................................. B-22
The Distributor........................................................................ B-22
Performance Information................................................................ B-24
Unaudited Financial Statements......................................................... B-25
Notes to Unaudited Financial Statements................................................ B-30
Independent Auditors' Report........................................................... B-35
Audited Financial Statements........................................................... B-36
Notes to Audited Financial Statements.................................................. B-41
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

<PAGE> 175

THE FUND AND THE TRUST

The Fund is a separate non-diversified sub-trust of the Trust, an open-end
management investment company. At present, the Fund, Van Kampen Merritt High
Yield Fund, Van Kampen Merritt Adjustable Rate U.S. Government Fund, Van Kampen
Merritt Strategic Income Fund and Van Kampen Merritt Emerging Markets Income
Fund, each a diversified separate sub-trust of the Trust, are the only
sub-trusts of the Trust, although other sub-trusts may be organized and offered
in the future.

The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 14,
1986. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts and indemnifies
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law, in certain
limited circumstances, may be held personally liable for the obligations of the
trust as though they were general partners, the provisions of the Declaration of
Trust described in the foregoing sentence make the likelihood of such personal
liability remote.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the Investment Company Act of 1940, as amended (the "1940 Act"), or
other applicable law) and except that the Trustees cannot amend the Declaration
of Trust to impose any liability on shareholders, make any assessment on shares
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.

Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.

INVESTMENT POLICIES AND RESTRICTIONS

The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its investment objective.

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets would then be invested
in securities of a single issuer or if as a result the Fund would hold
more than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer.

2. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests

B-2
<PAGE> 176

where liquidation of portfolio securities is considered disadvantageous or
inconvenient. In this connection, the Fund will not purchase portfolio
securities during any period that such borrowings, including the Fund's
commitments pursuant to reverse repurchase agreements, exceed 5% of the
total asset value of the Fund (after giving effect to the amount
borrowed). Notwithstanding this investment restriction, the Fund may enter
into when issued and delayed delivery transactions as described in the
Prospectus.

3. Make loans, except to the extent the obligations the Fund may invest in
are considered to be loans, through loans of portfolio securities or the
acquisition of securities subject to repurchase agreements.

4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with transactions described under the
caption "Investment Practices" in the Prospectus nor short term credits in
connection with the clearance of transactions are considered the purchase
of a security on margin.

5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures contracts or
related options, except to the extent that the hedging transactions
described under the heading "Investment Practices" in the Prospectus would
be deemed to be any of the foregoing transactions.

6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

7. Make investments for the purpose of exercising control or participation in
management.

8. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in investment companies that invest in
securities comparable to those in which the Fund may invest so long as the
Fund does not own more than 3% of the outstanding voting stock of any
investment company or securities of any investment company aggregating in
value more than 5% of the total assets of the Fund.

9. Invest in oil, gas or mineral leases or in equity interests in oil, gas or
other mineral exploration or development programs.

10. Purchase or sell real estate, commodities or commodities contracts except
to the extent that hedging instruments the Fund may invest in are
considered to be commodities or commodities contracts.

The Fund may not change any of these investment restrictions or any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
outstanding shares present at a meeting at which the holders of more than 50% of
the outstanding shares are present in person or by proxy. As long as the
percentage restrictions described above are satisfied at the time of the
investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed.

B-3
<PAGE> 177

Board-approved guidelines to be liquid. The Fund's policy with respect to
investment in illiquid and restricted securities is not a fundamental policy and
may be changed by the Board of Trustees, in consultation with the adviser,
without obtaining shareholder approval.

In connection with certain state securities law requirements, the Fund has a
policy of limiting its investment in warrants, valued at the lower of cost or
market, to not more than 5.0% of the value of the Fund's net assets and,
within such amount, to not more than 2.0% of the value of its net assets in
warrants not listed on the New York Stock Exchange or on the American Stock
Exchange; provided however, that warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.

ADDITIONAL INVESTMENT CONSIDERATIONS

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The value of underlying securities
will be at least equal at all times to the total amount of the resale
obligation, including the interest factor. The Fund receives payment for such
securities only upon physical delivery or evidence of book entry transfer by its
custodian. Regulations of the Securities and Exchange Commission (the "SEC")
require either that securities sold by the Fund under a reverse repurchase
agreement be segregated pending repurchase or that the proceeds be segregated on
the Fund's books and records pending repurchase. Reverse repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by the Fund under a reverse repurchase agreement could
decline below the price at which the Fund is obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the Fund and as
such would be subject to the restrictions on borrowing described under
"Investment Policies and Restrictions" in the Statement of Additional
Information. The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.

OTHER INVESTMENT STRATEGIES

B-4
<PAGE> 178

Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than current market values, limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.

B-5
<PAGE> 179

and Eurodollar instruments are cash settled for the net amount, if any, to the
extent the option is "in-the-money" (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised. Frequently, rather than taking or making delivery of the underlying
instrument through the process of exercising the option, listed options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guaranties and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to buy back the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank in
New York as "primary dealers", broker dealers, domestic or foreign banks or
other financial institutions which have received a short-term credit rating of
A-1 from Standard & Poor's Ratings Group ("S&P") or P-1 from Moody's Investor
Services, Inc. ("Moody's") or any equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that the amount of the Fund's obligation pursuant
to an OTC option is illiquid, and is subject to the Fund's limitation on
investing no more than 10% of its assets in illiquid instruments.

B-6
<PAGE> 180

receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security and may require the Fund to hold a security which it might otherwise
have sold. The Fund may sell options on securities the Fund owns or has the
right to purchase without additional payments, up to a maximum of 25% of the
Fund's net assets, for non-hedging purposes.

The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 5% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position will be offset prior
to settlement and that delivery will not occur.

B-7
<PAGE> 181

or other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to proxy hedging as described below.

B-8
<PAGE> 182

relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

B-9
<PAGE> 183

upon economic events occurring in foreign markets during non-business hours in
the United States, (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (v)
lower trading volume and liquidity.

B-10
<PAGE> 184

DESCRIPTION OF SECURITIES RATINGS

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:

1. DEBT

An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

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

The ratings are based, in varying degrees, on the following considerations:

1. Likelihood of default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors's rights;

INVESTMENT GRADE

<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. 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 highest rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally 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.
</TABLE>

SPECULATIVE GRADE

<TABLE>
<S> <C>
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
B speculative characteristics with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C 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.
</TABLE>

B-11
<PAGE> 185

<TABLE>
<S> <C>
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.
CI The rating 'CI' is reserved for income bonds on which no interest is being paid.
D Debt rated 'D'; is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
C The letter 'c' indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter 'i' indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter 'L' indicates that the rating pertains to the principal amount of
these bonds in the extent that the undersigning deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter 'L' indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter 'p' indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and cash
flows.
NR Not rated
</TABLE>

B-12
<PAGE> 186
Debt Obligations of Issuers outside the United States and its
territories are rated on the same basis as domestic corporate
and municipal issues. The ratings measure the creditworthiness of
the obligor but do not take into account currency exchange and
related uncertainties.

BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated
in the top four categories ("AAA," "AA," "A," and "BBB")
(commonly known as "investment grade" ratings) are generally
regarded as eligible for bank investment. In addition, the laws of
various states governing legal investments impose certain rating
or other standards for obligations eligible for investment by
savings banks, trust companies, insurance companies, and
fiduciaries generally.

2. COMMERCIAL PAPER

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.

Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. These categories are as follows:

<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely safe characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only a speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
</TABLE>

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

3. VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, 'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').

B-13
<PAGE> 187

MOODY'S INVESTORS SERVICE, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:

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

Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than 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 payment 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.

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

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

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

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

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

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

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

B-14
<PAGE> 188

2. SHORT-TERM DEBT

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

-- Leading market positions in well-established industries.

-- High rates of return on funds employed.

-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.

-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

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

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

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

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

3. COMMERCIAL PAPER

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

- Leading market positions in well-established industries.

- High rates of return on funds employed.

- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

- Board margins in earnings coverage of fixed financial charges and high
internal cash generation.

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

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

B-15
<PAGE> 189

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

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

OFFICERS AND TRUSTEES

The officers and trustees of the Trust (of which the Fund is a separate
sub-trust), their principal occupations for the last five years and their
affiliations, if any, with Van Kampen American Capital Investment Advisory Corp.
(the "Adviser"), Van Kampen American Capital Asset Management, Inc., Van Kampen
American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia
Pacific Company, Limited, Van Kampen American Capital Distributors, Inc., Van
Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

R. CRAIG KENNEDY, Trustee
Dennis Trading Group, Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President, Chief Executive Officer, Director and member of
the Investment Committee of the Joyce Foundation, a private foundation.

PHILIP P. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, Managing Director and Manager of Municipal Bond
Department, W.H. Newbold's Son & Co.

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President, Nelson Investment Planning Services, Inc., a financial planning
company.

B-16
<PAGE> 190

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Director of McCarthy, Crisanti & Maffei, Inc.
Senior Vice President of Van Kampen American Capital Management, Inc.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March, 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

B-17
<PAGE> 191

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ----------------
* Interested persons of each respective Fund as defined in the 1940 Act.

Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser and each of the foregoing officers holds the same
positions with each of the investment companies advised by the Adviser.

The compensation of the officers and Trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
Trustees. During the next year, the Fund expects to pay Trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc. $2,500 annually, and $250 per meeting
of the Board of Trustees, plus expenses. Under the Fund's retirement plan,
trustees who are not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc., have at least ten years
of service and retire at or after attaining the age of 60, are eligible to
receive a retirement benefit equal to the annual retainer for each of the ten
years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. can
elect to defer receipt of all or a portion of the trustee's fees earned by such
trustee until such trustee's retirement. The deferred compensation earns a rate
of return determined by reference to the Fund or other Van Kampen Merritt mutual
funds advised by the Adviser as selected by the trustee. To the extent permitted
by the 1940 Act, the Fund may invest in securities of other Van Kampen Merritt
mutual funds advised by the Adviser in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
- -------------------------------- ------------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy................ $ 14,849 $0 $2,500 $62,362
Philip G. Gaughan............... 13,757 0 2,500 63,250
Donald C. Miller................ 18,172 0 2,500 62,178
Jack A. Nelson.................. 18,228 0 2,500 62,362
Jerome L. Robinson.............. 18,198 0 2,500 58,475
Wayne W. Whalen................. 4,078 0 2,500 49,875
</TABLE>

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

B-18
<PAGE> 192

Trustee from the Fund Complex (as defined herein) as of December 31, 1994 is
as follows: Mr. Kennedy $14,737; Mr. Miller $14,553; Mr. Nelson $14,737 and
Mr. Robinson $13,725.

(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant. As of
December 31, 1994, no amounts had been accrued for retirement benefits
because such amounts were considered to be immaterial to the net assets of
the Registrant at such time. The Registrant will accrue amounts for
retirement benefits by the end of fiscal year 1995.

As of April 13, 1995, the trustees and officers as a group owned less than 1%
of the shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class A Shares: Xerox Financial Services Life Insurance
Company, 1 Tower Lane #3000, Villa Park, IL 60181-4644, 11%; and Nationsbank
Trust, U/A 11-09-89, Incarnate Word Health Services Self Insurance Trust, Attn
SAS/30063003071479, P.O. Box 831575, Dallas, TX 75283, 7%.

To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class B Shares.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Principal Financial Cust. FBO, Mary A.
Murphy, P.O. Box 508, Dallas, TX 75221-0508, 43%; Principal Financial IRA Cust.
FBO, Mary Alice Murphy, P.O. Box 215132, Dallas, TX 75221-5132, 15%; Edward D.
Jones & Co. F/A/O, Gaines Electric Co. Inc., EDJ# 306-05079-1-4, P.O. Box 2500,
Maryland Heights, MO 63043-8500, 13%; Raymond James & Assoc. Inc. CSDN, Hugh D.
McPherson IRA, 1217 Denton Road, Winter Park, FL 32792-2774, 9%; The Ohio
Company C/F, Wright RM, 86-97868-1-4, 155 East Broad Street, Columbus, OH
43215-3609, 7%; and Matthew Chapman, 5771 Royal Ave., Eugene, OR 97402-9335, 5%.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT.

B-19
<PAGE> 193

office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The
Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc.

VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of stock options, no
officer or trustee of the Fund owns or would own 5% or more of the common stock
of VK/AC Holding, Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.

The Adviser's activities are subject to the review and supervision of the
trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.

The investment advisory agreement for the Fund was approved by the
shareholders of the Fund at a shareholders meeting held on January 14, 1993.
Accordingly the agreement will remain in effect from year to year if
specifically approved by the trustees of the Trust, of which the Fund is a
separate sub-trust (or by the Fund's shareholders), and by the disinterested
trustees in compliance with the requirements of the 1940 Act. The agreement may
be terminated without penalty upon 60 days' written notice by either party
thereto and will automatically terminate in the event of assignment.

The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.

The Adviser has undertaken to reimburse the Fund for annual expenses of the
Fund which exceed the most stringent limit prescribed by any state in which the
Fund's shares are offered for sale. Currently, the most stringent limit in any
state would require such reimbursement to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes and other expenses which may be
excludable under applicable state law) exceed in any fiscal year 2 1/2% of the
average annual net assets of the Fund up to $30 million, 2% of the average
annual net assets of the Fund of the next $70 million, and 1 1/2% of the
remaining average annual net assets of the Fund. In addition to making any
required reimbursements, the Adviser may in its discretion, but is not obligated
to, waive all or any portion of its fee or assume all or any portion of the
expenses of the Fund.

B-20
<PAGE> 194

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized advisory
expenses of $3,008,248, $3,207,882 and $1,232,107, respectively.

OTHER AGREEMENTS.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor, the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
to the Transfer Agent if the Transfer Agent had provided such services. Payment
by the Fund for such services is made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor,
share such costs proportionately among themselves based upon their respective
net asset values.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $278,000, $248,700 and $92,720, respectively, representing the
Distributor's cost of providing certain support services.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $21,000, $11,000 and $7,900, respectively, representing the
Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. It is expected that Van Kampen American
Capital, Inc. can render such legal services on a more cost effective basis than
other providers of such services. Payment by the Fund for such services is made
on a cost basis for the employment of personnel as well as the overhead and the
equipment necessary to render such services. The Fund, and the other mutual
funds from whom the Adviser acts as investment adviser, share one half (50%) of
such costs equally. The remaining one half (50%) of such costs are allocated to
specific funds based on specific time allocations, or in the event services are
attributable only to types of funds (i.e. closed-end or open-end), the relative
amount of time spent on each type of fund and then further allocated between
funds of that type based upon their respective net asset values.

For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $17,000, $16,500, and $3,300, respectively, representing Van
Kampen American Capital, Inc.'s cost of providing legal services.

CUSTODIAN AND INDEPENDENT AUDITORS

B-21
<PAGE> 195

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Adviser, the amount of
additional commission or increased cost is reasonable in relation to the value
of such services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as set
forth above to the Fund and Adviser, (ii) have sold or are selling shares of the
Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.

State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.

TAX STATUS OF THE FUND

THE DISTRIBUTOR

B-22
<PAGE> 196

VK/AC Holding, Inc., a Delaware corporation that is controlled through an
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement with the Fund, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities dealers
and brokers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem shares of
the Fund and how such shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and banks who are acting as brokers (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance, which may include, but not be limited to, processing purchase and
redemption transactions, establishing and maintaining shareholder accounts
regarding the Fund, and such other services as may be agreed to from time to
time and as may be permitted by applicable statute, rule or regulation. Brokers,
dealers and banks that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."

For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $540,613, $3,563,969 and $1,364 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $471,049 and $872,003 represent
payments to financial intermediaries under the Selling Agreements for

B-23
<PAGE> 197

Class A Shares and Class B Shares, respectively. For the year ended June 30,
1994, the Fund has reimbursed the Distributor $48,070 and $90,367 for
advertising expenses, and $21,958 and $26,247 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.

PERFORMANCE INFORMATION

CLASS A SHARES

The Fund's yield with respect to the Class A Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 7.38%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class A Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 7.71%.

The Fund's average total return with respect to the Class A Shares for the (i)
the one year period ended June 30, 1994 was (6.50%), and (ii) the approximately
45 month period from September 21, 1990 (the commencement of the sale of Class A
Shares) through June 30, 1994 was 3.17%.

The Fund's cumulative non-standardized total return with respect to the Class
A Shares from September 21, 1990 (the commencement of the sale of Class A
Shares) through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 15.89%.

CLASS B SHARES

The Fund's yield with respect to the Class B Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 6.88%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class B Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 7.14%.

The Fund's average total return with respect to the Class B Shares for (i) the
one year period ended June 30, 1994 was (6.90%), and (ii) the approximately 36
month period from July 22, 1991 (the commencement of the sale of Class B Shares)
through June 30, 1994 was 2.31%.

The Fund's cumulative non-standardized total return with respect to the Class
B Shares from July 22, 1991 (the commencement of the sale of Class B Shares)
through June 30, 1994 (as calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 7.94%.

CLASS C SHARES

The Fund's yield with respect to the Class C Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 6.88%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class C Shares for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 7.13%.

The Fund's average total return with respect to the Class C Shares for the
approximately 11 month period from August 13, 1993 (the commencement of the sale
of Class C Shares) through June 30, 1994 was (7.83%).

The Fund's cumulative non-standardized total return with respect to the Class
C Shares from August 13, 1993 (the commencement of the sale of Class C Shares)
through June 30, 1994 (as calculated in the manner described in the Prospectus
under the heading "Fund Performance") was (6.32%).

B-24
<PAGE> 198
Van Kampen Merritt Short-Term Global Income Fund

<TABLE>
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Par
Amount
In Local
Currency S & P Moody's
(000) Description Rating Rating Coupon Maturity U.S. $ Market Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Australia 6.1% AU$
Government/Agency 6.1%
16,000 Queensland Treasury Corp......... AAA Aaa 8.000% 5/14/97 $ 11,851,388
6,500 Treasury Corp of Victoria........ NR Aa3 12.500 9/15/97 5,291,165
------------------
17,142,553
------------------
Canada 4.9% CA$
Government/Agency 4.9%
5,000 Alberta Municipal Finance Corp... NR NR 8.000 3/23/95 3,569,647
15,000 Canadian Government.............. NR Aaa 6.500 8/01/96 10,350,727
------------------
13,920,374
------------------
Germany 0.0% Deutsche Mark
Currency 0.0%
63 Deutsche Mark.................... 40,656
------------------
Italy 8.0% Lira
Currency 0.0%
48,800 Italian Lira..................... 30,091
Government/Agency 8.0%
37,500,000 Italian BTPS..................... AA A1 10.000 8/01/96 22,753,425
------------------
Total Italian Securities......... 22,783,516
------------------
Mexico 24.2% US$
Government/Agency 24.2%
47,513 Mexican Tesobonos................ A1 NR * 5/04/95 45,612,480
10,000 Mexican Tesobonos................ A1 NR * 7/27/95 9,349,000
10,000 Mexican Tesobonos................ A1 NR * 10/19/95 9,110,000
5,000 Mexican Tesobonos................ A1 NR * 10/26/95 4,545,500
------------------
68,616,980
------------------
Spain 3.9% Peseta
Government/Agency 3.9%
1,470,000 Kingdom of Spain ................ AA Aa2 11.000 6/15/97 11,096,594
Currency 0.0%
6,720 Spanish Peseta .................. 51,049
------------------
Total Spanish Securities ....... 11,147,643
------------------
Sweden 3.7% Krona
Government/Agency 3.7%
65,000 Swedish Government............... AA+ Aa2 * 12/20/95 8,031,139
17,500 Swedish Government............... AA+ Aa2 10.750 1/23/97 2,384,661
Currency 0.0%
1,036 Swedish Krona.................... 139,396
------------------
Total Swedish Securities......... 10,555,196
------------------
</TABLE>

See Notes to Financial Statements

B-25

<PAGE> 199

Van Kampen Merritt Short-Term Global Income Fund

<TABLE>
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Par
Amount
In Local
Currency S & P Moody's
(000) Description Rating Rating Coupon Maturity U.S. $ Market Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thailand 3.0% Baht
Banks 3.0%
50,000 ABN/AMRO Bank <F2>.................... AA- Aa1 9.100% 8/05/97 $ 1,918,144
170,000 Deutsche Bank CD...................... NR NR 8.750 9/19/96 6,627,325
------------------
8,545,469
------------------
United Kingdom 0.0% Pound
Currency 0.0%
37 British Pound Sterling ............... 58,423
------------------
United States 44.4% US$
Government/Agency 39.1%
45,000 U.S. T-Note .......................... AAA Aaa 4.750 2/15/97 42,377,344
40,000 U.S. T-Note .......................... AAA Aaa 6.500 8/15/97 38,787,500
30,000 U.S. T-Note .......................... AAA Aaa 7.375 11/15/97 29,685,938
Currency Indexed Debt Obligations 5.3%
Chilean Peso Indexed 3.5%
5,000 Citibank Time Deposits ............... NR Aa3 11.500 11/06/95 5,031,500
5,000 Citibank Time Deposits ............... NR Aa3 11.500 11/14/95 5,033,500
Indonesian Rupiah Indexed 1.8%
5,000 Citibank Time Deposits ............... NR Aa3 14.750 12/05/95 4,990,000
------------------
Total United States Securities ....... 125,905,782
------------------

Repurchase Agreements 1.7%
JP Morgan, US T-Note, $4,975,000 par, 3.875% coupon, due 09/30/95,
dated 12/30/94, to be sold on 01/03/95 at $4,810,805 ................................... 4,808,000
--------------
Total Investments 99.9%
(Cost $291,000,765) <F1> ............................................................... 283,524,592
Other Assets in Excess of Liabilities 0.1% ............................................. 213,255
--------------
Net Assets 100.0% ...................................................................... $ 283,737,847
--------------

*Zero coupon bond
<FN>
<F1>At December 31, 1994, the cost for federal income tax purposes is $291,000,765; the aggregate
gross unrealized appreciation is $1,203,782 and the aggregate gross unrealized depreciation is
$12,171,144, resulting in net unrealized depreciation on investments, foreign currency and open
option transactions of $10,967,362.
<F2>Assets segregated for open option transactions.
</TABLE>

See Notes to Financial Statements

B-26

<PAGE> 200

Van Kampen Merritt Short-Term Global Income Fund

<TABLE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $291,000,765) <F1>................................. $ 283,524,592
Cash.................................................................................. 25,337
Receivables:
Interest.............................................................................. 4,913,872
Fund Shares Sold...................................................................... 4,448
Unamortized Organizational Expenses and Initial Registration Costs <F1>............... 37,379
Other................................................................................. 1,964
---------------
Total Assets.......................................................................... 288,507,592
---------------
Liabilities:
Payables:
Fund Shares Repurchased............................................................... 2,219,745
Income Distributions.................................................................. 866,760
Forward Contracts <F5>................................................................ 452,029
Investment Advisory Fee <F2>.......................................................... 138,431
Accrued Expenses...................................................................... 881,572
Options at Market Value (Net premiums paid of $1,244,511) <F5>........................ 208,663
Other................................................................................. 2,545
---------------
Total Liabilities..................................................................... 4,769,745
---------------
Net Assets............................................................................ $ 283,737,847
---------------
Net Assets Consist of:
Paid in Surplus <F3> ................................................................. $ 369,457,020
Accumulated Distributions in Excess of Net Investment Income <F1>..................... (8,406,518)
Net Unrealized Depreciation on Investments and Foreign Currency....................... (10,967,362)
Accumulated Net Realized Loss on Investments ......................................... (66,345,293)
---------------
Net Assets............................................................................ $ 283,737,847
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $98,221,643 and
12,575,822 shares of beneficial interest issued and outstanding) <F3>................. $ 7.81
Maximum sales charge (3.00%* of offering price)....................................... .24
---------------
Maximum offering price to public ..................................................... $ 8.05
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $185,324,896 and
23,733,700 shares of beneficial interest issued and outstanding) <F3>................. $ 7.81
---------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $190,338 and
24,326 shares of beneficial interest issued and outstanding) <F3>..................... $ 7.82
---------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $970 and
124 shares of beneficial interest issued and outstanding) <F3> ....................... $ 7.82
---------------
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-27

<PAGE> 201

Van Kampen Merritt Short-Term Global Income Fund

<TABLE>
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Investment Income:
<S> <C>
Interest........................................................................................................... $ 13,769,985
Amortization of Discount (Premium) - Net........................................................................... 794,268
Net Realized Loss on Foreign Currency and Foreign Currency Forward Contracts....................................... (1,445,157)
--------------
Total Income....................................................................................................... 13,119,096
--------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $161,269, $1,150,502, $1,037 and $2,
respectively) <F6> ............................................................................................. 1,312,810
Investment Advisory Fee <F2> ...................................................................................... 979,324
Shareholder Services .............................................................................................. 421,179
Legal <F2>......................................................................................................... 29,050
Amortization of Organizational Expenses and Initial Registration Costs <F1> ....................................... 25,191
Trustees Fees and Expenses <F2>.................................................................................... 14,840
Other.............................................................................................................. 256,835
--------------
Total Expenses..................................................................................................... 3,039,229
--------------
Net Investment Income.............................................................................................. $ 10,079,867
-------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments (Including realized loss on closed and expired option transactions of $2,889,200). $ (13,038,419)
--------------
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency:
Beginning of the Period............................................................................................ (12,555,624)
End of the Period (Including unrealized depreciation on foreign currency translation and open option transactions
of $2,038,015 and $1,453,174, respectively)........................................................................ (10,967,362)
--------------
Net Unrealized Appreciation on Investments and Foreign Currency During the Period.................................. 1,588,262
--------------
Net Realized and Unrealized Loss on Investments and Foreign Currency............................................... $ (11,450,157)
--------------
Net Decrease in Net Assets from Operations......................................................................... $ (1,370,290)
--------------
</TABLE>

See Notes to Financial Statements

B-28

<PAGE> 202

Van Kampen Merritt Short-Term Global Income Fund

<TABLE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................................................ $ 10,079,867 $ 17,216,607
Net Realized Loss on Investments................................................................. (13,038,419) (28,926,494)
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency During the Period... 1,588,262 (5,827,126)
----------------- ----------------
Change in Net Assets from Operations ............................................................ (1,370,290) (17,537,013)
----------------- ----------------
Distributions from Net Investment Income*........................................................ (10,079,867) (17,216,607)
Distributions in Excess of Net Investment Income* <F1>........................................... (3,373,975) (4,433,220)
----------------- ----------------
Distributions from and in Excess of Net Investment Income*....................................... (13,453,842) (21,649,827)
Return of Capital Distribution*.................................................................. -0- (16,378,081)
----------------- ----------------
Total Distributions.............................................................................. (13,453,842) (38,027,908)
----------------- ----------------
Net Change in Net Assets from Investment Activities.............................................. (14,824,132) (55,564,921)
----------------- ----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold........................................................................ 4,552,330 48,354,257
Net Asset Value of Shares Issued Through Dividend Reinvestment................................... 7,524,685 21,920,768
Cost of Shares Repurchased....................................................................... (133,206,030) (193,990,293)
----------------- ----------------
Net Change in Net Assets from Capital Transactions .............................................. (121,129,015) (123,715,268)
----------------- ----------------
Total Decrease in Net Assets..................................................................... (135,953,147) (179,280,189)
Net Assets:
Beginning of the Period.......................................................................... 419,690,994 598,971,183
----------------- ----------------
End of the Period (Including undistributed net investment income of
$(8,406,518) and $(5,032,543), respectively) .................................................... $ 283,737,847 $ 419,690,994
----------------- ----------------
</TABLE>

<TABLE>
<CAPTION>
Six Months Ended Year Ended
*Distributions by Class December 31, 1994 June 30, 1994
Distributions from and in Excess of
Net Investment Income:
<S> <C> <C>
Class A Shares...................... $ (5,086,169) $ (8,004,201)
Class B Shares...................... (8,360,297) (13,642,774)
Class C Shares...................... (7,334) (2,850)
Class D Shares...................... (42) (2)
----------------- ----------------
$ (13,453,842) $ (21,649,827)
----------------- ----------------
Return of Capital Distribution:
Class A Shares...................... $ -0- $ (6,158,141)
Class B Shares...................... -0- (10,214,511)
Class C Shares...................... -0- (5,407)
Class D Shares...................... -0- (22)
----------------- ----------------
$ -0- $ (16,378,081)
----------------- ----------------
</TABLE>

See Notes to Financial Statements

B-29

<PAGE> 203

Van Kampen Merritt Short-Term Global Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is organized as a
sub-trust of Van Kampen Merritt Trust (the "Trust"), a Massachusetts business
trust, and is registered as a non-diversified open-end management investment
company under the Investment Company Act of 1940 as amended. The Fund commenced
investment operations on September 28, 1990. On July 22, 1991, the Fund
commenced distribution of Class B shares. The distribution of the Fund's Class
C and Class D shares commenced on August 13, 1993 and March 14, 1994,
respectively.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation-Investments are stated at value using the last available
bid price or yield equivalents obtained from dealers in the OTC or interbank
market. Short-term securities with remaining maturities of less than 60 days are
valued at amortized cost.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.

D. Currency Translation-Assets and liabilities denominated in foreign currencies
and commitments under forward foreign exchange currency contracts are translated
into U.S. dollars at the mean of the quoted bid and ask prices of such
currencies against the U.S. dollar. Purchases and sales of portfolio securities
are translated at the rate of exchange prevailing when such securities were
acquired or sold. Income and expenses are translated at rates of exchange
prevailing when accrued. For financial reporting purposes, realized gain/loss on
foreign currency and foreign currency forward contracts are included in net
investment income.

E. Organizational Expenses and Initial Registration Costs-The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $250,000. These costs are being
amortized on a straight line basis over the 60 month period ending September
28, 1995. Van Kampen American Capital Investment Advisory Corp. (the "Adviser")
has agreed that in the event any of the initial shares of the Fund originally
purchased by VKAC are redeemed during the amortization period, the Fund will
be reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

F. Federal Income Taxes It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $10,010,730, which will expire on June 30, 2001. Net
realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.

G. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net investment income for federal income
tax purposes includes gains and losses realized on transactions in options on
foreign currencies. These realized gains and losses are included as net realized
gains or losses for financial reporting purposes.

B-30

<PAGE> 204

Van Kampen Merritt Short-Term Global Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

Net realized gains on securities, if any, are distributed annually.
Distributions from net realized gains for book purposes may include short-term
capital gains which are included in ordinary income for tax purposes.

For tax purposes, the determination of a return of capital distribution is made
at the end of the Fund's fiscal year. Therefore, while it is likely that a
portion of the Fund's distributions will ultimately be characterized as a return
of capital for tax purposes, no such designation has been made for the six
months ended December 31, 1994.

2. Investment Advisory Agreement and Other Transactions with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly of .55% of the Fund's average net assets.

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.

For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $107,600 representing VKAC's cost of providing accounting, legal
and certain shareholder services to the Fund.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.

The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.

At December 31, 1994, VKAC owned 1,263, 1,298, 100 and 100 shares of beneficial
interest of Classes A, B, C and D, respectively.

3. Capital Transactions

The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $128,088,406, $241,153,334,
$214,229 and $1,051, for Classes A, B, C and D, respectively. For the six months
ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 102,105 $ 819,629
Class B....................... 464,394 3,714,701
Class C....................... 2,233 18,000
Class D....................... 1 -0-
------------- -----------------
Total Sales .................. 568,733 $ 4,552,330
------------- -----------------
Dividend Reinvestment:
Class A....................... 363,147 $ 2,897,669
Class B....................... 578,892 4,619,740
Class C....................... 911 7,270
Class D....................... -0- 6
------------- -----------------
Total Dividend Reinvestment... 942,950 $ 7,524,685
------------- -----------------
Repurchases:
Class A....................... (6,015,968) $ (47,969,720)
Class B....................... (10,665,038) (85,216,902)
Class C....................... (2,456) (19,408)
Class D....................... -0- -0-
------------- -----------------
Total Repurchases............. (16,683,462) $ (133,206,030)
------------- -----------------
</TABLE>

B-31

<PAGE> 205

Van Kampen Merritt Short-Term Global Income Fund

- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

At June 30, 1994, paid in surplus aggregated $172,340,828, $318,035,795,
$208,367 and $1,045, for Classes A, B, C and D, respectively. For the year ended
June 30, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 3,219,135 $ 29,120,587
Class B....................... 2,103,750 18,929,822
Class C....................... 33,998 302,784
Class D....................... 123 1,064
------------- -----------------
Total Sales .................. 5,357,006 $ 48,354,257
------------- -----------------
Dividend Reinvestment:
Class A....................... 931,309 $ 8,246,649
Class B....................... 1,543,949 13,668,730
Class C....................... 629 5,386
Class D....................... -0- 3
------------- -----------------
Total Dividend Reinvestment... 2,475,887 $ 21,920,768
------------- -----------------
Repurchases:
Class A....................... (8,636,073) $ (75,861,675)
Class B....................... (13,472,314) (118,034,222)
Class C....................... (10,989) (94,396)
Class D....................... -0- -0-
------------- -----------------
Total Repurchases............. (22,119,376) $ (193,990,293)
------------- -----------------
</TABLE>

Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within three years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.

<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- --------------------------------------------------
<S> <C> <C> <C>
First ................ 3.00% 1.00% 0.75%
Second ................ 2.00% None None
Third ................. 1.00% None None
Fourth and Thereafter . None None None
</TABLE>

For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of $35 and
received CDSC on the redeemed shares of Classes B, C and D of approximately
$654,100. Sales charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $428,072,913
and $514,865,516, respectively.

5. Derivative Financial Instruments

A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity and duration. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in value
reflected in the unrealized appreciation/depreciation on investments. Upon
disposition, a realized gain or loss is recognized accordingly, except for
exercised option contracts where the recognition of gain or loss is postponed
until the disposal of the security underlying the option contract.

Summarized below are the specific types of derivative financial instruments used
by the Fund.

A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.

B-32

<PAGE> 206

Van Kampen Merritt Short-Term Global Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------

Transactions in options for the six months ended December 31, 1994, were as
follows:

<TABLE>
<CAPTION>
Contracts Premium
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994....... 30 $ (4,152,667)
Options Written and
Purchased (Net).................... 26 (276,065)
Options Terminated in Closing
Transactions (Net)................. (36) 1,362,721
Options Expired (Net) ............. (7) 1,821,500
--------- ---------------
Outstanding at December 31, 1994... 13 $ (1,244,511)
--------- ---------------
</TABLE>

The descriptions and market values of the option contracts outstanding as of
December 31, 1994, are as follows:

Strike
Opening Expiration Price/ Market
Description Transaction Date Yield Value
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian Dollar Call .... Sell 1/10/95 .775 $ (25,500)
Australian Dollar Call .... Sell 1/13/95 .780 (16,500)
Australian Dollar Call .... Sell 1/13/95 .780 (16,500)
Australian Dollar Call .... Sell 1/13/95 .780 (16,500)
Australian Dollar Call .... Sell 1/18/95 .778 (14,100)
Italian BTPS Call ........ Buy 7/14/95 97.35 21,094
</TABLE>

<TABLE>
<CAPTION>
Receivers Options on Swaps:
<S> <C> <C> <C> <C>
3 year Japanese Swap. Sell 2/22/95 3.00% (229,000)
2 year German Swap .. Buy 6/01/95 6.36% 15,296
2 year Spanish Swap . Buy 6/05/95 9.63% 4,102
2 year Spanish Swap . Buy 6/05/95 9.71% 4,102
1 year Spanish Swap . Buy 10/11/95 11.38% 18,612
1 year German Swap .. Buy 10/13/95 7.10% 25,168
1 year French Swap .. Buy 10/13/95 7.74% 21,063
-------------
$ (208,663)
-------------
</TABLE>

B. Forward Currency Contracts-These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included in income as a component of
realized gain/loss on foreign currency and foreign currency forward contracts.

At December 31, 1994, the Fund has outstanding forward foreign exchange currency
contracts as follows:

Unrealized
Foreign Exchange Original Current Appreciation/
Currency Contracts Value Value Depreciation
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Buys to Open
Australian Dollar,
expiring 07/17/95 -
12/19/95 ............ $ 11,847,000 $12,161,411 $ 314,411
German Deutsche Mark,
expiring 01/09/95 -
07/17/95 .............. 50,182,297 50,045,314 (136,983)
British Pound Sterling,
expiring 01/12/95 -
07/20/95 .............. 18,499,872 18,504,985 5,113
Mexican Peso,
expiring 02/03/95 .... 5,000,000 4,855,775 (144,225)
Malaysian Ringitt,
expiring 07/17/95 ..... 2,000,000 2,008,225 8,225
New Zealand Dollar,
expiring 07/17/95 -
12/19/95 .............. 5,500,000 5,640,714 140,714
Swedish Krona,
expiring 07/14/95 .... 10,000,000 10,157,019 157,019

Sells to Open
Australian Dollar,
expiring 07/17/95 .... 3,827,500 3,903,993 (76,493)
Canadian Dollar,
expiring 07/17/95 .... 15,000,000 14,916,217 83,783
German Deutsche Mark,
expiring 01/12/95 -
07/17/95 .............. 69,533,856 70,814,566 (1,280,710)
Spanish Peseta,
expiring 01/19/95 -
07/17/95 .............. 9,348,342 9,379,845 (31,503)
Italian Lira,
expiring 07/14/95 -
01/19/96 .............. 24,410,632 24,656,793 (246,161)
Japanese Yen,
expiring 03/06/95 -
07/17/95 .............. 12,500,000 12,600,057 (100,057)
Mexican Peso,
expiring 02/03/95 .... 1,921,569 1,960,717 (39,148)
New Zealand Dollar,
expiring 01/09/95 .... 12,000,000 12,180,424 (180,424)
Swedish Krona,
expiring 01/17/95 -
12/14/95 .............. 21,824,024 22,140,979 (316,955)
---------------
$ (1,843,394)
---------------
</TABLE>

B-33

<PAGE> 207

Page: 19

Van Kampen Merritt Short-Term Global Income Fund
- --------------------------------------------------------------------------------

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

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

At December 31, 1994, the Fund had realized gains on closed but unsettled
forward currency contracts of $1,544,993 scheduled to settle between January 4
and December 14, 1995.

C. Forward Swap Transactions-These instruments represent a commitment to enter
into a swap agreement at a future date. The swap represents an agreement between
two parties to exchange a series of cash flows based upon various indices at
specified intervals.

The forward swap transactions outstanding as of December 31, 1994, and the
descriptions and unrealized depreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Description Depreciation
-------------
<S> <C>
JP Morgan, 6,750,000 AU$ notional amount,
effective 10/14/95, Fund receives 10.21% fixed,
Fund pays 6 month Australian LIBOR ........... $ (34,511)
JP Morgan, 5,000,000 AU$ notional amount,
effective 10/16/95, Fund receives 10.085% fixed,
Fund pays 3 month Australian LIBOR ........... (33,258)
JP Morgan, 15,000,000 DM notional amount,
effective 10/17/95, Fund receives 7.51% fixed,
Fund pays 6 month German LIBOR ............... (85,859)
-------------
$ (153,628)
-------------

</TABLE>

D. Indexed Securities-These instruments are identified in the portfolio of
investments.

Currency Indexed securities contain one or more embedded links to currency
indices or forward currency contracts which cause a security's valuation to
fluctuate based upon the value of the linked foreign currency or currencies.

6. Distribution and Service Plans

Annual fees under the Plans of up to .30% each for Class A and Class D shares
and 1.00% each for Class B and Class C shares are accrued daily. Included in
these fees for the six months ended December 31, 1994, are payments to VKAC of
approximately $847,000.

B-34
<PAGE> 208

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------

Independent Auditors' Report
- ------------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt Short-Term Global Income Fund:

We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt Short-Term Global Income Fund (the "Fund"),
including the portfolio of investments, as of June 30,1994, and the
related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibil-
ity of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based
on our audits.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt Short-Term Global Income Fund as of
June 30,1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
August 23,1994

B-35
<PAGE> 209

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------

Portfolio of Investments
June 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
In Local
Currency S & P Moody's
(000) Description Rating Rating Coupon Maturity U.S. $ Market Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Bonds
Australia 4.9% AU$
Government/Agency 4.9%
28,500 Queensland Treasury Corp . ....................... AA Aaa 8.000% 05/14/97 $ 20,497,869
-----------
Canada 7.5% CA$
Government/Agency 7.5%
40,000 Canadian Government............................... AA Aaa 6.500 08/01/96 27,796,760
5,000 Alberta Municipal Finance Corp.................... AA Aa2 8.000 03/23/95 3,623,282
-----------
31,420,042
-----------
Finland 5.8% Markka
Government/Agency 5.8%
132,000 Republic of Finland.............................. AA Aa2 6.500 09/15/96 24,300,392
-----------
France 0.0% Franc
Currency 0.0%
432 French Franc ................................... 79,444
-----------
Italy 11.6% Lira
Government/Agency 11.6%
80,000,000 Republic of Italy............................... AA A1 8.500 01/01/97 48,767,200
Currency 0.0%
346,050 Italian Lira...................................... 219,050
-----------
Total Italian Securities.......................... 48,986,250
-----------
Mexico 24.8% Peso
Government/Agency 24.8%
19,700 Mexican Tesobonos................................ A1+ P1 * 09/29/94 19,434,050
27,500 Mexican Tesobonos................................ A1+ P1 * 10/20/94 27,013,250
61,128 Mexican Tesobonos................................ A1+ P1 * 05/04/95 57,692,606
-----------
104,139,906
-----------
Spain 4.9% Peseta
Government/Agency 4.9%
2,750,000 Kingdom of Spain................................. AA Aa2 9.000 02/28/97 20,766,432
-----------
Thailand 2.6% Baht
Government/Agency 2.6%
250,000 Thai Military Bank CD ........................... NR NR 6000 01/26/95 9,845,247
25,000 Thai Military Bank CD ........................... NR NR 7.250 11/29/96 961,262
----------
10,806,509
-----------
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 210

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
In Local
Currency S & P Moody's
(000) Description Rating Rating Coupon Maturity U.S. $ Market Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States 34.2% US$
Government/Agency 10.3%
45,000 U.S. T-Note...................................... AAA Aaa 4.750% 02/15/97 $ 43,228,125
------------
Currency Indexed Debt Obligations 7.7%
Chilean Peso Indexed 0.7%
3,000 Citibank Time Deposits ......................... A1 P1 10.000 12/12/94 3,041,700
------------
Indonesian Rupiah Indexed 2.3%
10,000 Morgan Guaranty CD............................... A1+ P1 10.000 11/05/96 9,544,143
------------
Malaysian Ringgit Indexed 1.1%
4,500 Morgan Guaranty CD............................... A1+ P1 8.000 11/13/95 4,813,641
------------
Thai Baht Indexed 3.6%
15,000 Caisse National de Credit Agricole CD .......... A1+ P1 9.000 07/24/95 14,979,000
------------
Interest Rate Indexed Debt Obligations 16.2%
Japan Interest Rate Indexed 0.3%
1,000 General Electric Capital Corp.................... AAA Aaa 8.568 07/17/95 1,020,000
------------
Multi-Country Interest Rate Indexed 10.4%
10,000 Bankers Trust Corp. - (Italy/Spain).............. A1+ P1 8.000 03/03/95 9,321,000
19,500 Bayerische Landesbank CD - (Germany/France) ..... A1+ P1 7.000 09/16/94 17,341,350
19,000 Royal Bank of Canada CD - (Germany/France)....... A1+ P1 8.250 09/29/94 16,886,250
------------
43,548,600
------------
United Kingdom Interest Rate Indexed 1.9%
10,000 Toyota Motor Corp ............................... AAA Aaa 10.100 02/01/95 8,161,000
United States Interest Rate Indexed 3.6%
15,000 Toyota Motor Corp................................ AAA Aaa 5.900 05/05/97 15,000,000
-----------
Total United States Securities................................................................... 143,336,209
-----------
Repurchase Agreements 0.4%
UBS Securities, US T-Note, $1,490,000 par, 9.500% coupon,
due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $1,579,184............................................. 1,579,000
---------
Total Investments 96.7%
(Cost $411,410,417) <F1>........................................................................................ 405,912,053

Other Assets in Excess of Liabilities 3.3%........................................................................ 13,778,941
----------
Net Assets 100.0%................................................................................................. $419,690,994
-----------
</TABLE>

*Zero coupon bond

<F1>At June 30,1994, the cost for federal income tax purposes is $411,410,417;
the aggregate gross unrealized appreciation is $3,425,371 and the aggregate
gross unrealized depreciation is $15,980,995, resulting in net unrealized
depreciation on investments, foreign currency and open option transactions
of $12,555,624.

See Notes to Financial Statements

B-37
<PAGE> 211

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at Market Value (Cost $411,410,417) (Note 1)............................................................ $405,912,053
Cash................................................................................................................. 1,533
Receivables:
Investments Sold.................................................................................................... 35,094,671
Interest............................................................................................................ 10,542,660
Fund Shares Sold.................................................................................................... 245,299
Options at Market Value (Net premiums paid of $4,152,667) (Note 4)................................................... 1,367,903
Unamortized Organizational Expenses and Initial Registration Costs (Note 1).......................................... 62,570
Other................................................................................................................ 8,321
------------
Total Assets........................................................................................................ 453,235,010
------------
Liabilities:
Payables:
Investments Purchased............................................................................................... 25,951,125
Forward Currency Contracts (Note 4)................................................................................. 2,918,918
Fund Shares Repurchased............................................................................................. 2,228,125
Income Distributions................................................................................................ 1,145,594
Investment Advisory Fee (Note 2).................................................................................... 195,544
Accrued Expenses..................................................................................................... 1,104,710
------------
Total Liabilities................................................................................................... 33,544,016
------------
Net Assets........................................................................................................... 419,690,994
------------
Net Assets Consist of:
Paid in Surplus (Note 3)............................................................................................. $490,586,035
Accumulated Distributions in Excess of Net Investment Income (Note 1)................................................ (5,032,543)
Net Unrealized Depreciation on Investments and Foreign Currency...................................................... (12,555,624)
Accumulated Net Realized Loss on Investments......................................................................... (53,306,874)
------------
Net Assets........................................................................................................... $419,690,994
------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $147,712,448 and
18,126,538 shares of beneficial interest issued and outstanding) (Note 3)......................................... $ 8.15
Maximum sales charge (3.00%* of offering price)..................................................................... .25
------------
Maximum offering price to public.................................................................................... $ 8.40
------------
Class B Shares:
Net asset value and offering price per share (based on net assets ot $271,784,617 and
33,355,542 shares of beneficial interest issued and outstanding) (Note 3)......................................... $ 8.15
------------
Class C Shares:
Net asset value and offering price per share based on net assets of $192,925 and
23,638 shares of beneficial interest issued and outstanding) (Note 3)............................................. $ 8.16
------------
Class D Shares:
Net asset value and offering price per share (based on net assets of $1,004 and
123 shares of beneficial interest issued and outstanding) (Note 3) ............................................... $ 8.16
------------
</TABLE>

*On sales of $100,000 or more, the offering price will be reduced.

See Notes to Financial Statements

B-38
<PAGE> 212

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest ............................................................................................................ $ 41,417,652
Amortization of Discount (Premium) - Net ............................................................................ 726,588
Net Realized Loss on Foreign Currency and Foreign Currency Forward Contracts......................................... (16,256,117)
------------
Total Income........................................................................................................ 25,888,123
------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $540,613, $3,563,969, $1,364 and $1,
respectively) (Note 5)............................................................................................. 4,105,947
Investment Advisory Fee (Note 2)..................................................................................... 3,008,248
Shareholder Services................................................................................................. 845,364
Legal (Note 2) ...................................................................................................... 90,225
Amortization of Organizational Expenses and Initial Registration Costs (Note 1)...................................... 49,972
Trustees Fees and Expenses (Note 2).................................................................................. 25,340
Other................................................................................................................ 546,420
------------
Total Expenses ..................................................................................................... 8,671,516
------------
Net Investment Income................................................................................................ $ 17,216,607
------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments (Including realized loss on closed and expired option transactions of $727,202)..... (28,926,494)
------------
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency-
Beginning of the Period ............................................................................................ (6,728,498)
End of the Period (Including unrealized depreciation on foreign currency translation and open option transactions
of $4,272,496 and $2,784,764, respectively)......................................................................... (12,555,624)
------------
Net Unrealized Depreciation on Investments and Foreign Currency During the Period.................................... (5,827,126)
------------
Net Realized and Unrealized Loss on Investments and Foreign Currency................................................. (34,753,620)
------------
Net Decrease in Net Assets from Operations........................................................................... (17,537,013)
------------
</TABLE>

See Notes to Financial Statements

B-39
<PAGE> 213

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended June 30, 1994 and 1993
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From Investment Activities:
Operations:
<S> <C> <C>
Net Investment Income ..................................................................... $ 17,216,607 $ 34,896,910
Net Realized Loss on investments .......................................................... (28,926,494) (15,037,879)
Net Unrealized Depreciation on Investments and Foreign Currency During the Period.......... (5,827,126) (7,109,018)
------------ ------------
Change in Net Assets from Operations ...................................................... (17,537,013) 12,750,013
------------ ------------
Distributions from Net Investment Income* ................................................. (17,216,607) (35,495,354)
Distributions in Excess of Net Investment Income (Note 1) ................................. (4,433,220) (11,604,828)
------------ ------------
Distributions from and in Excess of Net Investment Income* ............................... (21,649,827) (47,100,182)
------------ ------------
Return of Capital Distribution * .......................................................... (16,378,081) -0-
------------ ------------
Total Distributions ...................................................................... (38,027,908) (47,100,182)
------------ ------------
Net Change in Net Assets from Investment Activities ........................................ (55,564,921) (34,350,169)
------------ ------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold ................................................................. 48,354,257 332,806,970
Net Asset Value of Shares Issued Through Dividend Reinvestment ............................ 21,920,768 27,855,193
Cost of Shares Repurchased ................................................................ (193,990,293) (174,164,861)
------------ ------------
Net Change in Net Assets from Capital Transactions......................................... (123,715,268) 186,497,302
------------ ------------
Total Increase/Decrease in Net Assets...................................................... (179,280,189) 152,147,133

Net Assets:

Beginning of the Period ................................................................... 598,971,183 446,824,050
------------ ------------
End of the Period (Including undistributed net investment income of
$(5,032,543) and $(11,604,828), respectively),........................................... $419,690,994 $598,971,183
------------ ------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1994 June 30, 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares ......................................... $ (8,004,201) $(17,978,193)
Class B Shares ......................................... (13,642,774) (29,121,989)
Class C Shares ......................................... (2,850) -0-
Class D Shares ......................................... (2) -0-
------------- ------------
$ (21,649,827) $(47,100,182)
------------- ------------
Return of Capital Distribution:
Class A Shares .......................................... $ (6,158,141) $ -0-
Class B Shares .......................................... (10,214,511) -0-
Class C Shares .......................................... (5,407) -0-
Class D Shares .......................................... (22) -0-
------------- ------------
$ (16,378,081) $ -0-
------------- ------------
</TABLE>

See Notes to Financial Statements

B-40
<PAGE> 214

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- ------------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Short-Term Global Income Fund (the "Fund") is
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, and is registered as a non-diversified
open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund commenced investment
operations on September 28, 1990. On July 22, 1991, the Fund
commenced distribution of Class B shares. The distribution of the
Fund's Class C shares, which were initially introduced as Class D
shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993. The distribution of the Fund's
fourth class of shares, Class D shares, commenced on
March 14, 1994.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation-Investments are stated at value using the
last available bid price or yield equivalents obtained from dealers in
the OTC or interbank market. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost.

B. Security Transactions-Security transactions are recorded
on a trade date basis. Realized gains and losses are determined on
an identified cost basis. The Fund may purchase and sell securities
on a "when issued" and "delayed delivery" basis, with settlement
to occur at a later date. The value of the security so purchased is
subject to market fluctuations during this period. The Fund will main-
tain in a segregated account with its custodian assets having an
aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made. At
June 30,1994, there were no when issued or delayed delivery
purchase commitments.

C. Investment Income-Interest income is recorded on an
accrual basis. Bond premium and original issue discount are amor-
tized over the expected life of each applicable security.

D. Currency Translation-Assets and liabilities denominated in
foreign currencies and commitments under forward foreign exchange
currency contracts are translated into U.S. dollars at the mean of the
quoted bid and ask prices of such currencies against the U.S. dollar.
Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were acquired or
sold. Income and expenses are translated at rates of exchange
prevailing when accrued. For financial reporting purposes, realized
gain/loss on foreign currency and foreign currency forward contracts
are included in net investment income.

E. Organizational Expenses and Initial Registration
Costs-The Fund has reimbursed Van Kampen Merritt Inc. ("Van
Kampen Merritt") for costs incurred in connection with the Fund's
organization and initial registration in the amount of $250,000. These
costs are being amortized on a straight line basis over the 60 month
period ending September 28, 1995. Van Kampen Merritt Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of
the initial shares of the Fund originally purchased by Van Kampen
Merritt are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares
redeemed bears to the number of initial shares held at the time of
redemption.

F. Federal Income Taxes-It is the Fund's policy to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of
its taxable income to its shareholders. Therefore, no provision for
federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax
laws which allow it to carry a realized capital loss forward eight years
following the year of the loss and offset such losses against any
future realized capital gains. At June 30, 1994, the Fund had an
accumulated capital loss carryforward for tax purposes of $10,010,730,
which will expire on June 30, 2001. Net realized gains or losses may
differ for financial and tax reporting purposes primarily as a result of
post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.

G. Distribution of Income and Gains-The Fund declares
daily and pays monthly dividends from net investment income. Net
Investment income for federal income tax purposes includes gains
and losses realized on transactions in options on foreign currencies.
These realized gains and losses are included as net realized gains or
losses for financial reporting purposes.

B-41
<PAGE> 215

Van Kampen Merritt Short-Term Global Income Fund
- ------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- ------------------------------------------------------------------------------

Net realized gains on securities, if any, are distributed annually.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included in ordinary income for
tax purposes.

During the current period, the Fund adopted Statement of Position
93-2 "Determination, Disclosure, and Financial Statement Presenta-
tion of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies." Accordingly, permanent book and tax basis
differences relating to shareholder distributions totaling $11,005,505
were reclassified from accumulated net realized gain/loss on invest-
ments to accumulated undistributed net investment income. Net
investment income, net realized gain/loss, and net assets were not
affected by this change.

H. Option and Futures Transactions-Premiums received
from call options written are recorded as deferred credits. The posi-
tion is marked to market daily with any difference between the
options' current market value and premiums received recorded as an
unrealized gain or loss. If the options are not exercised, premiums
received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on
premiums received less the cost of the closing transaction. When
options are exercised, premiums received are added to the proceeds
from the sale of the underlying securities and a gain or loss is
realized accordingly. These same principles apply to the sale of
put options.

Put and call options purchased are accounted for in the same
manner as portfolio securities. The cost of securities acquired through
the exercise of call options is increased by premiums paid. The pro-
ceeds from securities sold through the exercise of put options are
decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in
value settled daily in cash through a margin account. Gains or losses are
realized at the time the position is closed out or the contract expires.

2. Investment Advisory Agreement and Other Transactions
with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, the
Adviser will provide investment advice and facilities to the Fund for
an annual fee payable monthly of .55% of average daily net assets.

Certain legal expenses are paid to Skadden, Arps, Slate,
Meagher & Flom, counsel to the Fund, of which a trustee of the
Fund is an affiliated person.

For the year ended June 30, 1994, the Fund recognized
expenses of approximately $316,000 representing Van Kampen
Merritt's or the Adviser's cost of providing accounting, legal and
certain shareholder services to the Fund.

At June 30, 1994, Van Kampen Merritt owned 1,263, 1,251, 100
and 100 shares of beneficial interest of Classes A, B, C and D,
respectively.

3. Capital Transactions

The Fund has outstanding four classes of common shares, Classes A,
B, C and D. There are an unlimited number of shares of each class
without par value authorized. At June 30, 1994, paid in surplus
aggregated $172,340,828, $318,035,795, $208, 367 and $1,045, for
Classes A, B, C and D, respectively. For the year ended June 30,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ........................ 3,219,135 $ 29,120,587
Class B ........................ 2,103,750 18,929,822
Class C ........................ 33,998 302,784
Class D ........................ 123 1,064
---------- ------------
Total Sales ..................... 5,357,006 $ 48,354,257
---------- ------------
Dividend Reinvestment:
Class A ........................ 931,309 $ 8,246,649
Class B ........................ 1,543,949 13,668,730
Class C ........................ 629 5,386
Class D ........................ 0 3
---------- ------------
Total Dividend Reinvestment...... 2,475,887 $ 21,920,768
---------- ------------
Repurchases:
Class A ........................ (8,636,073) $ (75,861,675)
Class B ........................ (13,472,314) (118,034,222)
Class C ........................ (10,989) (94,396)
Class D ........................ 0 0
---------- ------------
Total Repurchases ............... (22,119,376) $(193,990,293)
---------- ------------
</TABLE>

B-42
<PAGE> 216

At June 30, 1993, paid in surplus aggregated $216,993,408 and
$413,685,976 for Classes A and B, respectively. For the year ended
June 30, 1993, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ....................... 12,442,414 $ 116,919,535
Class B ....................... 22,808,403 215,887,435
----------- -------------
Total Sales .................... 35,250,817 $ 332,806,970
----------- -------------
Dividend Reinvestment:
Class A ....................... 1,164,840 $ 10,723,145
Class B ....................... 1,864,104 17,132,048
----------- -------------
Total Dividend Reinvestment 3,028,944 $ 27,855,193
----------- -------------
Repurchases:
Class A ....................... (12,252,085) $(114,602,713)
Class B ....................... (6,551,328) (59,562,148)
----------- -------------
Total Repurchases............... (18,803,413) $(174,164,861)
----------- -------------
</TABLE>

Class B, C and D shares are offered without a front end sales
charge, but are subject to a contingent deferred sales charge (CDSC).
The CDSC will be imposed on most redemptions made within three
years of the purchase for Class B and one year of the purchase for
Classes C and D as detailed in the following schedule. The Class B,
C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and
incremental transfer agency costs.

<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- --------------------------------------------------------------
<S> <C> <C> <C>
First 3.00% 1.00% 0.75%
Second 2.00% None None
Third 1.00% None None
Fourth and Thereafter None None None
</TABLE>

For the year ended June 30, 1994, Van Kampen Merritt, as
Distributor for the Fund, paid net commissions on sales of the Fund's
Class A shares of approximately $200 and received CDSC on the
redeemed shares of Classes B, C and D of approximately $1,413,000.
Sales charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and cost of sales of investment securities,
excluding short-term notes, for the year ended June 30, 1994, were
$1,386,219,209 and $1,617,407,224, respectively.

Transactions in options for the year ended June 30, 1994, were
as follows:

<TABLE>
<CAPTION>
Contracts Premium
- --------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1993.......... 20,000 $ 210,000
Options Written
and Purchased (Net)................. 76 (5,529,922)
Options Terminated In Closing
Purchase Transactions (Net).......... (10,035) 1,394,744
Options Expired (Net)................. (10,011) (227,489)
------- -----------
Outstanding at June 30, 1994.......... 30 $ (4,152,667)
------- -----------
</TABLE>

B-43
<PAGE> 217

The descriptions and market values of the option contracts
outstanding at June 30, 1994 were as follows:

<TABLE>
<CAPTION>
Strike
Opening Expiration Price/ Market
Description Transaction Date Yield Value
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Japanese Yen Put................ Buy 12/07/94 100.77 $ 3,840
Binary Option Contracts
German LIBOR.................. Buy 06/05/95 6.00% 258,178
Japanese Yen.................. Buy 08/08/94 109.75 10,000
Japanese Yen.................. Buy 12/30/94 104.50 140,000
Japanese Yen.................. Buy 12/30/94 108.65 115,000
Japanese Yen.................. Buy 12/30/94 109.10 55,000
Japanese Yen.................. Buy 08/11/94 109.75 5,000
Japanese Yen.................. Buy 12/30/94 105.25 30,000
Japanese Yen.................. Buy 12/30/94 105.10 20,500
Japanese Yen.................. Buy 12/30/94 104.55 81,000
Receivers Option on Swaps
1 year French Swap........... Buy 06/12/95 6.73% 118,430
2 year French Swap........... Buy 06/05/95 6.97% 193,259
2 year French Swap........... Buy 06/05/95 7.21% 238,976
2 year French Swap........... Buy 06/21/95 7.37% 264,997
2 year French Swap........... Sell 06/26/95 7.75% (85,329)
1 year German Swap........... Buy 06/12/95 6.25% 39,369
2 year German Swap........... Buy 06/06/95 6.73% 168,644
2 year Italian Swap.......... Buy 06/05/95 10.48% 241,303
2 year Italian Swap.......... Sell 06/27/95 11.07% (189,119)
2 year Japanese
Swap....................... Sell 05/17/95 3.00% (210,000)
3 year Japanese
Swap....................... Sell 02/22/95 3.00% (370,000)
2 year Spanish Swap.......... Buy 06/05/95 9.63% 107,169
2 year Spanish Swap.......... Buy 06/05/95 9.71% 117,473
2 year Swedish Swap.......... Sell 06/07/95 12.00% (326,591)
2 year Swedish Swap.......... Sell 06/09/95 12.48% (151,642)
2 year United
Kingdom Swap............... Buy 06/05/95 8.75% 284,431
2 year United
Kingdom Swap............... Buy 06/05/95 8.89% 313,710
2 year United
Kingdom Swap .............. Sell 06/09/95 9.00% (154,918)
2 year United
Kingdom Swap............... Sell 06/05/95 10.00% (204,957)
Payers Option on Swaps
2 year German Swap .......... Buy 06/01/95 6.36% 254,180
----------
$1,367,903
----------
</TABLE>

The Fund may enter into forward exchange currency contracts
in order to hedge its exposure to changes in foreign currency
exchange rates on its foreign portfolio holdings. A forward exchange
contract is a commitment to purchase or sell a foreign currency at a
future date at a negotiated forward rate. The gain or loss arising from
the difference between the original contracts and the closing of such
contracts is included in income as a component of realized gain/loss
on foreign currency and foreign currency forward contracts.

At June 30. 1994, the Fund had outstanding forward exchange
currency contracts as follows:

<TABLE>
<CAPTION>
Unrealized
Foreign Exchange Current Appreciation/
Current Contracts Cost Value Depreciation
- -------------------------------------------------------------------
<S> <C> <C> <C>
Sells to Open
Australian Dollar,
expiring 07/29/94 ..........$ 7,201,000 $ 7,294,792 $ (93,792)
Australian Dollar,
expiring 08/05/94 .......... 3,561,588 3,608,086 (46,498)
Canadian Dollar,
expiring 07/21/94 .......... 21,440,057 21,684,871 (244,814)
Canadian Dollar,
expiring 07/29/94 .......... 10,815,488 10,815,488 -0-
Finnish Markka,
expiring 07/13/94 .......... 15,210,956 15,954,115 (743,159)
Finnish Markka,
expiring 07/14/94 .......... 9,300,295 9,750,493 (450,198)
German Deutsche Mark,
expiring 08/16/94 .......... 10,000,000 10,600,983 (600,983)
Italian Lira,
expiring 07/11/94 .......... 31,394,086 32,205,090 (811,004)
Italian Lira,
expiring 07/13/94 .......... 9,404,418 9,660,209 (255,791)
Italian Lira
expiring 08/05/94 .......... 10,000,000 10,000,000 -0-
Japanese Yen,
expiring 07/06/94 .......... 7,388,693 7,872,163 (483,470)
Spanish Peseta,
expiring 07/13/94 .......... 15,003,360 15,673,654 (670,294)
Buys to Open
Canadian Dollar,
expiring 07/29/94 .......... 21,688,837 21,677,788 (11,049)
German Deutsche Mark,
expiring 09/29/94 .......... 6,332,721 6,305,965 (26,756)
Japanese Yen,
expiring 08/01/94 .......... 10,144,045 10,176,009 31,964
------------
$(4,405,844)
------------
</TABLE>

B-44
<PAGE> 218

At June 30,1994, the Fund had realized gains on closed but
unsettled forward exchange currency contracts of $1,486,926,
scheduled to settle between July 8, 1994 and September 16, 1994.

5. Distribution and Service Plans

Annual fees under the Plans of up to .30% each for Class A
and Class D shares and 1.00% each for Class B and Class C shares
are accrued daily. Included in these fees for the year ended June 30,
1994, are payments to Van Kampen Merritt of approximately
$2,683,000.

B-45
<PAGE> 219

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

VAN KAMPEN MERRITT
ADJUSTABLE RATE U.S. GOVERNMENT FUND

Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") is a
separate diversified sub-trust of Van Kampen Merritt Trust, a Massachusetts
business trust which is an open-end management investment company, commonly
known as a mutual fund. The Fund's investment objective is to seek a high level
of current income consistent with a relatively stable net asset value. The Fund
will seek to achieve its investment objective by investing primarily in
securities that are issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government Securities") and that have interest rates
which reset at periodic intervals. In normal market conditions, the Fund expects
that substantially all of the securities in which the Fund will invest will
consist of adjustable rate mortgage-backed securities or other securities
collateralized by or representing an interest in mortgages and which have
interest rates which reset at periodic intervals. Adjustable rate
mortgage-backed U.S. Government Securities in which the Fund may invest involve
risks other than those present in other types of U.S. Government Securities. See
"Investment Objective and Policies -- Mortgage-Backed Securities." The Fund may
engage in certain transactions which may be deemed to be leverage. For a
discussion of the benefits and risks associated with these transactions, see
"Other Investment Practices." The Fund, which is not a money market fund, is
designed for investors who seek a higher yield than a money market fund and less
fluctuation in net asset value than a fixed rate U.S. Government bond fund. The
net asset value and yield of the Fund will fluctuate depending on market
conditions and other factors. There can be no assurance that the Fund's
investment objective will be achieved.
(Continued on next page.)
------------------

------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 220

(Continued from previous page.)

The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth certain information that a prospective
investor should know before investing in the Fund. Please read it carefully and
retain it for future reference. The address of the Fund is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, and its telephone number is 1-800-225-2222,
ext. 6504.

The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") which may be purchased at a price equal to their net asset
value per share, plus sales charges which, at the election of the investor, may
be imposed (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is expected to be more
beneficial to the investor, taking into account the amount of the purchase, the
length of time the investor expects to hold the shares and other circumstances.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares, up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and the Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class of shares has exclusive voting rights with respect to those provisions of
the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) the classes have different exchange privileges. Class B Shares
automatically will convert to Class A Shares six years after the end of the
calendar month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.
See "Purchasing Shares of the Fund."

2
<PAGE> 221

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Shareholder Transaction Expenses..................................... 9
Annual Fund Operating Expenses and Example........................... 10
Financial Highlights................................................. 12
The Fund............................................................. 14
Investment Objective and Policies.................................... 14
Other Investment Practices........................................... 24
Purchasing Shares of the Fund........................................ 29
Distributions from the Fund.......................................... 39
Redemption of Shares................................................. 40
Net Asset Value...................................................... 43
Investment Advisory Services......................................... 44
Portfolio Transactions and Brokerage Allocation...................... 46
The Distribution and Service Plans................................... 46
Tax Status........................................................... 48
Shareholder Programs................................................. 51
Investments by Tax-Sheltered Retirement Plans........................ 55
Fund Performance..................................................... 57
Shareholder Services................................................. 57
Description of Shares of the Fund.................................... 58
Shareholder Reports and Inquiries.................................... 58
Additional Information............................................... 59
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER, OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.

3
<PAGE> 222

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

THE FUND Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund")
is a separate diversified sub-trust of Van Kampen Merritt Trust, a trust which
is an open-end management investment company organized as a Massachusetts
business trust. See "The Fund."

INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective is to seek a
high level of current income with a relatively stable net asset value. The Fund
will seek to achieve its investment objective by investing primarily in
securities that are issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("U.S. Government Securities") and that have interest rates
which reset at periodic intervals. In normal market conditions, the Fund expects
that substantially all of the securities in which the Fund will invest will
consist of adjustable rate mortgage-backed securities ("ARMS") or other
securities, including certain derivative securities, collateralized by or
representing an interest in mortgages and which have interest rates which reset
at periodic intervals. There is no assurance that the Fund will achieve its
investment objective. The Fund is designed for investors who seek a higher yield
than a money market fund and less fluctuation in net asset value than a fixed
rate U.S. Government bond fund. The net asset value and yield of the Fund will
fluctuate depending on market conditions and other factors.

The Fund may invest up to 35% of its assets in fixed rate U.S. Government
Securities, in adjustable rate or fixed rate securities which are not U.S.
Government Securities, including Mortgage-Backed Securities (as defined herein)
that are not U.S. Government Securities, Asset-Backed Securities (as defined
herein), certain derivative securities, corporate or other debt obligations,
including not more than 10% of its assets in foreign securities. All securities
purchased by the Fund will be U.S. Government Securities or will be rated at
least Aa by Moody's Investors Services Inc. ("Moody's") or AA by Standard &
Poor's Ratings Group ("S&P") (or comparably rated by another nationally
recognized rating agency), or if unrated, determined to be of comparable quality
by the Fund's investment adviser; the Fund may, however, invest up to 10% of its
total assets in securities rated A by Moody's or S&P. See "Investment Objective
and Policies."

The Fund may also use various investment techniques including engaging in
strategic transactions, selling call options, investing in restricted or
illiquid securities, making forward commitments, entering into repurchase
agreements, reverse repurchase agreements and dollar rolls, investing in
Eurodollar instruments, lending its portfolio securities and entering into
foreign currency transactions. For further discussion of these practices and the
associated special considerations, see "Other Investment Practices."

4
<PAGE> 223

their investment in the Fund. To assist investors in making this determination,
the table under the caption "Annual Fund Operating Expenses and Example" sets
forth examples of the charges applicable to each class of shares.

The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of the
purchase ("Class A Shares") or (ii) on a contingent deferred basis (Class A
Share accounts over $1 million,"Class B Shares" and "Class C Shares"). Class A
Share accounts over $1,000,000 or otherwise subject to a CDSC, Class B Shares
and Class C Shares sometimes are referred to herein collectively as CDSC Shares.

The minimum initial investment with respect to the Class A Shares, Class B
Shares and Class C Shares is $1,000. The minimum subsequent investment with
respect to each class of shares is $100.

Class A Shares. Class A Shares are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), which
charge is reduced on investments of $25,000 or more. Class A Shares are not
subject to any sales charge when they are redeemed. Class A Shares are subject
to ongoing distribution and service fees at an aggregate annual rate of up to
0.30% of the Fund's average daily net assets attributable to the Class A Shares.
Certain purchases of Class A Shares qualify for reduced or no initial sales
charges and may be subject to a contingent deferred sales charge.

Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within three years of
purchase. Class B Shares are subject to a contingent deferred sales charge equal
to 3.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after purchase,
which charge is reduced each year thereafter. Class B Shares are subject to
ongoing distribution and service fees at an aggregate annual rate of up to 1.00%
of the Fund's average daily net assets attributable to the Class B Shares. Class
B Shares automatically will convert to Class A Shares six years after the end of
the calendar month in which the investor's order to purchase was accepted, in
the circumstances and subject to the qualifications described in this
Prospectus.

INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for the Fund. The
annual advisory fee (which is calculated daily and paid monthly) for the Fund is
0.60% of average daily net assets, reduced on assets over $500 million. See
"Investment Advisory Services."

5
<PAGE> 224

REDEMPTION Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."

SPECIAL RISK CONSIDERATIONS Yield and Net Asset Value Considerations. The yield
characteristics of ARMS and other Mortgage-Backed Securities differ from
traditional debt securities. The major differences typically include more
frequent interest and principal payments, usually monthly, and the possibility
that prepayments of principal on most classes of such securities may be made at
any time. In general, changes in the rate of prepayments on a security will
change the yield to maturity of the security.

Adjustable rate securities generally allow the Fund to participate in
increases in interest rates through periodic interest rate adjustments,
resulting in both higher yields and lower price fluctuations. During periods of
declining interest rates, however, coupon rates on adjustable rate securities
may be readjusted downward resulting in lower yields. The value of an adjustable
rate security is unlikely to rise during a period of declining interest rates to
the same extent as a fixed rate security. During periods of rising interest
rates, changes in the coupon of an adjustable rate security will lag behind
changes in the market rates which may result in such security having a lower
value until the coupon resets to reflect more closely market rates. An investor
that redeems shares of the Fund prior to the time the coupon rates of the Fund's
portfolio securities are adjusted could suffer a loss of principal. Adjustable
rate securities typically limit the maximum amount the coupon rate may be
adjusted during any adjustment period, in any one year and during the term of
the security. During periods of significant fluctuations in market rates of
interest the net asset value of the Fund may fluctuate more significantly since
these limits may prevent the Fund's portfolio securities from fully adjusting to
reflect market rates.

As a result of usual prepayment patterns, amounts available for reinvestment
by the Fund are likely to be greater during a period of declining interest rates
and, as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-Backed Securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment.

6
<PAGE> 225

The Fund may invest in derivative adjustable rate securities with interest
rates that adjust or vary inversely to changes in market interest rates. Such
securities, which are referred to as "inverse floating obligations," provide
opportunities for high current income. The Fund also may invest a portion of its
assets in derivative securities such as Stripped Mortgage-Backed Securities
(defined herein) that are highly sensitive to changes in prepayment and interest
rates. Under certain interest rate or prepayment rate scenarios, the Fund may
fail to recoup fully its investment in such securities. The market value of
inverse floating obligations and Stripped Mortgage-Backed Securities are subject
to greater risk of fluctuation in response to changes in market interest rates
than other adjustable rate securities, and such greater risk of fluctuation may
adversely affect the ability of the Fund to achieve its investment objective of
maintaining a relatively stable net asset value. In general, the Fund will
invest in such inverse floating obligations and Stripped Mortgage-Backed
Securities only when the Adviser believes that such securities, when combined
with the Fund's other portfolio investments, would enable the Fund to seek to
achieve its objective of high current income consistent with a relatively stable
net asset value. The Fund will not invest, in the aggregate, more than 15% of
its total assets in such inverse floating obligations and Stripped
Mortgage-Backed Securities. See "Investment Objective and Policies."

Asset-Backed Securities. Asset-Backed Securities have structural
characteristics similar to Mortgage-Backed Securities but have underlying assets
that are not mortgage loans or interests in mortgage loans, such as automobile
and credit card receivables and home equity loans. Asset-Backed Securities
present certain risks that are not presented by Mortgage-Backed Securities,
including the risk that these securities do not have the benefit of a security
interest in the related collateral. See "Investment Objectives and
Policies--Asset-Backed Securities."

Foreign Securities. The Fund may invest up to 10% of its assets in foreign
debt securities. Since foreign securities are normally denominated and traded in
foreign currencies, the values of the Fund's assets may be affected favorably or
unfavorably by changes in currency exchange rates and exchange control
regulations. The securities of some foreign companies, particularly foreign
securities that are principally traded in foreign markets, are less liquid and
at times more volatile than securities of comparable U.S. companies. Foreign
brokerage commissions and other fees are also generally higher than in the
United States. The Fund's investment in Eurodollar instruments will be subject
to the 10% limitation with respect to foreign securities. The Fund's investments
in foreign securities also may include commercial paper and certificates of
deposit which are indexed to certain specific foreign currency exchange rates.
The terms of such commercial paper and certificates of deposit provide that
their principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect changes in the exchange rate between two currencies while
the obligation is outstanding. Such commercial paper and certificates of deposit
entail the risk of loss of principal. See "Investment Objective and Policies."

Restricted and Illiquid Securities. The Fund may invest in securities the
disposition of which are subject to contractual restriction, that lack an
established secondary trading

7
<PAGE> 226

market or are otherwise considered illiquid. Liquidity of a security relates to
the ability to dispose easily of the security and the price to be obtained, and
does not generally relate to the credit risk or likelihood of payment at
maturity. Illiquid securities may trade at a discount from comparable, more
liquid investments. Stripped Mortgage-Backed Securities issued by parties other
than agencies or instrumentalities of the U.S. Government are considered, under
current guidelines of the staff of the Securities and Exchange Commission, to be
illiquid securities. The Fund may invest up to 15% of its net assets in illiquid
securities. See "Investment Objective and Policies--Mortgage-Backed
Securities--Stripped Mortgage-Backed Securities" and "Other Investment
Practices--Restricted and Illiquid Securities."

The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.

8
<PAGE> 227

- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
the offering price)............. 3.25%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price).......................... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of the
then current net asset value or
the original purchase price on Year 1 -- 3.00% Year 1 -- 1.00%
redemption proceeds)............ None(2)
Year 2 -- 2.00%
Year 3 -- 1.00%
Redemption fees (as a percentage
of amount redeemed)............. None None None
Exchange fees..................... None None None
</TABLE>

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

(1) Reduced on investments of $25,000 or more.

9
<PAGE> 228

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees(1) (as a percentage of average
daily net assets net of waiver)............... 0.00% 0.00% 0.00%
12b-1 fees(2) (as a percentage of average daily
net assets)................................... 0.30% 1.00% 1.00%
Other expenses(1) (as a percentage of average
daily net assets after assumption of
expenses)..................................... 0.41% 0.45% 0.46%
Total expenses(1) (as a percentage of average
daily net assets net of waiver)............... 0.71% 1.45% 1.46%
</TABLE>

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

(1) The Adviser waived its "Management fee" and assumed a portion of the "Other
expenses" of the Fund for the Fund's six-month period ended December 31,
1994. Absent the Adviser's waiver of its fee and assumption of a portion of
the expenses of the Fund, "Management fees" would have been 0.60% for each
class of shares, "Other Expenses" would have been 0.72% for Class A Shares,
0.76% for Class B Shares and 0.77% for Class C Shares, respectively, and
"Total expenses" would have been 1.62% for Class A Shares, 2.36% for Class B
Shares and 2.37% for Class C Shares, respectively.

(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund to the selling broker as compensation for ongoing services
rendered to investors. With respect to each class of shares, amounts in
excess of 0.25%, if any, represent an asset based sales charge. The asset
based sales charge with respect to Class C Shares includes 0.75% (as a
percentage of net asset value) paid to investors' broker-dealers as sales
compensation.

10
<PAGE> 229

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
EXAMPLE:
You would pay the following expenses on a $1,000
investment, assuming (i) an operating expense
ratio of 0.71% for Class A Shares, 1.45% for
Class B Shares and 1.46% for Class C Shares, (ii)
a 5% annual return and (iii) redemption at the
end of each period:
Class A Shares................................. $40 $54 $71 $ 118
Class B Shares................................. 45 56 79 135
Class C Shares................................. 25 46 80 175
An investor would pay the following expenses on the
same $1,000 investment assuming no redemption at
the end of each period:
Class A Shares................................. $40 $54 $71 $ 118
Class B Shares................................. 15 46 79 135
Class C Shares................................. 15 46 80 175
</TABLE>

The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above, carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion to
Class A Shares. Class B Shares acquired through the exchange privilege are
subject to the deferred sales charge schedule relating to the Class B Shares of
the Fund from which the purchase of Class B Shares was originally made.
Additionally, as Fund assets increase, the fees waived or expenses reimbursed by
the Adviser are expected to decrease. Accordingly, future expenses as projected
could be higher than those determined in the above table if the investor's Class
B Shares were exchanged from a fund with a higher contingent deferred sales
charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN. For a more complete description of such cash and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."

11
<PAGE> 230

<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------
AUGUST 28, 1992
SIX MONTHS (COMMENCEMENT
ENDED YEAR ENDED OF INVESTMENT)
DECEMBER 31, JUNE 30, OPERATIONS)
1994 1994 TO JUNE 30, 1993
---------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........ $9.399 $9.793 $ 9.700
----- ------ -------
Net Investment Income..................... .241 .452 .451
Net Realized and Unrealized Gain/Loss on
Investments............................. (.223) (.360) .049
----- ------ -------
Total from Investment Operations............ .018 .092 .500
----- ------ -------
Less Distributions from Net Investment
Income.................................... .233 .486 .407
----- ------ -------
Net Asset Value, End of Period.............. 9.184 $9.399 $ 9.793
===== ====== =======
Total Return* (Non-annualized).............. .14% .97% 5.22%
Net Assets at End of Period (In millions)... $6.5 $7.1 $4.7
Ratio of Expenses to Average Net Assets*
(Annualized).............................. .71% .61% .95%
Ratio of Net Investment Income to Average
Net Assets* (Annualized).................. 5.17% 4.73% 5.29%
Portfolio Turnover.......................... 5.94% 81.70% 76.62%
- ----------------
* If certain expenses had not been assumed
by the investment adviser, total return
would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets
(annualized).............................. 1.62% 1.62% 1.86%
Ratio of Net Investment Income to Average
Net Assets (annualized)................... 4.26% 3.72% 4.37%
</TABLE>

See Financial Statements and Notes Thereto

12
<PAGE> 231

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

FINANCIAL HIGHLIGHTS (CONTINUED)

(for one share outstanding throughout the period)

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

<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
--------------------------------------- ---------------------------
AUGUST 28, AUGUST 13,
1992 1993
(COMMENCEMENT (COMMENCEMENT
SIX MONTHS OF INVESTMENT SIX MONTHS OF
ENDED YEAR ENDED OPERATIONS) ENDED DISTRIBUTION)
DECEMBER 31, JUNE 30, TO JUNE 30, DECEMBER 31, TO JUNE 30,
1994 1994 1993 1994 1994
------------ ---------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $9.403 $9.799 $ 9.700 $9.403 $ 9.790
------ ------ ------- ------ -------
Net Investment
Income............... .209 .391 .378 .185 .366
Net Realized and
Unrealized Gain/Loss
on Investments....... (.226) (.370) .076 (.208) (.387)
------ ------ ------- ------ -------
Total from Investment
Operations............. (.017) .021 .454 (.023) (.021)
------ ------ ------- ------ -------
Less Distributions from
Net Investment
Income................. .197 .417 .355 .197 .366
------ ------ ------- ------ -------
Net Asset Value, End of
Period................. $9.189 $9.403 $ 9.799 $9.183 $ 9.403
====== ====== ======= ====== =======
Total Return*
(Non-annualized)....... (.14%) .15% 4.78% (.25%) (.27%)
Net Assets at End of
Period (In millions)... $22.9 $27.6 $14.1 $3.9 $4.0
Ratio of Expenses to
Average Net Assets*
(Annualized)........... 1.45% 1.31% 1.63% 1.46% 1.31%
Ratio of Net Investment
Income to Average Net
Assets* (Annualized)... 4.42% 4.14% 4.78% 4.38% 4.05%
Portfolio Turnover....... 5.94% 81.70% 76.62% 5.94% 81.70%
- ----------------
* If certain expenses had
not been assumed by the
investment adviser,
total return would have
been lower and the
ratios would have been
as follows:
Ratio of Expenses to
Average Net Assets
(Annualized)........... 2.36% 2.36% 2.55% 2.37% 2.37%
Ratio of Net Investment
Income to Average Net
Assets (Annualized).... 3.51% 3.09% 3.86% 3.47% 2.98%
</TABLE>

See Financial Statements and Notes Thereto

13
<PAGE> 232

- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------

Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") is a
separate diversified sub-trust of Van Kampen Merritt Trust (the "Trust"), which
is an open-end management investment company, commonly known as a "mutual fund,"
and is organized as a Massachusetts business trust.

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------

GENERAL

The Fund's investment objective is to seek a high level of current income
consistent with a relatively stable net asset value. The Fund will seek to
achieve its investment objective by investing primarily in securities that are
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
("U.S. Government Securities") and that have interest rates which reset at
periodic intervals. In normal market conditions, the Fund will invest at least
65% of its total assets in such adjustable rate U.S. Government Securities,
including Stripped Mortgage-Backed Securities (defined herein) and CMOs (as
defined herein) which are U.S. Government Securities. The Fund's investment
objective and the investment policy set forth in the preceding sentence are
fundamental and cannot be changed without shareholder approval. In normal market
conditions, the Fund expects that substantially all of the U.S. Government
Securities in which the Fund will invest will consist of adjustable rate
mortgage-backed securities ("ARMS") or other securities collateralized by or
representing an interest in mortgages and which have interest rates which reset
at periodic intervals. The net asset value and yield of the Fund will fluctuate
depending on market conditions and other factors. However, by investing
primarily in adjustable rate securities the Fund seeks to achieve less
fluctuation in net asset value than a portfolio that invests in fixed rate
securities. There can be no assurance that the Fund will achieve its objective.

Up to 35% of the Fund's assets may be invested in fixed rate U.S. Government
Securities, in adjustable rate or fixed rate securities that are not U.S.
Government Securities, including Mortgage-Backed Securities (as defined below)
that are not U.S. Government Securities, Asset-Backed Securities (as defined
below), corporate or other debt obligations, including not more than 10% of its
total assets in foreign securities. All securities purchased by the Fund will be
U.S. Government Securities or will be rated at least Aa by Moody's Investors
Services, Inc. ("Moody's") or AA by Standard & Poor's Ratings Group ("S&P") (or
comparably rated by another nationally recognized rating agency) or, if unrated,
determined to be a comparable quality by the Adviser; the Fund may, however,
invest up to 10% of its total asset in securities rated A by Moody's or S&P.

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The Fund may also use various investment techniques including engaging in
hedging and risk management transactions, selling call options, investing in
restricted or illiquid securities, making forward commitments, entering into
repurchase agreements, reverse repurchase agreements and dollar rolls, investing
in Eurodollar instruments, lending its portfolio securities and entering into
foreign currency transactions. For temporary defensive purposes, the Fund may
invest up to 100% of its assets in cash, U.S. Government Securities and money
market instruments. See "Investment Objective and Policies" and "Other
Investment Practices."

ADJUSTABLE RATE SECURITIES

Adjustable rate securities are debt securities having interest rates which are
adjusted or reset at periodic intervals ranging, in general, from one month to
three years, based on a spread over a specific interest rate or interest rate
index. There are three main categories of indices: (i) those based on U.S.
Government Securities, (ii) those derived from a calculated measure such as a
cost of funds index and (iii) those based on a moving average of interest rates,
including mortgage rates. Commonly utilized indices include, for example, the
One Year Constant Maturity Treasury Index, the London Interbank Offered Rate
(LIBOR), the Federal Home Loan Bank Cost of Funds, the prime rate and commercial
paper rates.

The adjustable rate feature of certain securities in which the Fund may invest
will tend to reduce substantial changes in the Fund's net asset value in
response to normal market interest rate fluctuations. As the coupon rates of the
Fund's adjustable rate securities are reset periodically, yields of these
portfolio securities will reflect changes in market interest rates and should
cause the net asset value of the Fund's shares to fluctuate less significantly
in response to changes in market interest rates than the net asset value of a
portfolio of long-term fixed rate securities. However, the net asset value and
yield of the Fund will fluctuate depending on market conditions and other
factors.

Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic upward adjustments of the coupon rates of such
securities, resulting in higher yields. During periods of declining interest
rates, however, coupon rates may readjust downward resulting in lower yields to
the Fund. During periods of rising interest rates, changes in the coupon rate of
adjustable rate securities will lag behind changes in the market interest rate,
which may result in such security having a lower value until the coupon resets
to reflect more closely market interest rates. Investors who redeem shares of
the Fund prior to the time the coupon rates of the Fund's portfolio securities
are adjusted could suffer some loss on their investment in the Fund's shares.
Adjustable rate securities typically limit the maximum amount the coupon rate
may be adjusted during any adjustment period, in any one year and during the
term of the security. During periods of significant fluctuations in market rates
of interest the net asset value of the Fund may fluctuate more significantly
since these limits may prevent the Fund's portfolio securities from fully
adjusting to reflect market rates.

The Fund may invest in derivative adjustable rate securities with interest
rates that adjust or vary inversely to changes in market interest rates. Such
securities, which are

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referred to as "inverse floating obligations," provide opportunities for high
current income, but the market value of such securities may be more volatile in
response to changes in market interest rates. Certain of such inverse floating
obligations have coupon rates that adjust to changes in market interest rates to
a greater degree than the change in the market rate and accordingly have
investment characteristics similar to investment leverage. As a result, the
market value of such inverse floating obligations are subject to greater risk of
fluctuation than other adjustable rate securities which do not vary inversely to
changes in market interest rates, and such greater risk of fluctuation may
adversely affect the ability of the Fund to achieve its investment objective of
maintaining a relatively stable net asset value. The Fund will invest in such
inverse floating obligations only when the Adviser believes that such
securities, when combined with the Fund's other portfolio investments, would
enable the Fund to seek to achieve its objective of high current income
consistent with a relatively stable net asset value. The Fund will not invest,
in the aggregate, more than 15% of its total assets in such inverse floating
obligations together with Stripped Mortgage-Backed Securities (defined herein).

U.S. GOVERNMENT SECURITIES

As a matter of fundamental policy, in normal market conditions the Fund will
invest at least 65% of its total assets in U.S. Government Securities which have
interest rates which reset at periodic intervals. In current market conditions,
the Fund expects that substantially all of the adjustable rate securities in
which the Fund will invest will consist of Mortgage-Backed Securities and other
derivative products which are described herein. See "Mortgage-Backed
Securities." The Fund may also invest in fixed rate U.S. Government Securities.
In general, U.S. Government Securities include securities issued by the U.S.
Government such as U.S. Treasury Securities, and securities issued or guaranteed
by agencies and instrumentalities of the U.S. Government. U.S. Government
Securities are generally considered to be of the same or higher credit quality
as privately issued securities rated Aaa by Moody's or AAA by S&P.

SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in both adjustable rate and fixed rate
securities issued or guaranteed by agencies or instrumentalities of the U.S.
Government, including, but not limited to, Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) securities. Obligations of GNMA, the
Farmers Home Administration and the Export-Import Bank are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the Unites States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment.
Such securities include obligations issued by the Student Loan Marketing
Association (SLMA), FNMA and FHLMC, each of which may borrow from the U.S.
Treasury to meet its obligations, although the U.S. Treasury is under no
obligation to lend to such entities. GNMA, FNMA and FHLMC may also issue
collateralized mortgage obligations. See "--Mortgage-Backed
Securities--Collateralized Mortgage Obligations and Multiclass Pass-Through
Securities" below.

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The Fund may invest in derivative securities of the component parts of U.S.
Government Securities, specifically the right to receive interest payments on
U.S. Government Securities or the right to receive the principal payment on U.S.
Government Securities. Stripped U.S. Government Securities that are currently
available are called STRIPS (Separate Trading of Registered Interest and
Principal of Securities) or CUBES (Coupon Under Book-Entry Safekeeping). STRIPS
and CUBES are issued under programs introduced by the United States Treasury and
are direct obligations of the U.S. Government. See "--Mortgage-Backed
Securities--Stripped Mortgage-Backed Securities."

U.S. TREASURY SECURITIES. The Fund also may invest in U.S. Treasury
securities, including Bills, Notes, Bonds and other debt securities issued by
the U.S. Treasury. The instruments are direct obligations of the U.S. Government
and, as such, are backed by the "full faith and credit" of the United States.
They differ primarily in their interest rates, the lengths of their maturities
and the dates of their issuances. U.S. Treasury securities are generally fixed
rate securities.

MORTGAGE-BACKED SECURITIES

"Mortgage-Backed Securities" are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
Mortgage-Backed Securities: (i) those issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, such as GNMA, FNMA and
FHLMC; (ii) those issued by private issuers that represent an interest in or are
collateralized by Mortgage-Backed Securities issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (iii) those issued
by private issuers that represent an interest in or are collateralized by whole
mortgage loans or Mortgage-Backed Securities without a government guarantee but
usually having some form of private credit enhancement.

In current market conditions, the Fund expects that a substantial portion of
the Mortgage-Backed Securities in which the Fund will invest will consist of
ARMS or other securities collateralized by or representing an interest in
mortgages and which have interest rates that are reset at periodic intervals.
ARMS are pass-through Mortgage-Backed Securities collateralized by mortgages
with adjustable rather than fixed interest rates. ARMS eligible for inclusion in
a mortgage pool generally provide for a fixed initial mortgage interest rate for
either the first three, six, twelve, thirteen, thirty-six or sixty scheduled
monthly payments. Thereafter, the interest rates are subject to periodic
adjustment based on changes to a designated benchmark index.

ARMS contain maximum and minimum rates beyond which the mortgage interest rate
may not vary over the lifetime of the security. In addition, certain ARMS
provide for limitations on the maximum amount by which the mortgage interest
rate may adjust for any single adjustment period. Alternatively, certain ARMS
contain limitations on changes in the required monthly payment. In the event
that a monthly payment is not sufficient to pay the interest accruing on an ARM,
any such excess interest is added to the principal balance of the mortgage loan,
which is repaid through future monthly payments. If the

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monthly payment for such an instrument exceeds the sum of the interest accrued
at the applicable mortgage interest rate and the principal payment required at
such point to amortize the outstanding principal balance over the remaining term
of the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.

The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal prepayments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund expects to invest a portion of its assets in
derivative Mortgage-Backed Securities such as Stripped Mortgage-Backed
Securities (defined herein) which are highly sensitive to changes in prepayment
and interest rates. The Adviser will seek to manage these risks (and potential
benefits) by investing in a variety of such securities and through hedging
techniques.

Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-Backed
Securities may decrease in value as a result of increases in interest rates and
may benefit less than other fixed income securities from declining interest
rates because of the risk of prepayment.

The Fund's yield will also be affected by the yields on instruments in which
the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full.

GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The Fund will invest in mortgage
pass-through securities representing participation interest in pools of
residential mortgage loans originated by U.S. governmental or private lenders or
guaranteed, to the extent provided in such securities, by the U.S. Government or
one of its agencies or instrumentalities. Such securities, which are a ownership
interests in the underlying mortgage loans, differ from conventional debt
securities, which provide for periodic payment of interest in fixed amounts
(usually semi-annually) and principal payments at maturity or on specified call
dates. Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayment) made

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by the individual borrowers on the pooled mortgage loans, net of any fees paid
to the guarantor of such securities and the servicer of the underlying mortgage
loans.

The guaranteed mortgage pass-through securities that the Fund will invest in
include those issued or guaranteed by GNMA, FNMA and FHLMC. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to security holders. GNMA
and FNMA also guarantee timely distribution of scheduled principal. FHLMC
guarantees only ultimate collection of principal on the underlying loans, which
collection may take up to one year. The Fund may also invest in other agency
securities, including but not limited to securities issued by the Small Business
Administration, Export-Import Bank of the United States, Federal Housing
Administration, Farm Credit Administration, Federal Home Loan Banks, General
Services Administration, U.S. Department of Transportation, U.S. Department of
Housing and Urban Development, and Student Loan Marketing Association. These
securities generally are not backed by the full faith and credit of the United
States.

PRIVATE MORTGAGE PASS-THROUGH SECURITIES. Private mortgage pass-through
securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement.

COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations ("CMOs") are debt obligations
which are secured by mortgage loans or other Mortgage-Backed Securities (such
collateral is collectively hereinafter referred to as "Mortgage Assets").
Multiclass pass-through securities are equity interests in a trust composed of
Mortgage Assets. Unless the context indicates otherwise, all references herein
to CMOs include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC"). All future references to CMOs
shall also be deemed to include REMICs. Adjustable rate U.S. Government CMOs are
adjustable rate U.S. Government Securities for purposes of the Fund's 65%
basket. There is no limit with respect to the percentage of the Fund's assets
that may be invested in CMOs.

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the underlying Mortgage Assets may cause the CMOs to be retired substantially
earlier than their stated maturities or final distribution dates. Interest is
paid or accrues on all classes of a CMO on a monthly, quarterly or semi-annual
basis. The principal of and interest on the Mortgage Assets may be allocated
among the several classes of a series of a CMO in many ways. By investing in
particular tranches of a CMO with specified cash flows, the Fund may gain more
predictability of cash flows than if it had invested in the underlying Mortgage
Assets. Generally, the more predictable the cash flow of a CMO tranche, the
lower the anticipated yield will be on that tranche at the time of issuance
relative to prevailing market yields on Mortgage-Backed Securities. As part of
the process of creating more predictable cash flows on most of the tranches in a
series of CMOs, one or more tranches generally must be created that absorb most
of the volatility in the cash flows on the underlying Mortgage Assets. The
yields on these tranches are generally higher than prevailing market yields on
Mortgage-Backed Securities with similar average lives. Because of the
uncertainty of the cash flows on these tranches, and the sensitivity thereof to
changes in prepayment rates on the underlying Mortgage Assets, the market prices
of and yield on these tranches tend to be more volatile.

One or more tranches of a CMO may have coupon rates which reset periodically
at a specified increment over an index such as LIBOR. These adjustable rate
tranches, known as "floating rate CMOs," "inverse floating CMOs" and "interest
only CMOs" will be considered as ARMS by the Fund. Floating rate CMOs may be
backed by fixed rate or adjustable rate mortgages; to date, fixed rate mortgages
have been more commonly utilized for this purpose. Floating rate CMOs are
typically issued with lifetime caps on the coupon rate thereon. These caps,
similar to the caps on adjustable rate mortgages, represent a ceiling beyond
which the coupon rate on a floating rate CMO may not be increased regardless of
increases in the interest rate index to which the floating rate CMO is geared.
Floating rate CMOs pay interest at rates that vary inversely with changes in
market rates of interest and may pay a rate of interest determined by applying a
multiple to the floating rate. Accordingly, when market rates of interest
decrease, the change in value of inverse floating CMOs owned by the Fund will
have a positive effect on the net asset value of the Fund and when market rates
of interest increase, the change in value of inverse floating rate CMOs owned by
the Fund will have a negative effect on the net asset value of the Fund. In
addition, the extent of increases and decreases in the net asset value of the
Fund in response to changes in market rates of interest generally will be larger
than comparable changes in the net asset value of the Fund if the Fund held an
equal principal amount of a fixed rate CMO security having similar credit
quality, redemption provisions and maturity.

The Fund also may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. The Fund will not, however,
invest in CMO residuals.

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STRIPPED MORTGAGE-BACKED SECURITIES. Stripped Mortgage-Backed Securities are
derivative multiclass mortgage securities. Stripped Mortgage-Backed Securities
may be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped Mortgage-Backed
Securities issued by parties other than agencies or instrumentalities of the
U.S. Government are considered, under current guidelines of the staff of the
Securities and Exchange Commission (the "SEC"), to be illiquid securities.

Stripped Mortgage-Backed Securities are structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving a small portion of the interest and a larger
portion of the principal from the Mortgage Assets, while the other classes will
receive primarily interest and only a small portion of the principal. In the
most extreme case, one class will receive all of the interest (the interest-only
or "IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). Adjustable rate U.S. Government IOs are
adjustable rate U.S. Government Securities for purposes of the Fund's 65%
investment policy. The yields to maturity on IOs and POs are sensitive to the
rate of principal payments (including prepayments) on the related underlying
mortgage assets, and principal payments may have a material effect on yield to
maturity. If the underlying Mortgage Assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment
in IOs. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. The market value of such Stripped Mortgage-Backed
Securities, including adjustable rate U.S. Government IOs, are subject to
greater risk of fluctuation in response to changes in market interest rates than
other adjustable rate securities, and such greater risk of fluctuation may
adversely affect the ability of the Fund to achieve its investment objective of
maintaining a relatively stable net asset value.

The Fund will invest in Stripped Mortgage-Backed Securities only when the
Adviser believes that such securities, when combined with the Fund's other
portfolio investments, would enable the Fund to seek to achieve its investment
objective of high current income consistent with a relatively stable net asset
value. The Fund will not invest, in the aggregate, more than 15% of its total
assets in such Stripped Mortgage-Backed Securities together with inverse
floating obligations.

TYPES OF CREDIT SUPPORT. To lessen the effect of failures by obligors on
underlying mortgages to make payments, ARMS and other Mortgage-Backed Securities
may contain elements of credit support. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through

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guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.

The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.

Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment on the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets. Other
information which may be considered include demographic factors, loan
underwriting practices and general market and economic conditions. Delinquency
or loss in excess of that which is anticipated could adversely affect the return
on an investment in such a security.

ASSET-BACKED SECURITIES

"Asset-Backed Securities" have structural characteristics similar to
Mortgage-Backed Securities but have underlying assets that are not mortgage
loans or interests in mortgage loans. Through the use of trusts and special
purpose corporations, various types of assets, primarily automobile and credit
card receivables and home equity loans, have been securitized in pass-through
structures similar to the mortgage pass-through structures or in a pay-through
structure similar to the CMO structure. In general, these types of loans are of
shorter average life than mortgage loans and are less likely to have substantial
prepayments. There is no limitation with respect to the percentage of the Fund's
assets that may be invested in asset-backed securities.

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<PAGE> 241

another party, there is a risk that the purchaser would acquire an interest
superior to that of the holders of the related Asset-Backed Securities. In
addition, because of the large number of vehicles involved in a typical issuance
and technical requirement under state laws, the trustee for the holders of
Asset-Backed Securities backed by automobile receivables may not have a proper
security interest in the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.

CORPORATE AND OTHER DEBT OBLIGATIONS

The Fund may invest in corporate and other debt obligations rated at least Aa
by Moody's or S&P (or comparably rated by another nationally recognized rating
agency) or, if unrated, deemed to be of comparable credit quality by the
Adviser; the Fund may, however, invest up to 10% of its total assets in
securities rated A by Moody's or S&P. These debt securities may have adjustable
or fixed rates of interest and in certain instances may be secured by assets of
the issuer. Adjustable rate corporate debt securities may have features similar
to those of adjustable rate Mortgage-Backed Securities, but corporate debt
securities, unlike Mortgage-Backed Securities, are not subject to prepayment
risk other than through contractual call provisions which generally impose a
penalty for prepayment. Fixed rate debt securities may also be subject to call
provisions.

FOREIGN SECURITIES

The Fund may invest up to 10% of its assets in foreign debt securities. Since
foreign securities are normally denominated and traded in foreign currencies,
the values of the Fund's assets may be affected favorably or unfavorably by
changes in currency exchange rates and exchange control regulations. There may
be less information publicly available about a foreign company than about a U.S.
company, and foreign companies 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 companies, particularly foreign
securities that are principally traded in foreign markets, are less liquid and
at times more volatile than securities of comparable U.S. companies. 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 domestic investments.

In addition, with respect to certain foreign countries, there is a possibility
of nationalization or expropriation of assets, confiscatory taxation, political
or financial instability and diplomatic developments which could affect the
values of investments in those countries. In certain countries, legal remedies
available to investors may be more limited than those available with respect to
investments in the United States or other countries. The laws of some foreign
countries may limit the Fund's ability to invest in securities of certain
issuers located in those countries. The markets for certain foreign securities
in which the Fund may invest may be less developed than comparable U.S. markets,
and may therefore be less liquid and more volatile. Special tax considerations
apply to foreign securities.

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<PAGE> 242

The staff of the SEC currently considers Eurodollar instruments to be foreign
securities. Although the Fund does not believe that Eurodollar securities are
foreign securities, the Fund's investment in Eurodollar securities will be
subject to the 10% limitation with respect to foreign securities.

The Fund's investments in foreign securities also may include commercial paper
and certificates of deposit which are indexed to certain specific foreign
currency exchange rates. The terms of such commercial paper and certificates of
deposit provide that the principal amount is adjusted upwards or downwards (but
not below zero) at maturity to reflect fluctuations in the exchange rate between
two currencies while the obligation is outstanding, depending on the terms of
the specific security. The Fund will purchase such commercial paper and
certificates of deposit with the currency in which it is denominated and, at
maturity, will receive interest and principal payments thereon in that currency,
but the amount of principal payable by the issuer at maturity will vary in
proportion to the change (if any) in the exchange rate between the two specified
currencies between the date the instrument is issued and the date the instrument
matures. Such commercial paper and certificates of deposit may entail the risk
of loss of principal. The Fund's will invest in such securities only when the
Adviser believes that such securities, when combined with the Fund's other
portfolio instruments, would enable the Fund to seek to achieve its objective of
high current income consistent with a relatively stable net asset value.

A more detailed explanation of foreign investments, and the risks associated
with them, is included in the Statement of Additional Information.

- --------------------------------------------------------------------------------
OTHER INVESTMENT PRACTICES
- --------------------------------------------------------------------------------

The Fund may also utilize various other investment strategies, policies and
practices as described below. Certain of these strategies may be used by the
Fund to earn income, facilitate portfolio management and mitigate risk. Such
strategies are generally accepted by modern portfolio managers and are regularly
utilized by many mutual funds and other institutional investors.

STRATEGIC TRANSACTIONS

The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income indices and other financial instruments, purchase and sell
financial futures contracts, enter into various interest rate transactions such
as swaps, caps, floors or collars, and enter into various currency transactions
such as currency forward contracts, currency futures contracts, currency swaps
or options on currency or currency futures. Collectively, all the above are
referred to as "Strategic Transactions." Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or currency exchange rate fluctuations, to protect the Fund's unrealized
gains in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to

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<PAGE> 243

manage the effective maturity or duration of the Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Strategic Transactions, other than
Strategic Transactions involving financial futures and options thereon, may also
be used to enhance potential gain although no more than 5% of the Fund's assets
will be committed to such Strategic Transactions for non-hedging purposes. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.

25
<PAGE> 244

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements with banks and broker-dealers,
under which the Fund purchases securities and agrees to resell the securities at
an agreed upon time and at an agreed upon price. Under the Investment Company
Act of 1940 (the "Investment Company Act"), repurchase agreements may be
considered collateralized loans by the Fund, and the difference between the
amount the Fund pays for the securities and the amount it receives upon resale
is accrued as interest and reflected in the Fund's net income. When the Fund
enters into repurchase agreements, it relies on the seller to repurchase the
securities. Failure to do so may result in a loss for the Fund if the market
value of the securities is less than the repurchase price. At the time the Fund
enters into a repurchase agreement, the value of the underlying security
including accrued interest will be equal to or exceed the value of the
repurchase agreement and, for repurchase agreements that mature in more than one
day, the seller will agree that the value of the underlying security including
accrued interest will continue to be at least equal to the value of the
repurchase agreement. In determining whether to enter into a repurchase
agreement with a bank or broker-dealer, the Fund will take into account the
creditworthiness of such party. In the event of default by such party, the Fund
may not have a right to the underlying security and there may be possible delays
and expenses in liquidating the security purchased, resulting in a decline in
its value and loss of interest. The Fund will use repurchase agreements as a
means of making short-term investments, and may invest in repurchase agreements
of duration of seven days or less without limitation. The Fund's ability to
invest in repurchase agreements that mature in more than seven days is subject
to an investment restriction that limits the Fund's investment in "illiquid"
securities, including such repurchase agreements, to 15% of the Fund's net
assets.

DOLLAR ROLLS

In order to seek a high level of current income, the Fund may enter into
dollar rolls in which the Fund sells securities for delivery in the current
month and simultaneously contracts to repurchase, typically in 30 or 60 days,
substantially similar (same type and coupon) securities on a specified future
date from the same party at an agreed upon price which is less than the sales
price. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The cash proceeds from the sale will be maintained by the Fund in
a segregated account with its custodian in which cash, U.S. Government
Securities or other liquid high-grade debt obligations will be equal in value to
its obligations. Because such assets are maintained in a segregated account, the
Fund will not treat such obligations as senior securities for purposes of the
Investment Company Act. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or cash equivalent security position
which matures on or before the forward settlement date of the dollar roll
transaction. "Covered rolls" are not subject to these segregation requirements.

26
<PAGE> 245

REVERSE REPURCHASE AGREEMENTS AND BORROWINGS

The Fund may enter into reverse repurchase agreement with respect to
securities which could otherwise be sold by the Fund for temporary borrowing
purposes. Reverse repurchase agreements involve sales by the Fund of portfolio
assets concurrently with an agreement by the Fund to repurchase the same assets
at a later date at a fixed price which is greater than the sales price. The Fund
intends to invest in reverse repurchase agreements which are for less than 7
days. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement or dollar
roll files for bankruptcy or becomes insolvent, the Fund's use of the proceeds
of the agreement may be restricted pending a determination by the other party,
or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.

The Fund is authorized to borrow money from banks or enter into reverse
repurchase agreements and dollar rolls in an amount up to 33 1/3% of the Fund's
total assets (after giving effect to any such borrowing) which amount includes
no more than 5% in bank borrowings and reverse repurchase agreements for
temporary purposes, such as clearances of portfolio transactions, share
repurchases and payment of dividends and distributions. The Fund will borrow
only when the Adviser believes that such borrowings will benefit the Fund.

Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as changes in the net
asset value of the Shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
stockholders as dividends will be reduced.

SECURITIES LENDING

The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value of the securities loaned. During the time portfolio securities are
on loan, the borrower will pay the Fund an amount equivalent to any dividend or
interest paid on such securities and the Fund may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered equivalent collateral or secured a
letter of

27
<PAGE> 246

credit. Loans are subject to termination at the option of the Fund or the
borrower. The Fund may pay reasonable administration and custodial fees in
connection with a loan. As with any extensions of credit, there are risks of
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially. However, these loans of
portfolio securities will only be made to firms deemed by the Adviser to be
creditworthy and when the income which can be earned from such loans justifies
the attendant risks.

RESTRICTED AND ILLIQUID SECURITIES

The Fund may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. In addition, the Fund will treat certain
non-U.S. Government Stripped Mortgage-Backed Securities as illiquid securities
so long as the staff of the SEC maintains its position that such securities are
illiquid.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell portfolio securities on a "when issued"
and "delayed delivery" basis. No income accrues to the Fund on securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of the securities at delivery may be more or less than
their purchase price, and yields generally available on comparable securities
when delivery occurs may be higher or lower than yields on the securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Fund will make commitments to purchase securities on such basis only with
the intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis. To the

28
<PAGE> 247

extent the Fund engages in "when issued" and "delayed delivery" transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio
consistent with the Fund's investment objective and policies and not for the
purpose of investment leverage.

PORTFOLIO TURNOVER

While the Fund has no policy with respect to portfolio turnover, the Adviser
expects that, in normal market conditions, the Fund's annual portfolio turnover
rate will not exceed 200%. To the extent that the Fund's actual portfolio
turnover was 200%, such portfolio turnover would be considered high. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. While the Fund will pay commissions in connection
with options and futures transactions, the securities in which it invests are
generally traded on a net basis with dealers acting as principals for their own
account without a stated commission. Nevertheless, high portfolio turnover may
involve correspondingly greater brokerage commissions, tax consequences and
other transaction costs which will be borne directly by the Fund. See "Portfolio
Transactions and Brokerage Transactions" in the Statement of Additional
Information.

TEMPORARY DEFENSIVE POSITIONS

When the Adviser determines that market conditions warrant and deems it to be
in the best interest of the Fund, the Fund may, for temporary defensive
purposes, invest up to 100% of its total assets in (i) cash, (ii) U.S.
Government securities and (iii) money market instruments. When maintaining such
a temporary defensive position, the Fund's yield may be lower and, therefore, it
may be more difficult to achieve the Fund's investment objective of high current
income.

INVESTMENT RESTRICTIONS

The Fund is subject to certain investment restrictions which constitute
fundamental policies. Fundamental policies cannot be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act. See "Investment Policies
and Restrictions" in the Statement of Additional Information.

- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund currently offers three classes of shares to the public on a
continuous basis through Van Kampen American Capital Distributors, Inc. (the
"Distributor"), as principal underwriter, which is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered through members
of the National Association of Securities Dealers, Inc. ("NASD") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for

29
<PAGE> 248

investors ("brokers"). The Fund reserves the right to suspend or terminate the
continuous public offering at any time and without prior notice.

ALTERNATIVE SALES ARRANGEMENTS

The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares, and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts over $1
million, "Class B Shares" and "Class C Shares"). Class A Share accounts over
$1,000,000 or otherwise subject to a CDSC, Class B Shares and Class C Shares
sometimes are referred to herein collectively as "Contingent Deferred Sales
Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
It is presently the policy of the Distributor, the distributor of each class of
shares, not to accept any order for Class B Shares or Class C Shares in an
amount of $1,000,000 or more because it ordinarily will be more advantageous for
an investor making such an investment to purchase Class A Shares.

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Shares
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares or Class C Shares. If
such an investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares (discussed below). Investors who intend to hold
their shares for

30
<PAGE> 249

a significantly long time may not wish to continue to bear the ongoing
distribution and service expenses of Class C Shares which, in the aggregate,
eventually would exceed the aggregate amount of the initial sales charge and
distribution and service expenses applicable to Class A Shares, irrespective of
the fact that a CDSC would eventually not apply to a redemption of such Class C
Shares.

The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) SEC registration fees incurred by a class of shares; (iv) the expense of
administrative personnel and services as required to support the shareholders of
a specific class; (v) Trustees' fees or expense incurred as a result of issues
relating to one class of shares; (vi) accounting expenses relating solely to one
class of shares; and (vii) any other incremental expenses subsequently
identified that should be properly allocated to one or more classes of shares
that shall be approved by the SEC pursuant to an amended exemptive order. All
such expenses incurred by a class will be borne on a pro rata basis by the
outstanding shares of such class. All allocations of administrative expenses to
a particular class of shares will be limited to the extent necessary to preserve
the Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended.

31
<PAGE> 250

broker, dealer or financial intermediary must be transmitted to the Fund by such
broker, dealer or financial intermediary prior to such time in order for the
investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the purchase price due to the failure of the
Fund to receive a purchase order prior to such time must be settled between the
investor and the broker, dealer or financial intermediary submitting the order.
See "Net Asset Value."

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediary for certain services
or activities which are primarily intended to result in sales of shares of the
Fund. Fees may include payment for travel expenses, including lodging, incurred
in connection with trips taken by invited registered representatives and members
of their families to locations within or outside of the United States for
meetings or seminars of a business nature. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. The
Distributor may provide additional compensation to Edward D. Jones & Co. or an
affiliate thereof based on a combination of its sales of shares and increases in
assets under management. Such payments are made by the Distributor out of its
own assets. These programs will not change the price an investor will pay for
shares or the amount that the Fund will receive from such sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an initial sales charge which is a variable percentage of
the offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions with respect to sales of Class A
Shares. The sales charge is allocated between an investor's broker, dealer or
financial intermediary and the Distributor. As indicated previously, at the
discretion of the Distributor the entire sales charge may be reallowed to such
broker, dealer or financial intermediary. During the initial offering, the
Distributor will reallow such entire sales charge. The staff of the SEC has
taken the position that brokers, dealers

32
<PAGE> 251

or financial intermediaries who receive more than 90% or more of the sales
charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933.

<TABLE>
<CAPTION>
AMOUNT OF
SALES CHARGE
REALLOWED
TOTAL SALES CHARGE TO DEALERS
-------------------------- ------------
PERCENTAGE PERCENTAGE PERCENTAGE
SIZE OF TRANSACTION OF OFFERING OF NET OF OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- -------------------------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Less than $25,000........................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000.............. 2.75 2.83 2.50
$250,000 but less than $500,000............. 1.75 1.78 1.50
$500,000 but less than $1,000,000........... 1.50 1.52 1.25
$1,000,000 or more.......................... * * *
</TABLE>

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

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
sales charges through a combination of investments, rights of accumulation or a
letter of intent (even if an investor currently is not making an investment of a
size that normally would qualify for a quantity discount).

Investors, or their broker, dealer or financial intermediary, must notify the
Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company Act.

33
<PAGE> 252

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares, "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor agree to
refund the appropriate portion of their respective concessions to the Fund, the
sales charge on an investor's previous purchases made within 90 days may be
adjusted to the reduced sales charge under the Letter of Intent, and the
refunded concession will be used to purchase shares of the designated Fund or
funds at the public offering price next determined after receipt of such monies.
Each investment made after signing the Letter of Intent will be entitled to the
initial sales charge applicable to the total investment indicated in the Letter
of Intent. If an investor does not complete the necessary purchases under the
Letter of Intent within 13 months from the date of the first purchase included
thereunder, the sales charge will be adjusted upward, corresponding to the
amount actually purchased.

When an investor signs a Letter of Intent, Class A Shares of the Fund
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these Class A Shares cannot be sold or redeemed
until the Letter of Intent is satisfied or the additional sales charges have
been paid. If the total purchases made under the Letter of Intent, less
redemptions, equal or exceed the amount specified in the Letter of Intent, these
Class A Shares will no longer be restricted. If the total purchases, less
redemptions, exceed the amount so specified, and qualify an investor for a
further quantity discount, the Distributor and the investor's securities dealer
or broker will, upon request, remit their respective portions of the sales
concession and with that amount, purchase additional Class A Shares of the Fund
for the investor's account at the next determined public offering price. If an
investor does not complete the necessary purchases under the Letter of Intent,
the sales charges will be adjusted upward and if, after written notice, the
investor does not pay the increased sales charge, sufficient restricted Class A
Shares will be redeemed to pay such charge.

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<PAGE> 253

1. Unit Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund or ISC Shares with no minimum initial or subsequent investment
requirement, and with a lower sales charge if the administrator of an investor's
unit investment trust program meets certain uniform criteria relating to cost
savings by the Fund and the Distributor. The total sales charge for all
investments made from unit trust distributions will be 1% of the offering price
(1.01% of net asset value). Of this amount, the Distributor will pay to the
broker, dealer or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their securities broker or dealer or the
Distributor.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

(b) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment

35
<PAGE> 254

subadviser to any such fund or an affiliate of such subadviser; and such
persons' families and their beneficial accounts.

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) 1.00% with respect to Class A Shares
in an amount of $1 million or more; (ii) 3.00% with respect to Class B Shares
and (iii) 1.00% with respect to Class C Shares. Such compensation will not
change the price an investor will pay for

36
<PAGE> 255

CDSC Shares or the amount that the Fund will receive from such sale. Sales
compensation with respect to Class A Shares subject to a CDSC is set forth under
"Purchasing Shares of the Fund -- Initial Sales Charge Alternative."

In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account, that
have converted from Class B Shares, if any, and fourth of CDSC Shares held
longest during the period of time that a contingent deferred sales charge is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.

To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) at $10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to charge because of dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 2.00% (the applicable rate in the second year after
purchase).

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<PAGE> 256

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ---------------------------------------------------------- -------------------
<S> <C>
First..................................................... 3.00%
Second.................................................... 2.00%
Third..................................................... 1.00%
Fourth and after.......................................... 0.00%
</TABLE>

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<PAGE> 257

convert to Class A Shares, an equal pro rata portion of the Class B Shares in
the sub-account also will convert to Class A Shares. The holding period
applicable to the Class B Shares acquired through the use of the exchange
privilege (discussed below) shall be the holding period applicable to a Class B
Share of such Fund acquired other than through use of the exchange privilege.
For purposes of calculating the holding period applicable to a Class B Share of
the Fund prior to conversion, a Class B Share of the Fund issued in connection
with an exercise of the exchange privilege, or a series of exchanges, shall be
deemed to have been issued on the date on which the investor's order to purchase
the exchanged Class B Share was accepted or, in the case of a series of
exchanges, when the investor's order to purchase the original Class B Share was
accepted.

The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or a portion
of net investment income of the Fund attributable to each class of shares. Net
investment income consists of all interest income, dividends, other ordinary
income earned by the Fund on its portfolio assets and net short-term capital
gains, less all expenses of the Fund attributable to the class of shares in
question. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed to the extent permitted by
applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.

Distribution with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.

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<PAGE> 258

shares either through a fed wire or NSCC settlement. Shares remain entitled to
dividends through the day such shares are processed for payment on redemption.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the same class
valued at net asset value, without a sales charge, unless a shareholder elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.

- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to Van Kampen Merritt Funds, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001.
The request should indicate the number of shares to be redeemed by a particular
fund, the class designation of such shares, identify the account number and be
signed exactly as the shares are registered. If the amount being redeemed is in
excess of $50,000 or if the redemption proceeds will be sent to an address other
than the address of record, the signature(s) must be guaranteed by a member firm
of a principal stock exchange, a commercial bank or trust company which is a
member of the Federal Deposit Insurance Corporation, a credit union or a savings
association. The guarantee must state the words "Signature Guaranteed" along
with the name of the granting institution. Shareholders should verify with the
institution that it is an eligible guarantor prior to signing. A guarantee from
a notary public is not acceptable. If certificates are held for the shares being
redeemed, such certificates must be sent and endorsed for transfer or
accompanied by an endorsed stock power. Share certificates should be sent by
registered mail to National Financial Data Services, 1004 Baltimore Avenue,
Sixth Floor, Kansas City, MO 64105-1807. Shareholders will receive the net asset
value per share next computed after the Transfer Agent receives the redemption
request and certificates (if any) in proper form. Any applicable contingent

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<PAGE> 259

deferred sales charge with respect to CDSC Shares redeemed will be deducted from
the redemption proceeds prior to transmittal of such proceeds to the
shareholder.

TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For inquiries through Telecommunications Device for the Deaf (TDD),
dial 1-800-772-8889. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the investor. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")
must be completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association unless the
Authorization is completed at the time an account is originally established. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. A redemption requested by telephone will be processed at the net
asset value next determined after receipt of the request. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder. The proceeds will then be made payable to the registered
shareowner(s) and mailed to the address registered on the account or wired to a
bank, as requested on the Authorizations. Investors cannot redeem shares by
telephone if certificates are held for those shares. This service is not
available with respect to shares held in an Individual Retirement Account for
which State Street Bank and Trust Company acts as custodian. In addition, this
service is not available with respect to shares purchased by check until 15 days
after purchase.

By establishing the telephone redemption service, an investor authorizes the
Transfer Agent or its agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If an investor is unable to reach the Fund by
telephone, he or she may redeem shares pursuant to the procedures set forth
above under the caption "Written Redemption Request." During

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<PAGE> 260

periods of extreme economic or market changes, it may be difficult for investors
to reach the Fund by telephone and to effect telephone redemptions.

REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
transmit the request to the Distributor. Shareholders will receive the net asset
value next determined after an investor places the sell order. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder. It is the responsibility of the shareholder's broker, dealer or
financial intermediary to transmit the redemption order to the Distributor.
Because the Fund generally will determine net asset value once each business day
as of the close of business, sell orders placed through an investor's broker,
dealer or financial intermediary must be transmitted to the Distributor by such
broker, dealer or financial intermediary prior to such time in order for the
investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the redemption price due to the failure of
the Distributor to receive a sell order prior to such time must be settled
between the investor and the broker, dealer or financial intermediary submitting
the order. The Fund does not charge for this transaction (other than any
contingent deferred sales charge applicable to CDSC Shares). Shareholders must
submit a written redemption request in proper form to their securities dealer
within five business days after calling the dealer with the sell order. The
request should indicate the number of shares to be redeemed, the class
designation of such shares, identify the account number and the order or
confirmation number assigned to the trade, and be signed by the investor exactly
as the shares are registered. If the amount of the redemption exceeds $50,000 or
if the redemption will be sent to an address other than the address of record,
signature(s) must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association. The guarantee
must state the words "Signature Guaranteed" along with the name of the granting
institution. Shareholders should verify with the institution that it is an
eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent endorsed for transfer or accompanied by an endorsed
stock power. Certificates should be sent by registered mail to Van Kampen
Merritt Funds, c/o National Financial Data Services, 1004 Baltimore Avenue,
Sixth Floor, Kansas City, MO 64105-1807. Shareholders whose shares are held in
an Individual Retirement Account (IRA) for which State Street Bank and Trust
Company acts as custodian may not sell their shares through securities dealers.

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<PAGE> 261

furnishing the Secretary of Treasury with such proof as he or she may require,
the Fund will require satisfactory proof of disability before it determines to
waive the CDSC on Class B Shares.

GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charges)
ordinarily will be mailed to investors or their dealer, as the case may be,
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the investor within one business day. If any
shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.

The Fund reserves the right to redeem any investment if the value of an
account falls below $500. Before the Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $500.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same;

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<PAGE> 262

from time to time, however, the per share net asset value of the different
classes of shares may differ.

Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a sub-trust. Securities with remaining maturities of 60 days
or less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees. Any securities denominated in a currency other than U.S. dollars
will translated into U.S. dollars on the valuation date for net asset value as
of the day and time for determination of net asset value.

Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Trustees of the Trust. Such valuations and procedures will be
reviewed periodically by the Board of Trustees.

- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

THE ADVISER. Van Kampen American Capital Investment Advisory Corp. is the
investment adviser for the Fund. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. ("Van Kampen American Capital"). Van Kampen
American Capital is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

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<PAGE> 263

aggregate, not more than 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. Presently, and after giving
effect to the exercise of such options, no officer or trustee of the Fund owns
or would own 5% or more of the common stock of VK/AC Holding, Inc. The address
of the Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
sub-trust. Subject to the Trustees' authority, the Adviser and the Fund's
officers will supervise and implement the Fund's investment activities and will
be responsible for overall management of the Fund's business affairs. The Fund
will pay the Adviser a fee (accrued daily and paid monthly) equal to a
percentage of the average daily net assets of the Fund as follows:

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- --------------------------------------------------------------- -----------
<S> <C>
First $500 million............................................. 0.600%
Next $500 million.............................................. 0.550%
Next $2 billion................................................ 0.500%
Next $2 billion................................................ 0.475%
Next $2 billion................................................ 0.450%
Next $2 billion................................................ 0.425%
Thereafter..................................................... 0.400%
</TABLE>

Under its investment advisory agreement with the Adviser dated February 17,
1993, and approved by shareholders of the Fund at a meeting held on January 14,
1993, the Fund has agreed to assume and pay the charges and expenses of the
Fund's operations, including the compensation of the Trustees of the Trust
(other than those who are affiliated persons, as defined in the Investment
Company Act, of the Adviser, Van Kampen American Capital Distributors, Inc. or
Van Kampen American Capital, Inc.), the charges and expenses of independent
accountants, legal counsel, any transfer or dividend disbursing agent and the
custodian (including fees for safekeeping of securities), costs of calculating
net asset value, costs of acquiring and disposing of portfolio securities,
interest (if any) on obligations incurred by the Fund, costs of share
certificates, membership dues in the Investment Company Institute or any similar
organization, reports and notices to shareholders, costs of registering shares
of the Fund under the federal securities laws, miscellaneous expenses and all
taxes and fees to federal, state or other governmental agencies, excluding state
securities registration expenses.

PORTFOLIO MANAGEMENT. Robert J. Hickey, an Assistant Vice President of the
Adviser, is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Hickey has been employed by the Adviser for the last five years.

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<PAGE> 264

The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The securities in which the
Fund invests are traded principally in the over-the-counter market. In the
over-the-counter market, securities generally are traded on a net basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the price,
a fixed amount of compensation for the managers, underwriters and dealers. The
Fund may also purchase certain money market instruments directly from an issuer,
in which case no commissions or discounts are paid. Purchases and sales of bonds
on a securities market are effected through brokers who charge a commission for
their services.

In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers which may be affiliated with the Fund, the Adviser, the Distributor or
dealers participating in the offering of the Fund's shares. In addition, in
selecting among firms to handle a particular transaction, the Adviser and the
Fund may take into account whether the firm has sold or is selling shares of the
Fund. See "Portfolio Transactions" in the Statement of Additional Information
for more information.
- --------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- --------------------------------------------------------------------------------

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<PAGE> 265

eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance. Brokers, dealers and financial
intermediaries that have entered into Selling Agreements with the Distributor
and sell shares of the Fund are referred to herein as "financial
intermediaries."

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<PAGE> 266

pursuant to the contingent deferred sales charge. In such event, with respect to
any such class of CDSC Shares, any unreimbursed expenses will be carried forward
and paid by the Fund (up to the amount of the actual expenses incurred) in
future years so long as such Distribution Plan is in effect. Except as mandated
by applicable law, the Fund does not impose any limit with respect to the number
of years into the future that such unreimbursed expenses may be carried forward
(on a Fund level basis). Because such expenses are accounted on a Fund level
basis, in periods of extreme net asset value fluctuation such amounts with
respect to a particular CDSC Share may be greater or less than the amount of the
initial commission (including carrying cost) paid by the Distributor with
respect to such CDSC Share. In such circumstances, a shareholder of such CDSC
Share may be deemed to incur expenses attributable to other shareholders of such
class. As of December 31, 1994, there were $109,453 and $7,318 of unreimbursed
distribution expenses with respect to Class B Shares and Class C Shares
respectively, representing 0.33% and 0.02% of the Fund's total net assets. If
the Distribution Plan was terminated or not continued, the Fund would not be
contractually obligated to pay the Distributor for any expenses not previously
reimbursed by the Fund or recovered through contingent deferred sales charges.

Because the Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts of the Trust. The Distributor will
endeavor to allocate such expenses among such funds in an equitable manner. The
Distributor will not use the proceeds from the contingent deferred sales charge
applicable to a particular class of CDSC Shares to defray distribution related
expenses attributable to any other class of CDSC Shares. Various federal and
state laws prohibit national banks and some state-chartered commercial banks
from underwriting or dealing in the Fund's shares. In addition, state securities
laws on this issue may differ from the interpretations of federal law, and banks
and financial institutions may be required to register as dealers pursuant to
state law. In the unlikely event that a court were to find that these laws
prevent such banks from providing such services described above, the Fund would
seek alternate providers and expects that shareholders would not experience any
disadvantage.
- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------

The following discussion reflects applicable federal income tax law, as of the
date of this Prospectus.

TAXATION OF THE FUND

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<PAGE> 267

limited to, gains from options, futures or forward contracts) derived with
respect to its business of investing in such stocks, securities or currencies.
For purposes of this requirement, the Treasury Department is authorized to issue
(but has not yet issued) regulations excluding from qualifying income foreign
currency gains that are not directly related to a regulated investment company's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities). The Fund expects that all of its foreign
currency gains will be directly related to its principal business of investing
in securities.

If the Fund qualifies as a regulated investment company and distributes each
year to its shareholders at least 90% of its net investment income (which
includes net short-term capital gains, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed to
shareholders. The Fund intends to distribute at least the minimum amount of net
investment income necessary to satisfy the distribution requirement. The Fund
will not be subject to federal income tax on any net capital gains distributed
to its shareholders. As a Massachusetts business trust, the Fund will not be
subject to any excise or income taxes in Massachusetts as long as it qualifies
as a regulated investment company for federal income tax purposes.

In order to avoid a nondeductible 4% excise tax the Fund will be required to
distribute, by December 31 of each year, at least 98% of its ordinary income for
such year and at least 98% of its capital gains net income (the latter of which
is generally computed on the basis of the one-year period ending on October 31
of such year), plus any amounts that were not distributed in previous taxable
years. For purposes of the excise tax, any ordinary income or capital gains net
income retained by, and subject to federal income tax in the hands of, the Fund
will be treated as having been distributed.

49
<PAGE> 268

Some of the Fund's investment practices, including those involving certain
risk management transactions and foreign currency transactions, may be subject
to special provisions of the Code that, among other things, defer the use of
certain losses of the Fund and affect the holding period of the securities held
by the Fund and the character of the gains or losses realized by the Fund. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as if they were closed out), which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirements for avoiding
federal income and excise taxes. Thus, these provisions could affect the amount,
timing and character of distributions to shareholders. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.

DISTRIBUTIONS

Distributions of the Fund's net investment income are taxable to shareholders
as ordinary income, whether paid in cash or reinvested in additional shares.
Distributions of the Fund's net capital gains ("capital gain dividends"), if
any, are taxable to a shareholder as long-term capital gains regardless of the
length of time the Shares have been held by such holder. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of
the shares held by the shareholders and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such shareholders (assuming
such Shares are held as a capital asset).

Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid during January of the
following year, will be treated as having been distributed by the Fund and
received by the shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as having been paid by the Fund
(except for purposes of the nondeductible 4% excise tax) during such taxable
year. In such case, shareholders will be treated as having received such
dividends in the taxable year in which the distribution is actually made.

The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund will not be eligible for the dividends received deduction for
corporations. Shareholders receiving distributions in the form of additional
Shares issued by the Fund will be treated for federal income tax purposes as
receiving a distribution in an amount equal to the fair market value of the
Shares received, determined as of the distribution date.

The Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to

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<PAGE> 269

the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
or who are otherwise subject to backup withholding.

SALE OF SHARES

Redeeming shareholders will recognize gain or loss in an amount equal to the
difference between the basis in their redeemed Shares and the amount received.
If such Shares are held as a capital asset, the gain or loss will be a capital
gain or loss and will be long-term if such Shares have been held for more than
one year. Any loss realized upon a taxable disposition of Shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gains dividends received with respect to such Shares.

GENERAL

The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own advisors regarding the
specific federal tax consequences of holding and disposing of Shares and any
proposed tax law changes. Distributions may be subject to treatment under state,
local and foreign tax laws which differ from federal income tax consequences.
- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent share certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.

SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, such shareholder's dividends
are being reinvested, a requested dollar amount may be paid from such account to
any person monthly, quarterly, semiannually or annually. The minimum amount that
may be withdrawn each period is $50: withdrawals will be made on the seventh
business day of the month in which they are scheduled to occur. Depending upon
the size of the payments requested and the fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the amounts in such account. If an investor acquires
additional shares of the Fund after joining the Systematic

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<PAGE> 270

Withdrawal Program, the investor must inform the Fund if he or she wants the new
shares to be subject to the Systematic Withdrawal Program by telephoning the
Fund at 1-800-341-2911.

With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares or, if the investor
does not join the program on the date of his or her initial investment, the net
asset value of the investor's Class B Shares on the date the investor elects to
participate in the Systematic Withdrawal Program. The Fund will waive the
contingent deferred sales charge applicable to Class B Shares redeemed pursuant
to the Fund's Systematic Withdrawal Programs.

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be able to be exchanged for ISC
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor
that offer an exchange privilege. Under the exchange privilege, the Fund offers
to exchange its Class A Shares for ISC Shares on the basis of relative net asset
value per share. Any ISC Shares exchanged into the Fund that have been charged a
sales load lower than the sales load applicable to Class A Shares of the Fund
will be charged the applicable sales load differential upon exchange. ISC Shares
of the Van Kampen Merritt Money Market Fund and Van Kampen Merritt Tax Free
Money Fund which have not previously been charged a sales load (except for
shares purchased via the reinvestment option) will be charged the applicable
sales load upon exchange into the Fund.

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<PAGE> 271

convert to Class A Shares. The exchange privilege with respect to any Van Kampen
Merritt money market fund sponsored by the Distributor is not available for
Class C Shareholders.

In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders will be able to effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time and requesting the exchange. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. The exchange
will be processed at the net asset value next determined after receipt of such
request. By utilizing the telephone exchange service, a shareholder authorizes
the Fund or the Transfer Agent to act upon the instructions of any person by
telephone to exchange shares from any account for which such service has been
authorized to any identically registered account(s) with any Van Kampen Merritt
fund distributed by the Distributor that offers an exchange privilege. The Fund,
the Distributor, the Transfer Agent and NFDS seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to exchange
shares by telephone to provide on a recorded line the name on the account, a
social security or tax identification number and such additional information as
may be deemed necessary or appropriate. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If a shareholder has certificates for any shares
being exchanged, such certificates must be surrendered prior to the exchange in
the same manner as in redemption of such shares. See "Redemption of
Shares--Telephone Redemptions." Any shares exchanged between the Fund and any of
the other funds will begin earning dividends on the next business day after the
exchange is effected. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).

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<PAGE> 272

to the account on the second business day following normal payment. In order to
utilize this option, the shareholder's bank must be a member of Automated
Clearing House. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once the Transfer Agent has
received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing the Transfer
Agent.

2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.

3. Dividend Diversification (Class A Shares Only). Monthly distributions and
any net long-term capital gain distributions to a shareholder's account may be
invested in the same class of shares of any other Van Kampen Merritt mutual fund
distributed by the Distributor at the then current net asset value, WITHOUT A
SALES CHARGE, upon election by a shareholder. This election may be made on the
account application, by written notice to the Transfer Agent or by calling the
Fund directly at 1-800-341-2911, during the hours of 7:00 a.m. to 7:00 p.m.
Central Standard Time. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889. In order to qualify for this privilege, a
shareholder must have established an account in the other mutual fund prior to
electing this privilege. This privilege may be modified or terminated by the
Fund at any time.

4. Easy Account Savings Enhancement Plan (EASE(SM)). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
account application or the EASE(SM) application which is available from the
Transfer Agent, the Fund, such shareholder's broker or dealer or the
Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASE(SM) program, a shareholder may
change the monthly amount or terminate participation at any time by writing or
calling the Transfer Agent. Shareholders in the EASE(SM) program will receive a
confirmation of these transactions from the Fund monthly and their regular bank
account statements will show the debit transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the account application in performing such services by
either withdrawing funds for deposit in the Fund pursuant to the EASE(SM) Plan
or depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election and/or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the

54
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Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or Shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.

Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss being disallowed under the "wash sale" rules.
- --------------------------------------------------------------------------------
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS
- --------------------------------------------------------------------------------

Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:

- Individual Retirement Accounts (IRA's) for individuals.

- Simplified Employee Pension Plans (SEP's) for employees.

- Qualified plans for self-employed individuals.

- Qualified corporate pension and profit-sharing plans for employees.

The purchase of Shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment,
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan, is $250.

55
<PAGE> 274

Shareholder considering establishing a retirement plan or purchasing shares of
the Fund in connection with a retirement plan should consult with their attorney
or tax adviser with respect to plan requirements and tax aspects pertaining to
them.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------

56
<PAGE> 275

separately for each class of shares. In lieu of or in addition to total return
and yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.

From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City, MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Fund, an account will be opened for each shareholder on the Fund's books and
shareholders will receive a confirmation of the opening of the account.
Shareholders will receive monthly statements giving details of all activity in
their account and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal income tax
purposes will be provided at the end of the year. Such statements will present
separately information with respect to each class of the Fund's shares. It is
expected that the transfer agency costs attributable to the Class B Shares and
the Class C Shares will be higher than the transfer agency costs attributable to
the Class A Shares.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------

The Fund is a sub-trust of the Van Kampen Merritt Trust, a Massachusetts
business trust organized March 14, 1986 (the "Trust"). Shares of the Trust
entitle their holders to

57
<PAGE> 276

one vote per share; however, separate votes are taken by each sub-trust on
matters affecting an individual sub-trust.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without par value, divided into classes. The Fund
currently offers three classes, designated Class A Shares, Class B Shares and
Class C Shares. Each class of shares represents an interest in the same assets
of the Fund and are identical in all respects except that each class bears
certain distribution expenses and has exclusive voting rights with respect to
its distribution fee. See "The Distribution and Service Plans."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of share is equal as to earnings, assets
and voting privileges, except as noted above, and each class bears the expenses
related to the distribution of its shares. There are no conversion, preemptive
or other subscription rights, except with respect to the conversion of Class B
Shares into Class A Shares as described above. In the event of liquidation, each
of the shares of the Fund is entitled to its portion of all of the Fund's net
assets after all debt and expenses of the Fund have been paid. Since Class B
Shares and Class C Shares pay higher distribution expenses, the liquidation
proceeds to Class B Shareholders and Class C Shareholders are likely to be lower
than to other shareholders.

The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may be written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

The fiscal year of the Fund ends on June 30. The Fund sends to its
shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
Independent Auditors, is sent to shareholders each year. After the end of each
year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.

Shareholder inquiries should be directed to Van Kampen Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn: Correspondence. Its
telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.

58
<PAGE> 277

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

59
<PAGE> 278

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS DEVICE
FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344

VAN KAMPEN MERRITT
ADJUSTABLE RATE
U.S. GOVERNMENT FUND
One Parkview Plaza

Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza

Oakbrook Terrace, IL 60181

Distributor

VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza

Oakbrook Terrace, IL 60181

Transfer Agent

STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt Funds

Legal Counsel

SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 279

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND

Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") is a
diversified separate sub-trust of the Van Kampen Merritt Trust, a Massachusetts
business trust (the "Trust"), an open-end management investment company. The
Fund's investment objective is to seek a high level of current income consistent
with a relatively stable net asset value. The Fund will seek to achieve its
investment objective by investing primarily in securities that are issued or
guaranteed by the U.S. Government or its agencies or instrumentalities ("U.S.
Government Securities") and which have interest rates which are reset at
periodic intervals. In current market conditions, the Fund expects that
substantially all of the U.S. Government Securities in which the Fund will
invest consist of adjustable rate mortgage-backed securities ("ARMS") or other
securities collateralized by or representing an interest in mortgages and which
have interest rates which reset at periodic intervals. The net asset value and
yield of the Fund will fluctuate depending on market conditions and other
factors. However, by investing primarily in adjustable rate securities the Fund
seeks to achieve less fluctuation in net asset value than a portfolio that
invests in fixed rate securities. There is no assurance that the Fund will
achieve its investment objective.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling 1-800-225-2222 ext. 6504. This Statement of Additional Information
incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Officers and Trustees................................................................. B-16
Investment Advisory and Other Services................................................ B-19
Portfolio Transactions and Brokerage Transactions..................................... B-21
Tax Status of the Fund................................................................ B-22
The Distributor....................................................................... B-22
Legal Counsel......................................................................... B-23
Performance Information............................................................... B-24
Unaudited Financial Statements........................................................ B-26
Notes to the Unaudited Financial Statements........................................... B-30
Independent Auditors' Report.......................................................... B-33
Audited Financial Statements.......................................................... B-34
Notes to Audited Financial Statements................................................. B-38
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

<PAGE> 280

THE FUND AND THE TRUST

The Fund is a separate diversified sub-trust of the Trust, an open-end
management investment company. At present, the Fund, Van Kampen Merritt
Short-Term Global Income Fund, Van Kampen Merritt High Yield Fund, Van Kampen
Merritt Strategic Income Fund and Van Kampen Merritt Emerging Markets Income
Fund are the only other sub-trusts of the Trust, although other sub-trusts may
be organized and offered in the future.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting.

Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.

INVESTMENT POLICIES AND RESTRICTIONS

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. With respect to 75% of its total assets, purchase any security (other than
obligations of the U.S. Government or its agencies or instrumentalities)
if, as a result more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested in securities of a single
issuer or, if as a result, the Fund would own more than 10% of the
outstanding voting securities of any one issuer.

2. Issue senior securities, borrow money or enter into reverse repurchase
agreements or dollar rolls in the aggregate in excess of 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing); provided,
however, that with respect to such amount no more than 5% may be invested
in bank borrowings and reverse repurchase agreements. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.

B-2
<PAGE> 281

3. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except in connection with hedging or risk management transactions.

4. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions). Neither
the deposit nor the payment by the Fund of initial or variation margin in
connection with hedging or risk management transaction is considered the
purchase of a security on margin.

5. Act as underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of
portfolio securities under certain federal securities laws.

6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell mortgaged-backed securities, securities
collateralized by or representing an interest in mortgages, securities
which are secured by real estate, securities of companies which invest or
deal in real estate and publicly traded securities of real estate
investment trusts.

7. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell futures contracts and options thereon in connection with
hedging or risk management transactions.

8. Make loans, except through the purchase of securities consistent with the
Fund's investment objective and policies, the acquisition of securities
subject to repurchase agreement or loans of portfolio securities.

9. Make investments for the purpose of exercising control or management of
any company other than a CMO issuer.

10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage
commissions and investment in such securities will not be in excess of the
amount permitted by the 1940 Act, (determined at the time of investment),
or except as part of a merger, consolidation or other acquisition.

11. Invest in equity interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.

12. Invest more than 25% of its assets in a single industry. (Neither the U.S.
Government nor any of its agencies or instrumentalities will be considered
an industry for purposes of this restriction).

The foregoing fundamental policies may not be changed without the approval of
a majority of the Fund's voting securities which requires the approval of the
lesser of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the
Fund's outstanding Shares present at a meeting at which the holders of more than
50% of the outstanding shares are present in person or by proxy. As long as the
percentage restrictions described above are satisfied at the time of the
investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed.

Whenever any fundamental investment policy or investment restriction states a
maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.

B-3
<PAGE> 282

quotations), will not be treated as restricted securities by the Fund pursuant
to such rules. The Fund may, from time to time, adopt a more restrictive
limitation with respect to investment in illiquid and restricted securities in
order to comply with the most restrictive state securities law, currently 10%.
This policy does not include restricted securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933, as amended, which the Board of
Trustees or the Fund's investment adviser has determined under Board-approved
guidelines to be liquid. The Fund's policy with respect to investment in
illiquid and restricted securities is not a fundamental policy and may be
changed by the Board of Trustees, in consultation with the adviser, without
obtaining shareholder approval.

ADDITIONAL INVESTMENT CONSIDERATIONS

The following information supplements the information provided in the
Prospectus under the headings "Investment Objective and Policies" and "Other
Investment Practices."

MORTGAGE-BACKED SECURITIES

U.S. Government Agency Mortgage-Backed Securities. The Fund may invest in
Mortgage-Backed Securities which are issued or guaranteed by the U.S. Government
or its agencies and instrumentalities such as Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) or Federal Home
Loan Mortgage Corporation (FHLMC). Mortgage-Backed Securities may represent an
undivided ownership interests in pools of mortgages. The mortgages backing these
securities may include conventional 30-year fixed rate mortgages, 15-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. The
U.S. Government or the issuing agency guarantees the payment of the interest on
and principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities are in most cases "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees. Because the
principal amounts of such underlying mortgages may generally be prepaid in whole
or in part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-Backed Securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying mortgage obligations. The remaining maturity of a
Mortgage-Backed Security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Adviser on the basis of
assumed prepayment rates with respect to such mortgages. The remaining expected
average life of a pool of mortgages underlying a Mortgage-Backed Security is a
prediction of when the mortgages will be repaid and is based upon a variety of
factors such as the demographic and geographic characteristics of the borrowers
and the mortgaged properties, the length of time that each of the mortgages has
been outstanding, the interest rates payable on the mortgages and the current
interest rate environment. While the timing of prepayments of graduated payment
mortgages differs somewhat from that of conventional mortgages, the prepayment
experience of graduated payment mortgages is basically the same as that of the
conventional mortgages of the same maturity dates over the life of the pool.

During periods of declining interest rates, prepayment of mortgages underlying
Mortgage-Backed Securities can be expected to accelerate. When the mortgage
obligations are prepaid, the Fund reinvests the prepaid amounts in other income
producing securities, the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
Mortgage-Backed Securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid Mortgage-Backed Securities. Moreover, prepayments of
mortgages which underlie securities purchased by the Fund at a premium would
result in capital losses.

U.S. Government Securities are considered among the most creditworthy of fixed
income investments. The yields available from U.S. Government Securities are
generally lower than the yields available from corporate debt securities. The
values of U.S. Government Securities will change as interest rates fluctuate. To
the extent U.S. Government Securities are not adjustable rate securities, these
changes in value in response to changes in

B-4
<PAGE> 283

interest rates generally will be more pronounced. During periods of falling
interest rates, the values of outstanding long-term fixed rate U.S. Government
Securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
Although changes in the value of U.S. Government securities will not affect
investment income from those securities, they may affect the net asset value of
the Fund.

At a time when the Fund has written call options on a portion of its U.S.
Government Securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distribution.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities. See "--Other Investment Strategies--Options Transactions
and Related Risks."

GNMA Certificates. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veteran's Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.

GNMA Certificates will represent a pro rata interest in one or more pools of
the following types of mortgage loans: (i) fixed rate level payment mortgage
loans, (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-
to four-family housing units.

FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.

Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. government.

B-5
<PAGE> 284

agency) of the following types: (i) fixed rate level payment mortgage loans;
(ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated
payment mortgage loans; (iv) variable rate California mortgage loans; (v) other
adjustable rate mortgage loans; and (vi) fixed rate loans secured by multifamily
projects.

FHLMC Certificates. FHLMC is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily Freddie Mac Certificates.

FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the rate provided for by such FHLMC Certificate, whether
or not received. Freddie Mac also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer, or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligation of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. government.

FHLMC Certificates represent a pro rata interest in a group of mortgage loans
(a "FHLMC Certificate group") purchased by FHLMC. The mortgage loans underlying
the FHLMC Certificates will consist of fixed rate or adjustable rate mortgage
loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.

Collateralized Mortgage Obligations. In reliance on an SEC interpretation, the
Fund's investment in certain qualifying collateralized mortgage obligations
(CMOs), including CMOs that have elected to be treated as Real Estate Mortgage
Investment Conduits (REMICs), are not subject to the Investment Company Act's
limitation on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, the CMOs and REMICs must be unmanaged,
fixed-asset issuers that (a) invest primarily in mortgage-backed securities, (b)
do not issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act, and (d) are
not registered or regulated under the Investment Company Act as investment
companies. To the extent that the Fund selects CMOs or REMICs that do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.

ADJUSTABLE RATE SECURITIES

Interest Rate Indices. The interest rates on adjustable rate securities are
generally reset periodically in accordance with rates determined by reference to
specific indices.

The One Year Constant Maturity Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year.

The Cost of Funds Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks whose home offices are located
in Arizona, California and Nevada (the "FHLB Eleventh District") that are member
institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of San
Francisco"), as computed from statistics tabulated and published by the FHLB of
San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.

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A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific rates, such as the One Year Constant Maturity Treasury Index.
Because of the various origination dates and maturities of the liabilities of
member institutions of the FHLB Eleventh District upon which the Cost of Funds
Index is based, among other things, at any time the Cost of Funds Index may not
reflect the average prevailing market interest rates on new liabilities of
similar maturities. There can be no assurance that the Cost of Funds Index will
necessarily move in the same direction as prevailing interest rates since as
longer term deposits or borrowings mature and are renewed at market interest
rates, the Cost of Funds Index will rise or fall depending upon the differential
between the prior rates and the new rates on such deposits and borrowings. In
addition, dislocations in the thrift industry in recent years have caused and
may continue to cause the cost of funds of thrift institutions to change for
reasons unrelated to changes in general interest rate levels. Furthermore, any
movement in the Cost of Funds Index as compared to other indices based upon
specific interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield to holders later than would be produced by such other
indices, and in a period of declining interest rates, the Cost of Funds Index
may remain higher than other market interest rates. This Cost of Funds Index may
result in a higher level of principal prepayments on mortgage loans which adjust
in accordance with the Cost of Funds Index than mortgage loans which adjust in
accordance with other indices.

The London Interbank Offered Rate Index ("LIBOR") is the rate at which banks
in London offer Eurodollars in trades between banks. LIBOR has become a key rate
in the U.S. domestic money market because it is perceived as reflecting the true
global cost of money.

FOREIGN SECURITIES

The Fund may invest up to 10% of its total assets in securities principally
traded in markets outside the United States. Foreign investments can be affected
favorably or unfavorably by changes in currency exchange rates and in exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. To hedge
against possible variations in foreign exchange rates, the Fund may purchase and
sell forward foreign currency contracts. These represent agreements to purchase
or sell specified currencies at specified dates and prices. The Fund will only
purchase and sell forward foreign currency contracts in amounts the Adviser
deems appropriate to hedge existing or anticipated portfolio positions and will
not use such forward contracts for speculative purposes. Foreign securities,
like other assets of the Fund, will be held by the Fund's custodian or by a
subcustodian. The Fund's investment in foreign securities also may include
commercial paper and certificates of deposit which are indexed to certain
specific foreign currency exchange rates. The staff of the Securities and
Exchange Commission (the "SEC") currently is considering whether the Fund's
purchase of this type of commercial paper and certificates of deposit would
result in the issuance of a "senior security" within the meeting of the 1940
Act. The Fund believes that such investments do not involve the creation of such
a senior security, but nevertheless undertakes, pending the resolution of this
issue by the staff, to establish a segregated account with respect to its
investments in this type of commercial paper and certificates of deposit and to
maintain in such account cash not available for investment in U.S. government
securities or other liquid high quality debt securities having a value equal to
the aggregate principal amount of outstanding commercial paper and certificates
of deposit of this type. See "--Other Investment Strategies--Transactions" for
additional information.

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OTHER INVESTMENT STRATEGIES

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General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."

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Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank in
New York as "primary dealers", broker dealers, domestic or foreign banks or
other financial institutions which have received a short-term credit rating of
A-1 from Standard & Poor's Ratings Group ("S&P") or P-1 from Moody's Investor
Services, Inc. ("Moody's") or any equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that the amount of the Fund's obligation pursuant
to an OTC option is illiquid, and is subject to the Fund's limitation on
investing no more than 15% of its assets in illiquid instruments.

The Fund may purchase and sell call options on U.S. Treasury and agency
securities, foreign sovereign debt, mortgage-backed securities, corporate debt
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and related futures on
such securities other than futures on individual corporate debt securities. All
calls sold by the Fund must be "covered" or must meet the asset segregation
requirements described below as long as the call is outstanding (i.e., the Fund
must own the securities or futures contract subject to the call). Even though
the Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security and may require the Fund to hold a security which it might otherwise
have sold.

The Fund may purchase and sell put options that relate to U.S. Government
Securities, Mortgage-Backed Securities, foreign sovereign debt, corporate debt
securities and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) or futures on such securities other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under its hedging,
duration management, risk management, and other Strategic Transactions other
than those with respect to futures and options thereon. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price.

General Characteristics of Futures. The Fund may purchase and sell financial
futures contracts or purchase put and call options on such futures as a hedge
against anticipated interest rate, currency market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract.

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contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position will be
offset prior to settlement and that delivery will not occur.

Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and, in so doing can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser.

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Risks of Currency Transactions. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and any combination
of futures, options and currency transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.

Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.

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A collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.

Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked. The staff of the SEC currently considers
Eurodollar instruments to be foreign securities. Although the Fund does not
believe that Eurodollar securities are foreign securities, the Fund's investment
in Eurodollar securities will be subject to the 10% limitation in foreign
securities.

Risks of Strategic Transactions Outside the United States. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.

Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or an amount of
cash or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by the
Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.

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REPURCHASE AGREEMENTS

REVERSE REPURCHASE AGREEMENTS

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date. The value of underlying securities will be at least equal at all times to
the total amount of the resale obligation, including the interest factor. The
Fund receives payment for such securities only upon physical delivery or
evidence of book entry transfer by its custodian. Regulations of the Securities
and Exchange Commission (the "SEC") require either that securities sold by the
Fund under a reverse repurchase agreement be segregated pending repurchase or
that the proceeds be segregated on the Fund's books and records pending
repurchase. Reverse repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.

SECURITIES LENDING

"WHEN-ISSUED" AND "DELAYED DELIVERY" SECURITIES

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purchaser during this period. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Fund. At the time of delivery
of the securities, the value may be more or less than the purchase price. The
Fund will also establish a segregated account with the Fund's custodian bank in
which it will continuously maintain cash, U.S. Government Securities or other
liquid high-grade debt portfolio securities equal in value to commitments for
such when-issued or delayed delivery securities; subject to this requirement,
the Fund may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value. The investment adviser does not believe that the Fund's net
asset value or income will be adversely affected by the Fund's purchase of
securities on such basis.

MONEY MARKET INSTRUMENTS

The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or foreign company or foreign government;
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks; and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated. Commercial paper will be rated, at the time of purchase, at least
A-2 by S&P or Prime-2 by Moody's, or, if not rated, issued by an entity having
an outstanding unsecured debt issue rated at least A or A-2 by S&P or A or
Prime-2 by Moody's.

OFFICERS AND TRUSTEES

The officers and trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with Van Kampen American Capital Investment Advisory Corp. (the "Adviser"),
Van Kampen American Capital Asset Management, Inc., Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc., Van Kampen American
Capital, Inc. or VK/AC Holding, Inc., are as follows:

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc. and Van Kampen American Capital Management, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

R. CRAIG KENNEDY, Trustee
Dennis Trading Group Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606.
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President, Chief Executive Officer, Director and member of
the Investment Committee of the Joyce Foundation, a private foundation.

PHILIP P. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co., Inc.

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DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, Florida 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March, 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

EDWARD C. WOOD, III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc., Van Kampen American Capital, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

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WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.
- ----------------
* Interested persons of the Fund as defined in the 1940 Act.

The compensation of the officers and Trustees who are affiliated persons (as
defined in the Investment Company Act of 1940) of the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. is paid
by the respective entity. The Fund pays the compensation of all other officers
and Trustees. During the next year, the Fund expects to pay Trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc. $2,500, plus $250 per meeting of the
Board of Trustees, plus expenses. Under the Fund's retirement plan, trustees who
are not affiliated with the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc., have at least ten years of service
and retire at or after attaining the age of 60, are eligible to receive a
retirement benefit equal to the annual retainer for each of the ten years
following such trustee's retirement. Under certain conditions, reduced benefits
are available for early retirement. Under the Fund's deferred compensation plan,
a trustee who is not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. can elect to defer
receipt of all or a portion of the trustee's fees earned by such trustee until
such trustee's retirement. The deferred compensation earns a rate of return
determined by reference to the Fund or other Van Kampen Merritt mutual funds
advised by the Adviser as selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other Van Kampen Merritt
mutual funds advised by the Adviser in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $14,849 $0 $2,500 $62,362
Philip G. Gaughan.............. 13,757 0 2,500 63,250
Donald C. Miller............... 18,172 0 2,500 62,178
Jack A. Nelson................. 18,228 0 2,500 62,362
Jerome L. Robinson............. 18,198 0 2,500 58,475
Wayne W. Whalen................ 4,078 0 2,500 49,875
</TABLE>

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

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As of April 13, 1995, the trustees and officers as a group owned less than 1%
of the Shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the Common Stock of VK/AC Holding, Inc.

The authorized stock of the Fund currently consists of an unlimited number of
full and fractional shares of beneficial interest, without par value.

As of April 13, 1995 the following persons owned of record or beneficially 5%
or more of the Fund's Class A Shares: R&N Associates, c/o Glen Neubert, 4100
McEwen Road, Dallas, TX 75244-5107, 17%.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class B Shares: Chicago Board of Education, Attn: Treasury
Dept. 6 West, 1918 W. Pershing Road, Chicago, IL 60609-2321, 13%.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C shares: Putnam Savings Bank, A Corporation, P.O.
Box 151, Putnam, CT 06260-0151, 32%; Painewebber for the benefit of Breakstone
Investment Partners, Ltd., 19500 Collins Avenue, N. Miami Beach, FL 33160-2259,
15%; and Chicago Board of Education, Attn. Treasury Dept. 6 West, 1918 W.
Pershing Rd., Chicago, IL 60609-2321, 17%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The
Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc.

B-19
<PAGE> 298

VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of stock options, no
officer or trustee of the Fund owns or would own 5% or more of the common stock
of VK/AC Holding, Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.

The Adviser's activities are subject to the review and supervision of the
trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.

The investment advisory agreement was approved by the shareholders of the Fund
at a shareholders meeting held on January 14, 1993. Accordingly, the agreement
will remain in effect from year to year if specifically approved by the trustees
of the Trust, of which the Fund is a separate sub-trust (or by the Fund's
shareholders), and by the disinterested trustees in compliance with the
requirements of the 1940 Act. The agreement may be terminated without penalty
upon 60 days' written notice by either party thereto and will automatically
terminate in the event of assignment.

For the years ended June 30, 1994 and 1993, the Fund recognized advisory
expenses of $183,973 and $77,810, respectively. The Adviser has waived such
expenses.

OTHER AGREEMENTS

Fund Accounting Agreement. The Fund has entered into an accounting services
agreement with the Adviser pursuant to which the Adviser provides accounting
services supplementary to those provided by the Custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund shares together with the other Van Kampen Merritt mutual
funds distributed by American Capital Distributors, Inc. (the "Distributor") in
the cost of providing such services, with 25% of such costs shared

B-20
<PAGE> 299

proportionately based on the number of outstanding classes of securities per
fund and with the remaining 75% of such cost being paid by the Fund and such
other funds proportionally based on their respective net assets.

For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $2,700 and $0, respectively, representing the Adviser's cost of
providing accounting services.

Support Services Agreement. Under a support services agreement with the
Distributor, the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
by the Fund to its the Transfer Agent if the Transfer Agent had provided such
services. Payment by the Fund for such services is made on cost basis for the
employment of the personnel and the equipment necessary to render the support
services. The Fund, and the other Van Kampen Merritt mutual funds distributed by
the Distributor, share such costs proportionately among themselves based upon
their respective net asset values.

For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $6,000 and $0, respectively, representing the Distributor's cost
of providing certain support services.

Legal Services Agreement. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: accurate maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. Payment by the Fund for such services is
made on a cost basis for the employment of personnel as well as the overhead and
equipment necessary to render such services. The Fund, and the other Van Kampen
Merritt mutual funds from whom the Adviser acts as investment adviser, share one
half (50%) of such costs equally. The remaining one half (50%) of such costs are
allocated to specific funds based on specific time allocations, or in the event
services are attributable only to types of funds (i.e. closed-end or open-end),
the relative amount of time spent on each type of fund and then further
allocated between funds of that type based upon their respective net asset
values.

For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $8,300 and $1,300, respectively, representing Van Kampen American
Capital, Inc.'s cost of providing legal services.

CUSTODIAN AND INDEPENDENT AUDITORS

PORTFOLIO TRANSACTIONS AND BROKERAGE TRANSACTIONS

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.

B-21
<PAGE> 300

for the security), than would be the case if no weight were given to the
broker's furnishing of those research services. This will be done, however, only
if, in the opinion of the Fund's Adviser, the amount of additional commission or
increased cost is reasonable in relation to the value of such services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth in the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.

State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.

TAX STATUS OF THE FUND

THE DISTRIBUTOR

DISTRIBUTION AGREEMENT

Shares of the Fund are offered through the Distributor, One Parkview Plaza,
Oakbrook, Terrace, Illinois 60181. The Distributor is a wholly owned subsidiary
of Van Kampen American Capital, Inc., which is a subsidiary of VK/AC Holding,
Inc., a Delaware corporation that is controlled through an ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C & D L.P."), a Connecticut limited
partnership. In addition, certain officers, directors and employees of Van
Kampen American Capital, Inc., and its subsidiaries own, in the aggregate not
more than 6% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 10% of the
common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement with the Fund, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities
dealers, brokers or other financial intermediaries, and is obligated to purchase
only those shares for which it

B-22
<PAGE> 301

has received purchase orders. A discussion of how to purchase and redeem shares
of the Fund and how such shares are priced is contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and banks who are acting as brokers (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance, which may include, but not be limited to, processing purchase and
redemption transactions, establishing and maintaining shareholder accounts
regarding the Fund, and such other services as may be agreed to from time to
time and as may be permitted by applicable statute, rule or regulation. Brokers,
dealers and banks that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."

For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $21,250, $207,242 and $22,482 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $17,091 and $51,087 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $1,096 and $2,249 for advertising expenses,
and $3,603 and $8,389 for compensation of the Distributor's sales personnel for
the Class A Shares and Class B Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

B-23
<PAGE> 302

PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 3.00% and 1.00%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.

The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.

CLASS A SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 3.73%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 4.77%.

The Fund's average total return with respect to the Class A Shares for (i) the
one year period ended June 30, 1994 was (2.06%) and (ii) the approximately 22
month period from August 28, 1992, the commencement of investment operations for
Class A Shares of the Fund, through June 30, 1994 was 1.66%.

B-24
<PAGE> 303

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 3.14%. In determining the Fund's net investment income for a
stated 30-day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 4.14%.

The Fund's average total return with respect to the Class B Shares for (i) the
one year period ended June 30, 1994 was (2.73%) and (ii) for the approximately
22 month period from August 28, 1992, the commencement of investment operations
for Class B Shares of the Fund, through June 30, 1994 was 1.62%.

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 3.14%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 4.14%.

The Fund's average annual total return for the approximately 11 month period
from August 13, 1993, the commencement of distribution for Class C Shares of the
Fund, through June 30, 1994 was (1.34%).

B-25
<PAGE> 304
Van Kampen Merritt Adjustable Rate U.S. Government Fund

Portfolio of Investments
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities 2.9%
$ 955 Nomura Asset Securities Corporation .............................. 7.265% 7/07/03 $ 978,875
------------
Mortgage-Backed Securities 84.4%
793 AFC Mortgage #93-4B2A1 ........................................... 6.936 12/25/23 793,905
954 Citicorp Mortgage Securities Inc #94-11A2 ........................ 6.250 8/25/24 911,300
1,808 DLJ Mortgage Acceptance Corporation #94-Q1 ....................... 4.883 3/25/24 1,743,292
882 Federal Home Loan Mortgage Corporation ........................... 6.625 7/01/14 871,541
1,723 Federal Home Loan Mortgage Corporation ........................... 5.635 3/01/18 1,703,658
2,834 Federal Home Loan Mortgage Corporation ........................... 6.522 8/01/20 2,854,220
872 Federal Home Loan Mortgage Corporation ........................... 7.290 7/01/22 878,405
1,266 Federal Home Loan Mortgage Corporation ........................... 6.095 10/01/23 1,239,309
1,742 Federal National Mortgage Association ............................ 6.809 1/01/16 1,762,037
2,345 Federal National Mortgage Association ............................ 7.013 11/01/18 2,347,593
1,642 Federal National Mortgage Association ............................ 6.347 3/01/19 1,629,226
899 Federal National Mortgage Association ............................ 6.741 3/01/19 906,915
1,833 Federal National Mortgage Association ............................ 5.124 2/01/21 1,779,585
2,229 Federal National Mortgage Association ............................ 7.161 10/01/22 2,234,043
1,606 Federal National Mortgage Association ............................ 5.896 10/01/23 1,581,831
1,789 Federal National Mortgage Association ............................ 4.371 1/01/24 1,777,357
614 Federal National Mortgage Association ............................ 5.190 11/01/26 593,819
490 Federal National Mortgage Association ............................ 5.289 3/01/29 474,098
1,753 Government National Mortgage Association ......................... 6.750 6/20/23 1,704,097
6,808 Salomon Brothers Mortgage Securities VII Inc - Interest Only ..... 2.283 2/25/24 370,180
------------
28,156,411
------------
Corporate Securities 4.1%
1,200 Greenwich Capital Acceptance Inc ................................. 6.594 7/25/22 1,171,500
4,300 Greenwich Capital Acceptance Inc - Interest Only ................ 2.514 10/25/22 180,623
------------
1,352,123
------------
Total Long-Term Investments 91.4%
(Cost $31,905,802) <F1> ................................................................... 30,487,409
-------------
Short-Term Investments at Amortized Cost 8.1%
Mexican Tesobonos ($1,000,000 par, yielding 7.07%, maturing 01/12/95) ................... 997,763
Repurchase Agreement, J.P. Morgan Securities, U.S. T-Note, $1,770,000 par, 3.875% coupon,
due 09/30/95, dated 12/30/94, to be sold on 01/03/95 at $1,710,998 ...................... 1,710,000
-------------
Total Short-Term Investments at Amortized Cost ............................................ 2,707,763
Other Assets in Excess of Liabilities 0.5% ................................................ 173,538
-------------
Net Assets 100% ........................................................................... $ 33,368,710
-------------
<FN>
<F1> At December 31, 1994, cost for federal income tax purposes is $31,905,802;
the aggregate gross unrealized appreciation is $-0- and the aggregate gross
unrealized depreciation is $1,418,393, resulting in net unrealized depreciation
of $1,418,393.
</FN>

</TABLE>

See Notes to Financial Statements

B-26
<PAGE> 305

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Assets and Liabilities
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $31,905,802) <F1>................................. $ 30,487,409
Short-Term Investments <F1>.......................................................... 2,707,763
Cash................................................................................. 821
Receivables:
Interest............................................................................. 392,441
Fund Shares Sold..................................................................... 5,189
Unamortized Organizational Expenses <F1>............................................. 21,245
Other ............................................................................... 119
-------------
Total Assets ........................................................................ 33,614,987
-------------
Liabilities:
Payables:
Fund Shares Repurchased.............................................................. 107,791
Income Distributions ................................................................ 33,872
Accrued Expenses..................................................................... 104,614
-------------
Total Liabilities.................................................................... 246,277
-------------
Net Assets........................................................................... $ 33,368,710
-------------
Net Assets Consist of:
Paid in Surplus <F3> ................................................................ $ 35,473,115
Accumulated Undistributed Net Investment Income...................................... 29,815
Accumulated Net Realized Loss on Investments ........................................ (715,827)
Net Unrealized Depreciation on Investments........................................... (1,418,393)
-------------
Net Assets........................................................................... $ 33,368,710
-------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $6,522,682 and
710,220 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
Maximum sales charge (3.00%* of offering price)...................................... .28
-------------
Maximum offering price to public .................................................... $ 9.46
-------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $22,906,032 and
2,492,656 shares of beneficial interest issued and outstanding) <F3> ................ $ 9.19
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,939,996 and
429,040 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
--------------
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 306

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest......................................................................................... $ 1,068,395
------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $9,221, $128,534 and
$20,402, respectively) <F6> .................................................................. 158,157
Investment Advisory Fee <F2> .................................................................... 110,360
Shareholder Services ............................................................................ 40,065
Custody ......................................................................................... 29,555
Trustees Fees and Expenses <F2>.................................................................. 18,200
Legal <F2>....................................................................................... 8,960
Amortization of Organizational Expenses <F1>..................................................... 4,032
Other ........................................................................................... 34,638
------------
Total Expenses................................................................................... 403,967
Less Fees Deferred and Expenses Reimbursed ($110,360 and $55,180, respectively).................. 165,540
------------
Net Expenses..................................................................................... 238,427
------------
Net Investment Income ........................................................................... $ 829,968
------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................................. $ 5,888,524
Cost of Securities Sold.......................................................................... (6,209,719)
------------
Net Realized Loss on Investments ................................................................ (321,195)
------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................................... (879,553)
End of the Period ............................................................................... (1,418,393)
------------
Net Unrealized Depreciation on Investments During the Period..................................... (538,840)
------------
Net Realized and Unrealized Loss on Investments.................................................. $ (860,035)
------------
Net Decrease in Net Assets from Operations....................................................... $ (30,067)
------------
</TABLE>

See Notes to Financial Statements
B-28
<PAGE> 307

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)

<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 829,968 $ 1,301,126
Net Realized Loss on Investments .................................. (321,195) (362,674)
Net Unrealized Depreciation on Investments During the Period....... (538,840) (985,777)
------------- -------------
Change in Net Assets from Operations ............................. (30,067) (47,235)
------------- -------------
Distributions from Net Investment Income:
Class A Shares..................................................... (174,010) (384,334)
Class B Shares..................................................... (541,377) (879,036)
Class C Shares..................................................... (86,659) (91,263)
------------- -------------
Total Distributions................................................ (802,046) (1,354,633)
------------- -------------
Net Change in Net Assets from Investment Activities................ (832,113) (1,401,868)
------------- -------------
From Capital Transactions <F3>:
Proceeds from Shares Sold.......................................... 5,151,481 35,960,141
Net Asset Value of Shares Issued Through Dividend Reinvestment .... 558,565 959,832
Cost of Shares Repurchased ........................................ (10,245,053) (15,553,274)
------------- -------------
Net Change in Net Assets from Capital Transactions................. (4,535,007) 21,366,699
------------- -------------
Total Increase/Decrease in Net Assets ............................. (5,367,120) 19,964,831
Net Assets:
Beginning of the Period............................................ 38,735,830 18,770,999
------------- -------------
End of the Period (Including undistributed net investment income of
$29,815 and $1,893, respectively).................................. $ 33,368,710 $ 38,735,830
------------- -------------
</TABLE>

See Notes to Financial Statements

B-29

<PAGE> 308
Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements
December 31, 1994 (Unaudited)

1. Significant Accounting Policies
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August 28,
1992, with two classes of common shares, Class A and Class B shares. The Fund
commenced the distribution of Class C shares on August 13, 1993.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitment until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Original
issue discount is amortized over the expected life of each applicable security.

D. Organizational Expenses-The Fund has reimbursed
Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC") for
costs incurred in connection with the Fund's organization in the amount of
$40,000. These costs are being amortized on a straight line basis over the 60
month period ending August 28, 1997. Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of the initial
shares of the Fund originally purchased by VKAC are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $61,584. Of this amount, $12,348 and $49,236 will expire on
June 30, 2001, and 2002, respectively. Net realized gains or losses may differ
for financial and tax reporting purposes primarily as a result of post October
31 losses which are not recognized for tax purposes until the first day of the
following fiscal year.

F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.

2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide facilities and investment advice to the Fund for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- -----------------------------------
<S> <C>
First $500 million ... .600 of 1%
Next $500 million .... .550 of 1%
Next $2 billion....... .500 of 1%
Next $2 billion....... .475 of 1%
Next $2 billion....... .450 of 1%
Next $2 billion....... .425 of 1%
Over $9 billion....... .400 of 1%
</TABLE>

B-30

<PAGE> 309

Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $16,100, representing VKAC's cost of providing accounting, legal,
portfolio pricing and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 10,050, 103 and 100 shares of beneficial
interest of Classes A, B and C, respectively.

3. Capital Transactions
The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $6,997,376,
$24,312,356 and $4,163,383 for Classes A, B and C, respectively. For the six
months ended December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 77,270 $ 721,562
Class B....................... 353,120 3,297,140
Class C....................... 121,041 1,132,779
--------- ------------
Total Sales................... 551,431 $ 5,151,481
--------- ------------
Dividend Reinvestment:
Class A....................... 14,012 $ 130,363
Class B....................... 39,002 362,968
Class C....................... 7,010 65,234
--------- ------------
Total Dividend Reinvestment... 60,024 $ 558,565
--------- ------------
Repurchases:
Class A....................... (134,285) $ (1,249,138)
Class B....................... (836,917) (7,799,308)
Class C....................... (128,101) (1,196,607)
--------- ------------
Total Repurchases ............ (1,099,303) $(10,245,053)
--------- ------------

</TABLE>

At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556 and
$4,161,977 for Classes A, B and C, respectively. For the period ended June 30,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ....................... 902,396 $ 8,731,126
Class B ....................... 2,364,040 22,736,081
Class C ....................... 464,005 4,492,934
--------- -------------
Total Sales ................... 3,730,441 $ 35,960,141
--------- -------------
Dividend Reinvestment:
Class A ....................... 26,263 $ 252,576
Class B ....................... 64,882 623,837
Class C ....................... 8,729 83,419
--------- -------------
Total Dividend Reinvestment ... 99,874 $ 959,832
--------- -------------
Repurchases:
Class A ....................... (656,490) $ (6,285,280)
Class B ....................... (926,283) (8,853,618)
Class C ....................... (43,644) (414,376)
--------- -------------
Total Repurchases.............. (1,626,417) $ (15,553,274)
--------- -------------
</TABLE>

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed
in the following schedule. The Class B and Class C shares bear the expense of
their respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.

<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge

Year of Redemption Class B Class C
- ------------------------------------------
<S> <C> <C>
First ................. 3.00% 1.00%
Second ................. 2.00% None
Third .................. 1.00% None
Fourth and Thereafter .. None None
</TABLE>

For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of $10 and CDSC
on the redeemed shares of Classes B and C of approximately $76,300. Sales
charges do not represent expenses of the Fund.

B-31
<PAGE> 310
Van Kampen Merritt Adjustable Rate U.S. Government Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $2,015,000
and $6,209,719, respectively.

5. Mortgage and Asset Backed Securities
A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies--Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation
(FHLMC).
An Interest Only security is another class of MBS representing ownership in the
cash flows of the interest payments made from a specified pool of MBS. The cash
flow on this instrument decreases as the mortgage principal balance is repaid by
the borrower.
Asset Backed Securities are similar to MBS but made up of pools of
other assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on these securities are
made from the cash flows from the group of assets.

6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts. Annual fees under
the Plans of up to .30% for Class A shares and 1.00% each for Class B and Class
C shares are accrued daily. Included in these fees for the six months ended
December 31, 1994, are payments to VKAC of approximately $111,600.

B-32

<PAGE> 311

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt Adjustable Rate U.S. Government Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund"), including the
portfolio of investments, as of June 30,1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended and for the period from August 28,1992 (commencement of
investment operations) through June 30,1993, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30,1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt Adjustable Rate U.S. Government Fund as of June
30,1994, the results of its operations for the year then ended, the changes in
its net assets for the year then ended and for the period from August 28,1992
(commencement of investment operations) through June 30,1993, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.

KPMG Peat Marwick

Chicago, Illinois
August 4, 1994

B-33
<PAGE> 312

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities 87.0%
$ 938 AFC Mortgage................................................... 5.735% 03/25/25 $ 945,076
1,949 DLJ Mortgage Acceptance Corporation............................ 3.945 03/25/24 1,931,543
953 Federal Home Loan Mortgage Corporation......................... 4.625 07/01/14 954,012
1,855 Federal Home Loan Mortgage Corporation......................... 5.634 03/01/18 1,904,730
3,071 Federal Home Loan Mortgage Corporation......................... 5.569 08/01/20 3,158,327
1,000 Federal Home Loan Mortgage Corporation......................... 5.507 07/01/22 1,020,161
1,372 Federal Home Loan Mortgage Corporation......................... 4.105 10/01/23 1,369,590
2,732 Federal Home Loan Mortgage Corporation......................... 3.733 01/01/24 2,697,822
1,848 Federal National Mortgage Association.......................... 5.493 01/01/16 1,914,516
2,815 Federal National Mortgage Association.......................... 5.445 11/01/18 2,905,691
1,943 Federal National Mortgage Association.......................... 5.323 03/01/19 1,996,782
1,034 Federal National Mortgage Association.......................... 5.593 03/01/19 1,063,721
1,849 Federal National Mortgage Association.......................... 5.124 02/01/21 1,830,494
2,504 Federal National Mortgage Association.......................... 5.586 10/01/22 2,509,816
1,794 Federal National Mortgage Association.......................... 4.245 10/01/23 1,818,427
1,954 Federal National Mortgage Association.......................... 3.386 01/01/24 1,917,684
702 Federal National Mortgage Association.......................... 4.960 11/01/26 706,116
556 Federal National Mortgage Association.......................... 4.937 03/01/29 550,329
262 Federal National Mortgage Association Interest Only............ 7.000 02/25/98 656
1,792 Federal National Mortgage Association Interest Only............ 5.206 12/25/08 164,666
1,843 Government National Mortgage Association....................... 6.000 06/20/23 1,840,678
7,359 Salomon Brothers Mortgage Securities VII Inc Interest Only..... 2.290 03/25/24 478,354
-----------
33,679,191
-----------
Corporate Securities 3.9%
1,200 Greenwich Capital Acceptance Inc............................... 6.087 07/25/22 1,218,000
5,059 Greenwich Capital Acceptance Inc Interest Only................. 2.528 10/25/22 303,562
-----------
1,521,562
-----------
Total Long-Term Investments 90.9%
(Cost $36,080,306) <F1>........................................................................................... 35,200,753
Repurchase Agreement 8.6%
UBS Securities, U S. T-Note, $3,225,000 par, 9.50% coupon,
due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $3,351,391................................................ 3,351,000

Other Assets in Excess of Liabilities 0.5%......................................................................... 184,077
-----------
Net Assets 100%.................................................................................................... $38,735,830
-----------

<FN>
<F1> At June 30,1994, cost for federal income tax purposes is $36,080,306;
the aggregate gross unrealized appreciation is $33,022 and the aggregate
gross unrealized depreciation is $912,575, resulting in net unrealized
depreciation of $879,553.
</FN>
</TABLE>

See Notes to Financial Statements

B-34

<PAGE> 313

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- -------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $36,080,306) (Note 1)................................. $ 35,200,753
Short-Term Investments (Note 1).......................................................... 3,351,000
Cash..................................................................................... 730
Receivables:
Interest................................................................................ 254,896
Investments Sold........................................................................ 121,663
Fund Shares Sold........................................................................ 8,705
Unamortized Organizational Expenses (Note 1)............................................. 25,276
Other.................................................................................... 485
-----------------
Total Assets............................................................................ 38,963,508
-----------------
Liabilities:
Payables:
Fund Shares Repurchased................................................................. 145,827
Income Distributions.................................................................... 42,635
Accrued Expenses......................................................................... 39,216
-----------------
Total Liabilities....................................................................... 227,678
-----------------
Net Assets............................................................................... $ 38,735,830
-----------------
Net Assets Consist of:
Paid in Surplus.......................................................................... $ 40,008,122
Accumulated Undistributed Net Investment Income.......................................... 1,893
Accumulated Net Realized Loss on Investments............................................. (394,632)
Net Unrealized Depreciation on Investments............................................... (879,553)
-----------------
Net Assets............................................................................... $ 38,735,830
-----------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $7,079,499 and
753,223 shares of beneficial interest issued and outstanding) (Note 3)...... ....... $ 9.40
Maximum sales charge (3.00%* of offering price)..................................... .29
-----------------
Maximum offering price to public........................................................ $ 9.69
-----------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $27,621,738 and
2,937,451 shares of beneficial interest issued and outstanding) (Note 3)............ $ 9.40
-----------------
Class C Shares:
Net asset value and offering price per share (based on net assets of $4,034,593 and
429,090 shares of beneficial interest issued and outstanding) (Note 3).............. $ 9.40
-----------------
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-35
<PAGE> 314

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<S> <C>
Investment Income:
Interest......................................................................... $ 1,646,183
--------------
Expenses:
Distribution (12b-1) and Service Fees Allocated to Classes A, B and C of
$21,250, $207,242 and $22,482, respectively) (Note 5).......................... 250,974
Investment Advisory Fee (Note 2)................................................. 183,973
Shareholder Services............................................................. 59,481
Custody.......................................................................... 51,910
Legal (Note 2)................................................................... 19,290
Trustees Fees and Expenses (Note 2).............................................. 16,300
Amortization of Organizational Expenses (Note 1)................................. 7,997
Other............................................................................ 72,345
--------------
Total Expenses.................................................................. 662,270
Less Fees Waived and Expenses Reimbursed ($183,973 and $133,330, respectively).. 317,303
--------------
Net Expenses.................................................................... 344,967
--------------
Net Investment Income............................................................ $ 1,301,216
--------------
Realized and Unrealized Gain/Loss on Investments:

Realized Gain/Loss on Investments:
Proceeds from Sales............................................................. $ 23,282,526
Cost of Securities Sold......................................................... (23,645,200)
--------------
Net Realized Loss on Investments................................................. (362,674)
--------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................... 106,224
End of the Period............................................................... (879,553)
--------------
Net Unrealized Depreciation on Investments During the Period..................... (985,777)
--------------
Net Realized and Unrealized Loss on Investments.................................. $ (1,348,451)
--------------
Net Decrease in Net Assets from Operations....................................... $ (47,235)
--------------
</TABLE>

See Notes to Financial Statements

B-36

<PAGE> 315
Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended June 30, 1994 and the Period August 28, 1992
(Commencement of Investment Operations) through June 30, 1993
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1994 June 30, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.......................................................... $ 1,301,216 $ 645,443
Net Realized Loss on Investments............................................... (362,674) (30,385)
Net Unrealized Appreciation/Depreciation on Investments During the Period...... (985,777) 106,224
------------ ------------
Change in Net Assets from Operations........................................... (47,235) 721,282
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................................................ (384,334) (225,135)
Class B Shares................................................................ (879,036) (366,571)
Class C Shares................................................................ (91,263) -0-
------------ ------------
Total Distributions........................................................... (1,354,633) (591,706)
------------ ------------
Net Change in Net Assets from Investment Activities............................ (1,401,868) 129,576
------------ ------------
From Capital Transactions (Note 3):

Proceeds from Shares Sold...................................................... 35,960,141 27,153,714
Net Asset Value of Shares Issued Through Dividend Reinvestment................. 959,832 427,880
Cost of Shares Repurchased..................................................... (15,553,274) (8,950,841)
------------ ------------
Net Change in Net Assets from Capital Transactions............................. 21,366,699 18,630,753
------------ ------------
Total Increase in Net Assets................................................... 19,964,831 18,760,329
------------ ------------
Net Assets:

Beginning of the Period........................................................ 18,770,999 10,670
------------ ------------
End of the Period (Including undistributed net investment income
of $1,893 and $53,737, respectively).......................................... $ 38,735,830 $ 18,770,999
------------ ------------
</TABLE>

See Notes to Financial Statements

B-37

<PAGE> 316

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- -------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August
28, 1992 with two classes of common shares, Class A and Class B shares. The
distribution of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund will maintain, in a segregated account with its custodian, assets having
an aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitment until payment is made. At June 30, 1994, there
were no when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.

D. Organizational Expenses-The Fund will reimburse Van Kampen Merritt Inc.
("Van Kampen Merritt") for costs incurred in connection with the Fund's
organization in the amount of $40,000.

These costs are being amortized on a straight line basis over the 60 month
period ending August 28, 1997. Van Kampen Merritt Investment Advisory Corp.
(the "Adviser") has agreed that in the event any of the initial shares of the
Fund originally purchased by Van Kampen Merritt are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. Federal Income Taxes-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At June 30, 1994, the Fund had an accumulated capital
loss carry forward for tax purposes of $61,564. Of this amount, $12,348 and
$49,236 will expire on June 30, 2001, and 2002, respectively. Net realized gains
or losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes until
the first day of the following fiscal year.

F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, permanent book and tax basis differences relating to
shareholder distributions totaling $1,573 have been reclassified from
accumulated net realized gain/loss on investments to accumulated undistributed
net investment income. Net investment income, net realized gain/loss, and net
assets were not affected by this change.

B-38
<PAGE> 317

Van Kampen Merritt Adjustable Rate U.S. Government Fund
- -------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- -------------------------------------------------------------------------

G. Options and Futures Transactions-Premiums received from call options written
are recorded as deferred credits. The position is marked to market daily with
any difference between the options' current market value and premiums received
recorded as an unrealized gain or loss. If the options are not exercised,
premiums received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on premiums
received less the cost of the closing transaction. When options are exercised,
premiums received are added to the proceeds from the sale of the underlying
securities and a gain or loss is realized accordingly. These same principles
apply to the sale of put options.

Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.

2. Investment Advisory Agreement and Other Transactions with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, the Adviser
will provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------------------------------------
<S> <C>
First $500 million................................... .600 of 1%
Next $500 million.................................... .550 of 1%
Next $2 billion...................................... .500 of 1%
Next $2 billion...................................... .475 of 1%
Next $2 billion...................................... .450 of 1%
Next $2 billion...................................... .425 of 1%
Over $9 billion...................................... .400 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended June 30, 1994, the Fund recognized expenses of
approximately $17,600, representing Van Kampen Merritt's or the Adviser's cost
of providing accounting, legal, portfolio pricing and certain shareholder
services to the Fund.

Certain officers and trustees of the Fund are also officers and directors of the
Adviser and Van Kampen Merritt. The Fund does not compensate its officers or
trustees who are officers of the Adviser or Van Kampen Merritt.

At June 30, 1994, Van Kampen Merritt owned 20,850,103 and 100 shares of
beneficial interest of Classes A, B and C, respectively.

3. Capital Transactions

The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556
and $4,161,977 for Classes A, B and C, respectively. For the year ended June
30, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A......................... 902,396 $ 8,731,126
Class B......................... 2,364,040 22,736,081
Class C......................... 464,005 4,492,934
----------- -------------
Total Sales..................... 3,730,441 $ 35,960,141
----------- -------------
Dividend Reinvestment:
Class A......................... 26,263 $ 252,576
Class B......................... 64,882 623,837
Class C......................... 8,729 83,419
----------- -------------
Total Dividend Reinvestment..... 99,874 $ 959,832
----------- -------------
Repurchases:
Class A......................... (656,490) $ (6,285,280)
Class B......................... (926,283) (8,853,618)
Class C......................... (43,644) (414,376)
----------- -------------
Total Repurchases...............(1,626,417) $(15,553,274)
----------- -------------
</TABLE>

B-39
<PAGE> 318

At June 30, 1993, paid in surplus aggregated $4,696,167 and $13,945,256 for
Classes A and B, respectively. For the period ended June 30, 1993, transactions
were as follows:

Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,212,488 $ 11,769,304
Class B....................... 1,582,925 15,384,410
----------- -------------
Total Sales.................... 2,795,413 $ 27,153,714
----------- -------------
Dividend Reinvestment:
Class A....................... 18,325 $ 177,867
Class B....................... 25,646 250,013
----------- -------------
Total Dividend Reinvestment.... 43,971 $ 427,880
----------- -------------
Repurchases:
Class A....................... (749,759) $ (7,260,704)
Class B....................... (173,759) (1,690,137)
----------- -------------
Total Repurchases.............. (923,518) $ (8,950,841)
----------- -------------
</TABLE>

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.

Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
- ---------------------------------------------------------------
<S> <C> <C>
First...................................... 3.00% 1.00%
Second..................................... 2.00% None
Third...................................... 1.00% None
Fourth and Thereafter...................... None None
</TABLE>

For the year ended June 30, 1994, Van Kampen Merritt, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of $22 and
CDSC on the redeemed shares of Classes B and C of approximately $91,000. Sales
charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended June 30, 1994, were $41,367,854 and
$23,485,307, respectively.

5. Distribution and Service Plans

Annual fees under the Plans of up to .30% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1994, are payments to Van Kampen Merritt of approximately
$183,000.

B-40

<PAGE> 319

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

VAN KAMPEN MERRITT
STRATEGIC INCOME FUND

Van Kampen Merritt Strategic Income Fund (the "Fund") is a non-diversified
mutual fund organized as a sub-trust of Van Kampen Merritt Trust. The Fund's
primary investment objective is to seek to provide its shareholders with high
current income. The Fund has a secondary investment objective of seeking capital
appreciation. The Fund will seek to achieve its investment objectives by
investing primarily in a portfolio of income securities selected by Van Kampen
American Capital Investment Advisory Corp., the Fund's investment adviser, from
the following market sectors: U.S. government securities; domestic investment
grade income securities; domestic lower grade income securities; foreign
investment grade income securities; and foreign lower grade income securities.
The Adviser will allocate the Fund's investments among these market sectors
based on its evaluation of the relative investment opportunities and investment
risks presented by such sectors from time to time. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in U.S.
dollar-denominated income securities and at least 40% of the Fund's total assets
will be invested in U.S. government securities and investment grade rated income
securities.

A substantial portion of the Fund's assets may be invested in lower grade
income securities, including securities of issuers in emerging market countries
and securities rated in the lowest
(Continued on next page.)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------

FOR ARIZONA INVESTORS: THESE SECURITIES ARE SPECULATIVE

A Statement of Additional Information, dated April 30, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling 1-800-225-2222, extension 6504 or, for
Telecommunication Device For the Deaf, 1-800-772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL(SM)

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

THIS PROSPECTUS IS DATED APRIL 30, 1995.

<PAGE> 320

(Continued from previous page.)

rating category. Investment in lower grade income securities involves
significant risks. Lower grade securities commonly are referred to as "junk
bonds." The Fund intends to borrow money for investment purposes which will
create the opportunity for increased return but also involves special risks. The
Fund is allowed to invest in derivative mortgage-backed securities, as described
in "Investment Objectives and Policies--Portfolio Securities--Mortgage-Backed
and Asset-Backed Securities," without limitation. In addition, the Fund may
invest up to 20% of total assets in defaulted bank loans. The Fund is designed
for investors willing to assume additional risk in return for the potential for
high current income and capital appreciation. There can be no assurance that the
Fund will achieve its investment objectives. See "Investment Objectives and
Policies--Special Risk Factors" and "Investment Practices--Use of Leverage."

This Prospectus sets forth certain information about the Fund that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
1-800-225-2222.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares seven years after the end of the calendar month in
which the investor's order to purchase was accepted, in the circumstances and
subject to the qualifications described in this Prospectus. See "Purchasing
Shares of the Fund."

2
<PAGE> 321

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................. 4
Shareholder Transaction Expenses.................................... 5
Annual Fund Operating Expenses and Example.......................... 6
Financial Highlights................................................ 8
The Fund............................................................ 9
Investment Objectives and Policies.................................. 9
Investment Practices................................................ 19
Purchasing Shares of the Fund....................................... 23
Alternative Sales Arrangements.................................... 23
Initial Sales Charge Alternative.................................. 26
Deferred Sales Charge Alternatives................................ 30
Distributions from the Fund......................................... 33
Purchase of Additional Shares with Distributions.................. 33
Redemption of Shares................................................ 34
Net Asset Value..................................................... 37
Investment Advisory Services........................................ 38
Portfolio Transactions and Brokerage Allocation..................... 40
The Distribution and Service Plans.................................. 40
Tax Status.......................................................... 42
Shareholder Programs................................................ 44
Investments by Tax-Sheltered Retirement Plans....................... 48
Fund Performance.................................................... 49
Shareholder Services................................................ 50
Description of Shares of the Fund................................... 50
Shareholder Reports and Inquiries................................... 51
Additional Information.............................................. 52
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS OR BY THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.

3
<PAGE> 322

- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------

The following summary is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus and the Statement of
Additional Information.

THE FUND Van Kampen Merritt Strategic Income Fund (the "Fund") is a non-
diversified mutual fund organized as a sub-trust of Van Kampen Merritt Trust.

INVESTMENT OBJECTIVES AND POLICIES The Fund's primary investment objective is
to seek to provide its shareholders with high current income. The Fund has a
secondary investment objective of seeking capital appreciation. The Fund will
seek to achieve its investment objectives by investing primarily in a portfolio
of income securities selected by the Fund's investment adviser from the
following market sectors: U.S. government securities; domestic investment grade
income securities; domestic lower grade income securities; foreign investment
grade income securities; and foreign lower grade income securities. See
"Investment Objectives and Policies."

PURCHASING SHARES OF THE FUND Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The different classes of shares permit an investor to choose the
method of purchasing shares that is more beneficial to the investor, taking into
account the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. See "Purchasing Shares of the Fund."

INVESTMENT ADVISER Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. See "Investment Advisory
Services."

SPECIAL RISK FACTORS A substantial portion of the Fund's assets may be invested
in lower grade income securities, including securities of issuers in emerging
market countries and securities rated in the lowest ratings category. Lower
grade income securities commonly are referred to as "junk bonds." Investment in
lower grade income securities involves significant risks. The Fund intends to
borrow money for investment purposes which will create the opportunity for
increased return but also involves special risks. The Fund is also allowed to
invest in derivative mortgage-backed securities and defaulted bank loans. The
Fund is designed for investors willing to assume additional risk in return for
the potential for high current income and capital appreciation. There can be no
assurance that the Fund will achieve its investment objectives. See "Investment
Objectives and Policies--Special Risk Factors."

4
<PAGE> 323

- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of the
offering price)................... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price)............................ None None(3) None(3)
Deferred sales charge (as a
percentage of original purchase
price on redemption proceeds)..... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
Redemption fees (as a percentage of
amount redeemed).................. None None None
Exchange fees....................... None None None
</TABLE>

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

(1) Reduced on investments of $100,000 or more.

(3) CDSC Shares received as reinvested dividends are subject to a 12b-1
distribution fee, a portion of which may indirectly pay for the initial
sales commission incurred on behalf of the investor. See "The Distribution
and Service Plans."

5
<PAGE> 324

<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- ---------
<S> <C> <C> <C>
Management Fees (as a percentage of
average daily net assets)(1)...................... 1.01% 1.01% 1.01%
12b-1 Fees (as a percentage of
average daily net assets)(2)...................... 0.30% 1.00% 1.00%
Other Expenses:
Miscellaneous Other Expenses
(as a percentage of
average daily net assets)(1)(3)................. 0.63% 0.64% 0.63%
Interest Expenses (as a percentage of
average daily net assets)(1)(3)................. 1.86% 1.86% 1.86%
Total Other Expenses (as a percentage of
average daily net assets)(1)(3)................... 2.49% 2.50% 2.49%
Total (as a percentage of
average daily net assets)(1)(3)................... 3.80% 4.51% 4.50%
</TABLE>

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

(1) Represents the effective management fee as a percent of average daily net
assets. Management Fees are based on a percentage of average daily managed
assets. For purposes of determining the investment fee, "average daily
managed assets" means the average daily value of the Fund's aggregate
assets, minus the sum of accrued liabilities other than the aggregate amount
of any borrowings undertaken by the Fund.

(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation.

(3) The Fund incurred financing expenses related to borrowings for investment
purposes. Borrowings provide the opportunity for increased net income, but
may increase the Fund's investment risk. Total Expenses without regard to
the interest expense would have been 1.94%, 2.65% and 2.64% for each of the
Class A Shares, Class B Shares and Class C Shares, respectively. See
"Financial Highlights" and "Investment Objectives and Policies -- Special
Risk Factors."

6
<PAGE> 325

EXAMPLE:

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (i) an operating expense
ratio of 3.80% for Class A Shares, 4.51% for
Class B Shares and 4.50% for Class C Shares,
(ii) 5% annual return and (iii) redemption at
the end of each time period:
Class A Shares................................. $84 $ 158 $ 234 $ 432
Class B Shares................................. $85 $ 171 $ 243 $ 441
Class C Shares................................. $55 $ 136 $ 228 $ 461
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares................................. $84 $ 158 $ 234 $ 432
Class B Shares................................. $45 $ 136 $ 228 $ 441
Class C Shares................................. $45 $ 136 $ 228 $ 461
</TABLE>

The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion to
Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Investment Advisory Services" and "The Distribution and
Service Plans."

7
<PAGE> 326

The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods unless
otherwise indicated, and their report thereon appears in the Fund's related
Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the Statement of Additional Information.

<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------------------- --------------------------- ---------------------------
FROM FROM FROM
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1993
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT OF INVESTMENT
SIX MONTHS OPERATIONS) SIX MONTHS OPERATIONS) SIX MONTHS OPERATIONS)
ENDED TO ENDED TO ENDED TO
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
1994 1994 1994 1994 1994 1994
-------------- ------------- ------------ ------------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 11.975 $14.300 $ 11.968 $14.300 $ 11.966 $14.300
-------- ------- -------- ------- -------- -------
Net Investment Income.. .531 .531 .489 .482 .487 .474
Net Realized and
Unrealized Loss on
Investments and
Foreign Currency..... (.968) (2.356) (.969) (2.359) (.961) (2.353)
-------- ------- -------- ------- -------- -------
Total from Investment
Operations............. (.437) (1.825) (.480) (1.877) (.474) (1.879)
-------- ------- -------- ------- -------- -------
Less Distributions from
Net Investment
Income................. .600 .500 .546 .455 .546 .455
-------- ------- -------- ------- -------- -------
Total Distributions..... .600 .500 .546 .455 .546 .455
-------- ------- -------- ------- -------- -------
Net Asset Value, End of
Period................. $ 10.938 $11.975 $ 10.942 $11.968 $ 10.946 $11.966
======== ======= ======== ======= ======== =======
Total Return
(Non-annualized)....... (3.85%) (12.83%) (4.22%) (13.21%) (4.13%) (13.21%)
Net Assets at End of
Period (In millions)... $24.7 $24.5 $47.9 $46.4 $2.4 $2.1
Ratio of Operating
Expenses to Average Net
Assets (Annualized).... 1.94% 1.88% 2.65% 2.63% 2.64% 2.65%
Ratio of Interest
Expense to Average Net
Assets (Annualized).... 1.86% .96% 1.86% .96% 1.86% .96%
Ratio of Net Investment
Income to Average Net
Assets (Annualized).... 9.19% 8.64% 8.39% 7.86% 8.25% 7.72%
Portfolio Turnover...... 88.63% 114.04% 88.63% 114.04% 88.63% 114.04%
Bank Borrowing:
</TABLE>

<TABLE>
<CAPTION>
AMOUNT OF DEBT AVERAGE DAILY BALANCE AVERAGE WEEKLY BALANCE AVERAGE AMOUNT OF
OUTSTANDING AT OF DEBT OUTSTANDING OF SHARES OUTSTANDING DEBT PER SHARE
PERIOD ENDED END OF YEAR DURING PERIOD DURING PERIOD DURING PERIOD
- --------------------------------------- --------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Six Months Ended June 30,
1994.................... $ 19,574,968 $ 4,421,010 5,163,012 $ 0.856
Six Months Ended December
31, 1994................ $ 35,389,479 $25,118,000 6,552,448 $ 3.833
</TABLE>

See Financial Statements and Notes Thereto

8
<PAGE> 327

- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------

Van Kampen Merritt Strategic Income Fund (the "Fund") is a mutual fund, which
pools shareholders' money to seek to achieve specified investment objectives. In
technical terms, the Fund is a separate, non-diversified sub-trust of Van Kampen
Merritt Trust (the "Trust"), which is an open-end management investment company,
commonly known as a "mutual fund," organized as a Massachusetts business trust.

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to other mutual funds distributed by
Van Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- --------------------------------------------------------------------------------

The Fund's primary investment objective is to provide its shareholders with
high current income. The Fund has a secondary investment objective of seeking
capital appreciation. The Fund will seek to achieve its investment objectives by
investing primarily in a portfolio of income securities selected by the Adviser
from the following market sectors: U.S. government securities; domestic
investment grade income securities; domestic lower grade income securities;
foreign investment grade income securities; and foreign lower grade income
securities. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in U.S. dollar-denominated income securities and at
least 40% of the Fund's total assets will be invested in U.S. government
securities and investment grade rated income securities. A substantial portion
of the Fund's assets (up to 60%) may be invested in lower grade income
securities, including securities of issuers located in emerging market
countries. The Fund may invest 100% of total assets in asset-backed securities.
Such investments involve significant risks. See "Investment Objectives and
Policies--Special Risk Considerations." The Fund is designed for investors
willing to assume additional risk in return for the potential for high current
income and capital appreciation. The Fund's investment objectives are
fundamental and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"). There
can be no assurance that the Fund will achieve its investment objectives.

The Adviser will allocate the Fund's investments among market sectors based on
its evaluation of the relative investment opportunities and investment risks
presented by income securities in such sectors from time to time. See
"Investment Objectives and Policies--Allocation of Investments." Under normal
market conditions, the Fund will invest at least 10% of its total assets in each
of at least three market sectors. The Fund is not required to invest a minimum
amount of its assets in any one market sector. The Fund

9
<PAGE> 328

does not intend to invest more than 25% of its total assets in any one industry
or in income securities of issuers (including foreign governments) located in
any single country other than the United States.

Investment grade income securities are income securities rated at least BBB by
Standard & Poor's Ratings Group ("S&P"), at least Baa by Moody's Investors
Service, Inc. ("Moody's"), comparably rated by any other nationally recognized
statistical rating organization or, if not rated by any nationally recognized
statistical rating organization, determined by the Adviser to be of comparable
quality to income securities so rated. Securities rated BBB by S&P are regarded
by S&P as having an adequate capacity to pay interest and repay principal.
Whereas such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories. Securities rated Baa by
Moody's are considered by Moody's as medium grade obligations. Such securities
are in the opinion of Moody's, neither highly protected nor poorly secured.
Interest payments and principal security appear to Moody's to be adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. In the opinion of
Moody's, they lack outstanding investment characteristics and in fact have
speculative characteristics as well. Lower grade income securities are income
securities rated BB or below by S&P, Ba or below by Moody's, comparably rated by
any other nationally recognized statistical rating organization or, if not rated
by any nationally recognized statistical rating organization, determined by the
Adviser to be of comparable quality to income securities so rated. Lower grade
income securities are commonly referred to as "junk bonds" and are regarded by
S&P and Moody's as predominately speculative with respect to the capacity to pay
interest or repay principal in accordance with their terms. Lower grade income
securities involve a greater degree of credit risk than investment grade income
securities. There is no minimum rating or comparable quality standard imposed on
the Fund's investments and the Fund may purchase income securities that are
rated D and that are in default in the payment of interest or repayment of
principal. In S&P's view, the D rating category is used when interest payments
or principal payments are not made on the date due even if an applicable grace
period has not expired, unless S&P believes that such payments will be made
during such grace period. The 'D' rating also is used upon the filing of a
bankruptcy petition if debt service payments are jeopardized. The Fund will not,
however, invest in any security that does not provide for, or that is not
current in the payment of, periodic interest or dividend distributions if as a
result of such investment more than 20% of the Fund's total assets would, at the
time of investment, be invested in such securities.

ALLOCATION OF INVESTMENTS

The Adviser allocates the Fund's investments among various market sectors
based on the Adviser's assessment of the relative investment opportunities and
investment risks presented by income securities in such sectors from time to
time. The Adviser believes that, over time, market sectors become undervalued
relative to the risks of investing in such sectors due to actual or perceived
changes in interest rate cycles, business or

10
<PAGE> 329

economic conditions, rates of inflation, currency relationships, political
factors, investor demand, new issue or secondary market supply and other
factors. Accordingly, the relative investment performance of the various market
sectors change over time, with the best performing sectors frequently changing
from year to year. The Adviser seeks to take advantage of these changes by
allocating a greater proportion of the Fund's assets to those market sectors
that the Adviser believes are undervalued. If successful, this strategy may
enable the Fund to achieve a higher level of investment return over time than if
the Fund invested exclusively in one market sector or if the Fund allocated a
fixed proportion of its assets to each market sector. In addition, the Fund has
a policy of investing, under normal market conditions, a portion of its assets
in each of at least three market sectors. This policy may, over time, enable the
Fund to experience less volatility in income and net asset value than if the
Fund invested exclusively in one market sector. The Fund is, however, more
dependent on the Adviser's ability to successfully evaluate the relative values
of various market sectors as compared to an investment company that does not
seek to adjust market sector allocations over time.

The Adviser dedicates at least one portfolio manager to the continuing
analysis of each market sector in which the Fund may invest. Peter W. Hegel, the
Adviser's Chief Investment Officer, makes market sector investment allocation
decisions for the Fund based on recommendations made by such portfolio managers
responsible for each market sector. Once assets are allocated to a particular
sector, the portfolio manager responsible for such sector selects the Fund's
investments within that sector and monitors such investments on an ongoing
basis, subject to the continuing supervision and authority of Mr. Hegel. Market
sector allocations may be adjusted at any time and are formally reviewed at
least monthly.

MARKET SECTORS

U.S. GOVERNMENT SECURITIES. U.S. government securities are obligations issued
or guaranteed by the U.S. government or its agencies, instrumentalities or
political subdivisions (collectively "agencies"). These obligations may be
either direct obligations of the U.S. Treasury or obligations issued or
guaranteed by U.S. government agencies. Of the obligations issued or guaranteed
by agencies, some are backed by the full faith and credit of the U.S. government
and others are backed only by the right of the issuer to borrow from the U.S.
Treasury. U.S. government securities generally are not rated, but are generally
considered to be of at least the same credit quality as privately issued
securities rated in the highest investment grade rating categories.

DOMESTIC INVESTMENT GRADE INCOME SECURITIES. Domestic investment grade income
securities are income securities of domestic issuers rated investment grade or,
if not rated, determined by the Adviser to be of comparable quality to
investment grade rated securities. Such securities are issued primarily by
domestic corporations.

DOMESTIC LOWER GRADE INCOME SECURITIES. Domestic lower grade income securities
are income securities of domestic issuers rated below investment grade or, if
not rated, determined by the Adviser to be of comparable quality to securities
rated below investment grade. Lower grade income securities commonly are
referred to as "junk

11
<PAGE> 330

bonds." Such securities are issued primarily by domestic corporations.
Investment in lower grade income securities involves certain risks. See
"Investment Objectives and Policies -- Special Risk Considerations."

FOREIGN INVESTMENT GRADE INCOME SECURITIES. Foreign investment grade income
securities are income securities issued by non-domestic issuers and rated
investment grade or, if not rated, determined by the Adviser to be of comparable
quality to income securities rated investment grade. Such securities may include
income securities issued or guaranteed by foreign governments or their agencies,
central banks of foreign countries, supranational entities, such as the
International Bank for Reconstruction and Development, and corporations or other
business entities. Foreign investment grade income securities may be denominated
in any currency and include U.S. dollar denominated income securities sold in
the United States (commonly known as "Yankee bonds") and income securities
denominated in U.S. dollars or other currencies and sold outside the United
States (commonly referred to as "Eurobonds"). As of the date of this prospectus,
most foreign investment grade income securities are issued by issuers located in
more developed countries, including Canada, Japan, Australia, New Zealand and
several Western European countries.

FOREIGN LOWER GRADE INCOME SECURITIES. Foreign lower grade income securities
are income securities issued by non-domestic issuers and rated below investment
grade or, if not rated, determined by the Adviser to be of comparable quality to
income securities rated below investment grade. Lower grade income securities
commonly are referred to as "junk bonds." Such securities may include income
securities issued or guaranteed by foreign governments or their agencies,
central banks of foreign countries and corporations or other business entities.
Investments in this sector may include interests or assignments in nonperforming
or restructured income securities. Issuers of foreign lower grade income
securities frequently will be located in emerging market countries, including
countries in Latin America, Eastern Europe, Africa and much of Asia. Investment
in emerging market countries involves significant risks. See "Investment
Objectives and Policies--Special Risk Considerations."

PORTFOLIO SECURITIES

As used in this prospectus, the term "income securities" includes: fixed or
variable rate bonds, notes, bills or debentures; mortgage backed securities;
asset backed securities; stripped income securities; convertible securities;
zero coupon or deferred payment securities; payment in kind securities;
preferred stock; dividend paying common stock; warrants and other equity
securities acquired as units together with other income securities; bank debt
obligations; short-term paper; loan participations and assignments; assignments
and interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of other income securities and
securities whose principal or interest payments are indexed to changes in the
values of currencies, interest rates, commodities or a basket of securities. The
Fund may invest in income securities of any maturity and denominated in any
currency. At least 65% of the Fund's total assets will be invested in U.S.
dollar denominated securities. Following is a brief

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description of some of the portfolio securities in which the Fund may invest.
See the Statement of Additional Information for more information concerning
these and other portfolio securities in which the Fund may invest.

MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed securities are
securities that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans secured by real property.
Mortgage-backed securities may be issued by the U.S. government or its agencies
or by private entities. The yield characteristics of mortgage-backed securities
differ from traditional debt securities. Interest and principal prepayments are
made more frequently, usually monthly, and principal may be prepaid at
any time. Mortgage-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of prepayment.
Amounts available for reinvestment by the Fund are likely to be greater during a
period of declining interest rates and, as a result, likely to be reinvested at
lower interest rates than during a period of rising interest rates. Asset-backed
securities have structural characteristics similar to mortgage-backed
securities, but have underlying assets such as automobile and credit card
receivables and home equity loans. In general, these types of loans are of
shorter average life than mortgage loans and are less likely to have substantial
prepayments.

STRIPPED INCOME SECURITIES. Stripped income securities are derivative
obligations representing an interest in all or a portion of the income or
principal components of an underlying or related security, a pool of securities
or other assets. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The market values of
stripped income securities tend to be more volatile in response to changes in
interest rates than are conventional income securities. In the case of mortgage
backed IOs, if the underlying assets experience greater than anticipated
prepayments of principal, the Fund may not fully recoup its initial investment.

FLOATING AND VARIABLE RATE INCOME SECURITIES. Income securities may provide
for floating or variable rate interest or dividend payments. The Fund may invest
in derivative floating and variable rate securities such as inverse floaters,
whose rates vary inversely with market rates of interest, or range floaters or
capped floaters, whose rates are subject to periodic or lifetime caps. Such
securities may also pay a rate of interest determined by applying a multiple to
the variable rate. The extent of increases and decreases in the value of
securities whose rates vary inversely with changes in market rates of interest
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity.

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securities usually are issued and traded at a deep discount from their face or
par value and generally are subject to greater fluctuations of market value in
response to changing interest rates than securities of comparable maturities and
credit quality that pay cash interest (or dividends in the case of preferred
stock) on a current basis. Even though the holder of a zero coupon bond or a
payment-in-kind security does not receive cash interest payments prior to
maturity, a portion of the purchase price discount must be accrued as income
each year under current federal tax law. In order to generate sufficient cash to
make distributions, the Fund may have to dispose of securities that it would
otherwise continue to hold, which, in some cases, may be disadvantageous to the
Fund.

PREMIUM SECURITIES. The fund may invest in income securities bearing coupon
rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. Although such securities bear coupon rates higher than prevailing
market rates, because they are purchased at a price in excess of par value, the
yield earned by the Fund on such investments may not exceed prevailing market
yields. If securities purchased by a Fund at a premium are called or sold prior
to maturity, the Fund may recognize a capital loss. Additionally, the Fund will
recognize a capital loss if it holds such securities to maturity.

EQUITY FEATURES. Income securities may involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
interest of other payments, often in addition to a fixed rate of return, that
are based on the borrower's attainment of specified levels of revenues, sales or
profits). At times, the Fund may also acquire warrants and other equity
securities in connection with the purchase of income securities.

BRADY BONDS. The Fund may invest in Brady Bonds and other sovereign debt of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. Certain Brady Bonds
have been collateralized as to principal due at maturity by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds.
Brady Bonds have been issued only recently, and accordingly do not have a long
payment history. In light of the risk of Brady Bonds including, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds, investments in Brady
Bonds are to be viewed as speculative.

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OTHER SOVEREIGN-RELATED DEBT. In addition to Brady Bonds, the Fund may invest
in sovereign or sovereign-related debt obligations, including obligations of
supranational entities. Such investments may include participations and
assignments of sovereign bank debt, restructured external debt that has not
undergone a Brady-style debt exchange, and internal government debt. The Fund
may invest in fixed and floating rate loans ("Loans") arranged through private
negotiations between a foreign government or agency and one or more financial
institutions ("Lenders"). The Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Fund generally has no direct
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan ("Loan Agreement"), nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.

STRUCTURED INVESTMENTS. The Fund may invest a portion of its assets in
interests in entities organized and operated for the purpose of restructuring
the investment characteristics of other income securities. This type of
restructuring involves the deposit with or purchase by an entity of income
securities (such as bank loans or Brady Bonds) and the issuance by that entity
of one or more classes of securities ("Structured Investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions.

PRIVATE PLACEMENTS. The Fund may invest in income securities that are sold in
private placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in the OTC secondary market.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities may in turn be less liquid and more
difficult to value than publicly traded securities. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. Certain of the Fund's direct investments,
particularly in emerging foreign markets, may include investments in smaller,
less seasoned companies, which may involve greater risks. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.

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INDEXED INCOME SECURITIES. The Fund may invest in income securities that are
indexed to certain specific foreign currency exchange rates, interest rates or
other reference rates. The terms of such securities provide that their principal
amount is adjusted upwards or downwards (but ordinarily not below zero) at
maturity to reflect changes in the exchange rate between two currencies (or
other rates) while the obligations are outstanding.

SPECIAL RISK FACTORS

INVESTMENTS IN INCOME SECURITIES. The value of the income securities held by
the Fund, and thus the net asset value of the shares, generally will fluctuate
with (i) changes in the perceived creditworthiness of the issuers of those
securities, (ii) movements in interest rates, and (iii) changes in the relative
values of the currencies in which the Fund's investments are denominated with
respect to the U.S. dollar. Many of the income securities in which the Fund will
invest have long maturities. A longer average maturity generally is associated
with a higher level of volatility in market value in response to changes in
interest rates. In addition, securities issued at a discount, such as certain
types of Brady Bonds and zero coupon obligations, may be subject to greater
fluctuations in market value in response to changes in interest rates.

The Fund may invest in derivative income securities such as stripped income
securities, inverse floaters, range floaters and capped floaters. Investment in
such securities involves special risks as compared to investment in conventional
floating or variable rate income securities. The extent of increases and
decreases in the value of such securities and the corresponding changes to the
per share net asset value of the Fund in response to changes in market rates of
interest generally will be larger than comparable changes in the value of an
equal principal amount of a fixed rate income security having similar credit
quality, redemption provisions and maturity. The markets for such securities may
be less developed than the markets for conventional floating or variable rate
income securities.

INVESTMENT IN LOWER GRADE INCOME SECURITIES. A substantial portion of the
Fund's assets may be invested in lower grade securities, commonly referred to as
"junk bonds." Debt securities rated BB or below by S&P or below Ba by Moody's
are deemed by S&P and Moody's to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal and may involve major
risk exposure to adverse conditions. The lower grade income securities in which
the Fund may invest may include securities having the lowest ratings assigned by
S&P or Moody's and, together with comparable unrated securities, may include
securities in default or that face the risk of default with respect to the
payment of principal or interest or that have filed for bankruptcy protection.
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing. See the Statement of Additional
Information for a more complete description of S&P and Moody's ratings. Lower
grade income securities are especially subject to adverse changes in general
economic conditions, the industries in which the issuers are engaged, the
financial condition of the issuers and prevailing interest rates. Issuers of
lower grade securities are often highly leveraged and may not have available to
them more traditional methods of financing. During periods of economic downturn
or rising interest rates, highly leveraged issuers may experience financial
stress which could

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adversely affect their ability to make payments of principal and interest and
increase the possibility of default. Lower grade income securities are generally
unsecured and are often subordinated to other income securities of the issuer.
To the extent the Fund is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings, the Fund may incur
additional expenses and, with respect to foreign lower grade income securities,
may have limited legal recourse in the event of a default. Lower grade income
securities frequently have call or buy-back features which permit an issuer to
call or repurchase the security prior to its maturity. If an issuer exercises
these provisions in a declining interest rate environment, the Fund may have to
reinvest in lower yielding securities, resulting in a decrease in income earned
by the Fund.

DEFAULTED SECURITIES. The Fund may invest in defaulted securities. Defaulted
securities are securities with respect to which payment of interest or repayment
of principal is in arrears. Any investment in defaulted securities primarily
would be intended to benefit the Fund's investment objective with respect to
capital appreciation and not its investment objective with respect to providing
a high level of current income. Defaulted securities may be less liquid than
investments in more highly rated securities and the Fund may be unable to
dispose of such securities in a timely fashion. Investment in defaulted
securities should be considered speculative. Defaulted securities may not resume
payment of interest or repayment of principal in accordance with the terms of
the original obligation and the Fund may not recoup its investment in such
securities.

INVESTMENTS IN FOREIGN INCOME SECURITIES. Investment in foreign income
securities involves certain special risks not usually associated with investment
in domestic income securities. In addition, the magnitude of such risks is
generally greater with respect to investment in emerging market countries.
Investments in foreign income securities involve risks relating to political and
economic developments abroad. With respect to many foreign countries, there is
the possibility of nationalization, expropriation or confiscatory taxation,
political instability, increased governmental regulation, social instability or
diplomatic developments (including armed conflict) which could adversely affect
the economies of such countries or the value of the Fund's investments in those
countries. Foreign investment in certain countries is restricted or controlled
to varying degrees. These restrictions or controls may at times limit or
preclude foreign investment in certain emerging market income securities and
increase the costs and expenses of the Fund. Disclosure, accounting and
regulatory standards in many respects are less stringent in many countries than
in the U.S and there may be less publicly available information concerning
foreign issuers than there is with respect to domestic issuers. In addition,
there may be less timely and accurate information with respect to general
economic conditions and trends in countries in which issuers of foreign income
securities are located, particularly in emerging market countries. There also
may be a lower level of monitoring and regulation of securities markets and the
activities of investors in such markets, and enforcement of existing regulations
has in many instances been limited. Foreign markets also have different
clearance and settlement procedures, and in certain markets settlement may fail
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and no return is earned thereon.
Because the Fund may

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invest in non-U.S. dollar-denominated securities, changes in foreign currency
exchange rates will affect the Fund's net asset value, the value of dividends
and interest earned, gains and losses realized on the sale of securities and net
investment income to be distributed to shareholders. The exchange rates between
the U.S. dollar and other currencies can be volatile. Investment income on
certain foreign securities in which the Fund may invest may be subject to
foreign withholding or other government taxes.

SOVEREIGN DEBT. The issuer of sovereign debt or the governmental authorities
that control the repayment of sovereign debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt.
Sovereign debt differs from debt obligations issued by private entities in that,
generally, remedies for defaults must be pursued in the courts of the defaulting
party. Legal recourse is therefore limited. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors.

LEVERAGE. The Fund may borrow for investment purposes in an amount equal to
33 1/3% of the Fund's total assets (after giving effect to the amount borrowed).
The use of leverage creates the opportunity for enhanced return, but also should
be considered a speculative technique and may increase the Fund's investment
risk, including the potential for greater volatility in the Fund's net asset
value and net income available for distribution to shareholders.

RESTRICTED AND ILLIQUID SECURITIES. Subject to limitations under state law,
the Fund may invest up to 15% of its net assets in illiquid securities including
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. The Fund may
find it difficult to sell such illiquid securities when the Adviser believes it
is advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more liquid. The lack of a liquid secondary
market also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio and calculating net
asset value. These risks may be intensified in the case of securities issued by
issuers located in, or traded in capital markets located in, emerging foreign
markets. Such securities may trade infrequently and such markets may be unable
to respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings impossible at times, particularly in times
of economic distress. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust will not be treated as
restricted securities by the Fund pursuant to such rules.

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NON-DIVERSIFIED STATUS. The Fund has registered as a non-diversified
investment company, which means that the Fund may invest to a greater degree in
a relatively limited number of issuers than may a diversified investment
company. To the extent that the Fund so invests, the Fund will be more
susceptible to any single adverse economic, political or regulatory occurrence.

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INVESTMENT PRACTICES
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In connection with the investment policies described above, the Fund also may
engage in strategic transactions, enter into currency transactions, purchase and
sell securities on a "when issued" and "delayed delivery" basis, borrow money
from banks, enter into repurchase and reverse repurchase agreements, engage in
dollar rolls and lend its portfolio securities, in each case subject to the
limitations set forth below. These investment practices entail risks. See the
Statement of Additional Information for a more complete discussion of these
practices.

STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments and
purchase and sell financial futures contracts and enter into various interest
rate and currency transactions such as forward contracts, futures contracts,
swaps, caps, floors or collars or options on currencies or futures.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective interest rate exposure of the Fund's
portfolio, to protect against changes in currency exchange rates, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Strategic Transactions may also be
used to enhance potential gain, although no more than 5% of the Fund's assets
will be committed to certain Strategic Transactions for non-hedging
transactions. The use of Strategic Transactions for non-hedging purposes should
be considered a speculative technique. Any or all of these investment techniques
may be used at any time and there is no particular strategy that dictates the
use of one technique rather than another, as use of any Strategic Transaction is
a function of numerous variables including market conditions. The Fund may also
invest in income securities the terms of which include elements of or are
similar in effect to Strategic Transactions in which the Fund may engage. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.

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result in losses to the Fund, force the sale or purchase of portfolio securities
at inopportune times or for prices other than current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors including
the imposition of exchange controls, suspension of settlements or the inability
to deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. The Strategic Transactions that
the Fund may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" purchase
basis. No income accrues to or is earned by the Fund on portfolio securities in
connection with such transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher or lower than yields on the such securities
obtained pursuant to such transactions.

SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of

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that security will decline. When the Fund makes a short sale, it must borrow the
security sold short and deliver it to the broker-dealer through which it made
the short sale in order to satisfy its obligation to deliver the security upon
conclusion of the sale. The Fund is obligated to collateralize its obligation to
replace the borrowed security with cash, U.S. government securities or other
highly liquid securities. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any payments received on such
borrowed securities. If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the borrowed security,
the Fund will incur a loss; conversely, if the price declines, the Fund will
realize a capital gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited. The short sale of a security is considered a
speculative investment technique.

The market value of the security sold short of any one issuer will not exceed
either 5% of the Fund's total assets or 5% of such issuer's voting securities.
The Fund will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
25% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.

LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. The
Fund is the beneficial owner of the loaned securities in that any gain or loss
in the market price during the loan inures to the Fund and its shareholders.

USE OF LEVERAGE. The Fund is authorized to borrow money from banks for
investment purposes in an amount up to 33 1/3% of its total assets (including
the amount of the borrowing). The Fund is also authorized to borrow an
additional 5% of its total assets from any person without regard to the
foregoing limitation for temporary purposes such as clearance of portfolio
transactions, the payment of dividends and share repurchases. The use of
leverage will provide the opportunity for increased net income, but also should
be considered a speculative technique and may increase the Fund's investment
risk. The Fund expects initially to borrow in an amount equal to approximately
25% of its total assets.

Borrowing will exaggerate changes in the net asset value of the shares and in
the yield on the Fund's portfolio, which may, in turn, result in increased
volatility of the market price of the shares. Borrowing will create interest
expenses for the Fund which can exceed the income from the assets obtained with
the proceeds. To the extent the income derived from securities purchased with
funds obtained through borrowing exceeds the interest and other expenses that
the Fund will have to pay in connection with such borrowing, the Fund's net
income will be greater than if the Fund did not borrow. Conversely, if the
income from the assets obtained through borrowing is not sufficient to cover the
cost of

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borrowing, the net income of the Fund will be less than if the Fund did not
borrow, and therefore the amount available for distribution to shareholders will
be reduced. See "Investment Objectives and Policies -- Special Risk Factors --
Leverage."

BANK BORROWING. The Fund may borrow money from banks on a secured or unsecured
basis, and may be required to pledge specific portfolio securities as
collateral. The Fund may incur various fees and expenses in connection with bank
borrowings, including initial facility fees, ongoing commitment fees and
interest expenses. Loan agreements may include various covenants, including
restrictions on certain investment practices in which the Fund might otherwise
be permitted to engage. Bank borrowings constitute senior securities under the
Investment Company Act, and the Fund is required to maintain an asset coverage
of at least 300% of the amount of any bank borrowing.

DOLLAR ROLLS. Dollar rolls are transactions in which the Fund sells securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, the Fund foregoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and lower forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The Fund also could be compensated through the
receipt of fee income equivalent to a lower forward price. At the time the Fund
enters into a dollar roll, the Fund's custodian will segregate cash or liquid,
high-grade debt securities having a value not less than the forward purchase
price. Dollar rolls will be considered borrowings and, accordingly, will be
subject to the Fund's 33 1/3% limitation on borrowings.

REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
agreements. Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed date and price. At the time the
Fund enters into a reverse repurchase agreement, an approved custodian will
segregate cash or liquid, high grade debt securities having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements will be considered borrowings and, accordingly, will be subject to
the Fund's 33 1/3% limitation on borrowings.

DEFENSIVE STRATEGIES. At times, conditions in the markets may, in the
Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may use alternative strategies primarily designed to reduce fluctuations
in the value of the Fund's assets. In implementing these "defensive" strategies,
the Fund may invest to a substantial degree in high-quality, short-term
obligations.

PORTFOLIO TURNOVER. Other than for tax purposes, frequency of portfolio
turnover generally will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund does not anticipate having
annual portfolio turnover rates in excess of 200%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
Fund and its shareholders.

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INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions set forth in the Statement of Additional Information which are
fundamental policies. These investment restrictions together with the Fund's
investment objectives cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act. The Fund's other investment policies are not fundamental
and may be changed without shareholder approval. See "Investment Policies and
Restrictions" in the Statement of Additional Information.

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PURCHASING SHARES OF THE FUND
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ALTERNATIVE SALES ARRANGEMENTS

The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and the
aggregate distribution and services fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund.

The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts over $1
million, "Class B Shares" and "Class C Shares"). Class A Share accounts over
$1,000,000 or otherwise subject to a contingent deferred sales charge ("CDSC"),
Class B Shares and Class C Shares sometimes are referred to herein collectively
as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."

The minimum initial investment with respect to each class of shares is $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
It is presently the policy of the Distributor, the distributor of each class of
shares, not to accept any order for Class B Shares or Class C Shares in an
amount of $1,000,000 or more because it ordinarily will be more advantageous for
an investor making such an investment to purchase Class A Shares.

23
<PAGE> 342

An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares. If such an
investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares (discussed below). Investors who intend to hold
their shares for a significantly long time may not wish to continue to bear the
ongoing distribution and service expenses of Class C Shares which, in the
aggregate, eventually would exceed the aggregate amount of the initial sales
charge and distribution and service expenses applicable to Class A Shares,
irrespective of the fact that a CDSC would eventually not apply to a redemption
of such Class C Shares.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, services fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee or services fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Net Asset Value."

24
<PAGE> 343

incurred as a result of issues relating to one class of shares; (vi) accounting
expenses relating solely to one class of shares; and (vii) any other incremental
expenses subsequently identified that should be properly allocated to one or
more classes of shares that shall be approved by the SEC pursuant to an amended
exemptive order. All such expenses incurred by a class will be borne on a pro
rata basis by the outstanding shares of such class. All allocations of
administrative expenses to a particular class of shares will be limited to the
extent necessary to preserve the Fund's qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended.

The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase directly with the investor's securities
broker, dealer or financial intermediary or with the Distributor, plus any
applicable sales charge. Pursuant to state law, such intermediaries may be
required to register as broker/dealers. Sales personnel of brokers, dealers and
financial intermediaries distributing the Fund's shares may receive differing
compensation for selling different classes of shares. It is the responsibility
of the investor's broker, dealer or financial intermediary to transmit the order
to the Distributor. Because the Fund generally will determine net asset value
once each business day as of the close of business, purchase orders placed
through an investor's broker, dealer or financial intermediary must be
transmitted to the Fund by such broker, dealer or financial intermediary prior
to such time in order for the investor's order to be fulfilled on the basis of
the net asset value to be determined that day. Any change in the purchase price
due to the failure of the Fund to receive a purchase order prior to such time
must be settled between the investor and the broker, dealer or financial
intermediary submitting the order. See "Net Asset Value."

The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. In addition, the
Distributor is sponsoring a sales contest for INVEST Financial Corporation
("INVEST") relating to the

25
<PAGE> 344

Fund and other funds distributed by the Distributor, pursuant to which the
Distributor may provide an INVEST broker an award valued up to $750.00 for sales
of such funds during the period April 1, 1995, through May 31, 1995. Such
payments are made by the Distributor out of its own assets. These programs will
not change the price an investor will pay for shares or the amount that the Fund
will receive from such sale.

INITIAL SALES CHARGE ALTERNATIVE

Investors choosing the initial sales charge alternative purchase Class A
Shares. The public offering price of Class A Shares is equal to the net asset
value per share plus an initial sales charge which is a variable percentage of
the offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. See "Alternative Sales Arrangements" above. The staff
of the SEC has taken the position that brokers, dealers or financial
intermediaries who receive 90% or more of the sales charge may be deemed to be
"underwriters" as that term is defined in the Securities Act of the 1933.

<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- -------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
$100 but less than $100,000................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000............. 3.75 3.90 3.25
$250,000 but less than $500,000............. 2.75 2.83 2.25
$500,000 but less than $1,000,000........... 2.00 2.04 1.75
$1,000,000 or more.......................... * * *
</TABLE>

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

QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
sales charges through a combination of investments, rights of accumulation or a
Letter of Intent (even if investors are not currently making an investment of a
size that would normally qualify for a quantity discount).

26
<PAGE> 345

Investors, or their brokers, dealers or financial intermediaries must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer, financial intermediary or the Distributor.

For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:

(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned, either
alone or in combination, by any of the foregoing; or

(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code,
as amended); or

(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act.

2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.

3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor agree to
refund the appropriate
portion of their respective concessions to the Fund, the sales charge on an
investor's previous purchases made within 90 days may be adjusted to the reduced
sales charge under the Letter of Intent, and the refunded concession will be
used to purchase shares of the Fund at the public offering price next determined
after receipt of such monies. Each investment made after signing the Letter of
Intent will be entitled to the sales charge applicable to the total investment
indicated in the Letter of Intent. If an investor does not

27
<PAGE> 346

complete the necessary purchases under the Letter of Intent within 13 months
from the date of the first purchase included thereunder, the sales charge will
be adjusted upward, corresponding to the amount actually purchased.

When an investor signs a Letter of Intent, Class A Shares purchased with a
value of 5% of the amount specified in the Letter of Intent will be restricted;
that is, these Class A Shares cannot be sold or redeemed until the Letter of
Intent is satisfied or the additional sales charges have been paid. If the total
purchases made under the Letter of Intent, less redemptions, equal or exceed the
amount specified in the Letter of Intent, these Class A Shares will no longer be
restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities broker, dealer or financial
intermediary will, upon request, remit their respective portions of the sales
concession and with that amount, purchase additional Class A Shares of the Fund
for the investor's account at the next computed offering price. If an investor
does not complete the necessary purchases under the Letter of Intent, the sales
charges will be adjusted upward and if, after written notice, the investor does
not pay the increased sales charge, sufficient restricted Class A Shares will be
redeemed to pay such charge.

OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced sales charges in connection with unit trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.

1. Unit Trust Reinvestment Programs. The Fund will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund and ISC Shares with no minimum initial or subsequent investment
requirement, and with a lower sales charge if the administrator of an investor's
unit investment trust program meets certain uniform criteria relating to cost
savings established by the Fund and the Distributor. The total sales charge for
all investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the broker, dealer or financial intermediary if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their securities broker, dealer, financial
intermediary or the Distributor.

As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without

28
<PAGE> 347

any systematic withdrawal program. There will be no minimum for reinvestments
from unit investment trusts. The Fund will send account activity statements to
such participants on a quarterly basis only, even if their investments are made
more frequently. The Fund reserves the right to modify or terminate this program
at any time.

2. NAV Purchase Options

The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:

29
<PAGE> 348

DEFERRED SALES CHARGE ALTERNATIVES

Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) 1.00% with respect to Class A Shares
in an amount of $1 million or more; (ii) 4.00% with respect to Class B Shares
and (iii) 1.00% with respect to Class C Shares. Such compensation will not
change the price an investor will pay for CDSC Shares or the amount that the
Fund will receive from such sale. Sales compensation with respect to Class A
Shares subject to a CDSC is set forth under "Purchasing Shares of the Fund --
Initial Sales Charge Alternative."

Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution fee facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase. Investors
should understand that the purpose of the contingent deferred sales charge and
the distribution fee with respect to a class of CDSC Shares is the same as the
initial sales charge and the distribution fee with respect to Class A Shares.

30
<PAGE> 349

contingent deferred sales charge no longer is applicable to such shares, third
of Class A Shares in the shareholder's Fund account that have converted from
Class B Shares, if any, and fourth of CDSC Shares held longest during the period
of time that a contingent deferred sales charge is applicable to shares of the
respective CDSC class. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.

To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) at $10 per share (at a cost of $1,000) and in the second year after
purchase, the net asset value per share is $12 and, during such time, the
investor has acquired 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to the charge because of dividend
reinvestment. With respect to the remaining 40 shares, the charge is applied
only to the original cost of $10 per share and not to the increase in net asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 3.75% (the applicable rate in the second year after
purchase).

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C>
First..................................................... 4.00%
Second.................................................... 3.75%
Third..................................................... 3.50%
Fourth.................................................... 2.50%
Fifth..................................................... 1.50%
Sixth..................................................... 1.00%
Seventh and after......................................... 0.00%
</TABLE>

31
<PAGE> 350

CONVERSION FEATURE. Seven years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher distribution fee applicable to Class B Shares. The
purpose of the conversion feature is to relieve the holders of Class B Shares
for such seven year period from the higher aggregate distribution and service
fees applicable to Class B Shares. Proceeds received by the Distributor from the
distribution fee and the contingent deferred sales charge, if any, with respect
to a particular Class B Share may be more or less than the Distributor's actual
distribution related expense with respect to such Class B Share.

For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to the Class B Shares of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of the Fund prior to conversion, a Class B Share
of the Fund issued in connection with an exercise of the exchange privilege, or
a series of exchanges, shall be deemed to have been issued on the date on which
the investor's order to purchase the exchanged Class B Share was accepted or, in
the case of a series of exchanges, when the investor's order to purchase the
original Class B Share was accepted.

32
<PAGE> 351

- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------

The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare distributions on a daily basis and to pay such
distributions from net investment income and principal attributable to each
respective class of shares of the Fund on a monthly basis. The Fund may at times
pay out less than the entire amount of net investment income earned in any
particular period and may at times pay out such accumulated undistributed income
in addition to net investment income earned in other periods in order to permit
the Fund to maintain a more stable level of distributions to shareholders. As a
result, the distributions paid by the Fund for any particular period may be more
or less than the amount of net investment income earned by the Fund during such
period. Net investment income consists of all interest income, dividends, other
ordinary income earned by the Fund on its portfolio assets and net short-term
capital gains, less all expenses of the Fund (including any interest payments
required with respect to any borrowings by the Fund) attributable to the class
of shares in question. Expenses of the Fund are accrued each day. Net realized
long-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.

Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.

PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit quarterly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge, unless a shareholder elects
otherwise to the Transfer Agent. This election

33
<PAGE> 352

may be made by telephone by calling 1-800-341-2911, during the hours of 7:00
a.m. to 7:00 p.m. Central Standard Time or in writing to the Transfer Agent. For
inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889. If a shareholder elects to change the method of distribution,
such change will be effective only with regard to distributions for which the
record date is seven or more business days after the Transfer Agent has received
the request.

- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------

WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular fund and the class designations of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
or if the account of record has changed within 30 days of the request, the
signature(s) must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the Federal Deposit
Insurance Corporation, a credit union or a savings association. The guarantee
must state the words "Signature Guaranteed" along with the name of the granting
institution. Shareholders should verify with the institution that it is an
eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Dwight Building, Sixth
Floor, Kansas City, MO 64105-1807. Shareholders will receive the net asset value
per share next computed after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.

34
<PAGE> 353

firm of a principal stock exchange, a commercial bank or trust company which is
a member of the Federal Deposit Insurance Corporation, a credit union or a
savings association unless the Authorization is completed at the time an account
is originally established. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. A redemption requested by
telephone will be processed at the net asset value next determined after receipt
of the request. Any applicable contingent deferred sales charge with respect to
CDSC Shares redeemed will be deducted from the redemption proceeds prior to
transmittal of such proceeds to the shareholder. The proceeds would then be made
payable to the registered shareowner(s) and mailed to the address registered on
the account or wired to a bank, as requested on the Authorizations. A request
for any telephone redemptions to be mailed to the address of record can not be
processed if the address of record has been changed within 30 days prior to such
request. Shareholders cannot redeem shares by telephone if stock certificates
are held for those shares. This service is not available with respect to shares
held in an Individual Retirement Account for which State Street Bank and Trust
Company acts as custodian. In addition, this service is not available with
respect to shares purchased by check until 15 days after purchase.

By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services ("NFDS") seek to employ procedures reasonably
believed to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring a person attempting to redeem shares by
telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent or unauthorized request. This service may be
amended or terminated at any time by the Transfer Agent or the Fund. If a
shareholder is unable to reach the Fund by telephone, he or she may redeem
shares pursuant to the procedures set forth above under the caption "Written
Redemption Request." During periods of extreme economic or market changes, it
may be difficult for investors to reach the Fund by telephone and to effect
telephone redemptions.

REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the investor's

35
<PAGE> 354

broker, dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, sell orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the redemption price due to the
failure of the Distributor to receive a sell order prior to such time must be
settled between the investor and the broker, dealer or financial intermediary
submitting the order. The Fund does not charge for this transaction (other than
any contingent deferred sales charge applicable to CDSC Shares). Shareholders
must submit a written redemption request in proper form to their securities
dealer within five business days after calling the dealer with the sell order.
The request should indicate the number of shares to be redeemed and the class
designation of such shares, identify the account number and the order or
confirmation number assigned to the trade and be signed by the shareholder
exactly as the shares are registered. If the amount of the redemption exceeds
$50,000 or if the redemption proceeds will be sent to an address other than the
address of record, or if the address of record has been changed within 30 days
of the request, signature(s) must be guaranteed by a member firm of a principal
stock exchange, a commercial bank or trust company which is a member of the
Federal Deposit Insurance Corporation, a credit union or a savings association.
The guarantee must state the words "Signature Guaranteed" along with the name of
the granting institution. Shareholders should verify with the institution that
it is an eligible guarantor prior to signing. A guarantee from a notary public
is not acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent endorsed for transfer or accompanied by an endorsed
stock power. Certificates should be sent by registered mail to State Street Bank
and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, 1004 Baltimore Avenue, Dwight Building, Sixth Floor, Kansas City, MO
64105-1807. Shareholders whose shares are held in an Individual Retirement
Account ("IRA") for which State Street Bank and Trust Company acts as custodian
may not sell their shares through their securities dealers.

36
<PAGE> 355

redemption is made within one year of the initial determination of disability.
This waiver of the CDSC on Class B Shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.

GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to Class B Shares and Class C Shares, any applicable contingent deferred
sales charge) ordinarily will be mailed to shareholders or their dealer, as the
case may be, within seven calendar days after a redemption request or repurchase
order and share certificates (if any) are received in proper form as set forth
above. Wire transfers from the Fund of redemption proceeds, in the manner
described above, ordinarily will be transmitted to the shareholder within one
business day. If any shares are redeemed or repurchased shortly after purchase,
the Fund will not mail the proceeds until checks received for the purchase of
shares have cleared, which may take 10 days or more. The proceeds, of course,
may be more or less than the cost of the shares.

- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------

The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different classes of
shares may differ.

Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or

37
<PAGE> 356

securities with similar characteristics in accordance with procedures
established in good faith by the Board of Trustees of the Trust, of which the
Fund is a sub-trust. Securities with remaining maturities of 60 days or less are
valued at amortized cost when amortized cost is determined in good faith by or
under the direction of the Board of Trustees of the Trust to be representative
of the fair value at which it is expected such securities may be resold. Any
securities or other assets for which current market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established by and under the general supervision of the Board of
Trustees.

- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------

Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, Inc. VK/AC Holding, Inc. is controlled, through
the ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership, C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New
York based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. and its subsidiaries (some of whom are
officers or trustees of the Fund) own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and the right to acquire, upon the exercise
of options, approximately an additional 10% of the common stock of VK/AC
Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc. The address of the Adviser is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.

ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate sub-trust. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for

38
<PAGE> 357

overall management of the Fund's business affairs. The Fund will pay the Adviser
a fee equal to a percentage of the average daily managed assets of the Fund as
follows:

<TABLE>
<CAPTION>
AVERAGE DAILY MANAGED ASSETS % PER ANNUM
- --------------------------------------------------------------- -----------
<S> <C>
First $500 million............................................. 0.75 of 1%
Over $500 million but less than $1 billion..................... 0.70 of 1%
Over $1 billion................................................ 0.65 of 1%
</TABLE>

For purposes of determining the investment advisory fee, "average daily managed
assets" shall mean the average daily value of the Fund's aggregate assets, minus
the sum of accrued liabilities other than the aggregate amount of any borrowings
(whether from banks, through reverse repurchase agreements or dollar rolls, or
otherwise) undertaken by the Fund.

Under its investment advisory agreement, the Fund has agreed to assume and pay
the charges and expenses of the Fund's operation, including the compensation of
the Trustees of the Trust (other than those who are affiliated persons, as
defined in the Investment Company Act, of the Adviser, Van Kampen American
Capital Distributors, Inc. or Van Kampen American Capital, Inc.), the charges
and expenses of accountants, legal counsel, any transfer or dividend disbursing
agent and the custodian (including fees for safekeeping of securities), costs of
calculating net asset value, costs of acquiring and disposing of portfolio
securities, interest (if any) on obligations incurred by the Fund, costs of
share certificates, membership dues in the Investment Company Institute or any
similar organization, reports and notices to shareholders, costs of registering
shares of the Fund under the federal securities laws, miscellaneous expenses and
all taxes and fees to federal, state or other governmental agencies, excluding
state securities registration expenses.

The Adviser utilizes at its own expense certain research services of its
affiliate, McCarthy, Crisanti & Maffei, Inc. ("MCM").

PORTFOLIO MANAGEMENT. Peter W. Hegel is a Senior Vice President, Chief
Investment Officer and Portfolio Manager of the Adviser. He makes market sector
investment allocation decisions for the Fund based on recommendations made by
portfolio managers responsible for each market sector. Mr. Hegel has been
employed by the Adviser for the last five years. The Adviser dedicates at least
one portfolio manager to the continuing analysis of each market sector in which
the Fund may invest. Once assets are allocated to a particular sector, the
portfolio manager responsible for such sector selects the Fund's investments
within that sector and monitors such investments on an ongoing basis, subject to
the continuing supervision and authority of Mr. Hegel.

39
<PAGE> 358

The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions. The income securities in
which the Fund may invest are traded principally in the over-the-counter market.
In the over-the-counter market, securities generally are traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a mark-up to the
dealer. Securities purchased in underwritten offerings generally include, in the
price, a fixed amount of compensation for the managers, underwriters and
dealers. The Fund may also purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid. Purchases
and sales of bonds on a stock exchange are effected through brokers who charge a
commission for their services.

40
<PAGE> 359

members of the NASD who are acting as securities dealers, NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance. Brokers, dealers and financial
intermediaries that have entered into Selling Agreements with the Distributor
and sell shares of the Fund are referred to herein as "financial
intermediaries."

CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.30% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such financial intermediaries as
a service fee or the amount of the Distributor's actual distribution related
expense.

CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan in connection with the distribution of Class B Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class B Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by financial intermediaries and in connection with the
maintenance of such shareholders' accounts.

CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays financial intermediaries in connection with the distribution of
the Class C Shares up to 0.75% of the Fund's average daily net assets
attributable to Class C Shares maintained in the Fund more than one year by such
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of the 0.75% not paid to such financial intermediaries or the amount
of the Distributor's actual distribution related expense attributable to the
Class C Shares. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class C Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by financial intermediaries and in
connection with the maintenance of such shareholders' accounts.

OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.

41
<PAGE> 360

The Distributor's actual distribution-related expenses with respect to a class
of CDSC Shares for any given year may exceed the fees payable to the Distributor
with respect to such shares under the Distribution Plan, the Service Plan and
payments received pursuant to the contingent deferred sales charge. In such
event, with respect to any such class of CDSC Shares, any unreimbursed
distribution expenses will be carried forward and paid by the Fund (up to the
amount of the actual expenses incurred) in future years so long as such
Distribution Plan is in effect. Except as mandated by applicable law, the Fund
does not impose any limit with respect to the number of years into the future
that such unreimbursed expenses may be carried forward (on a Fund level basis).
Because such expenses are accounted on a Fund level basis, in periods of extreme
net asset value fluctuation such amounts with respect to a particular CDSC Share
may be greater or less than the amount of the initial commission (including
carrying cost) paid by the Distributor with respect to such CDSC Share. In such
circumstances, a shareholder of such CDSC Share may be deemed to incur expenses
attributable to other shareholders of such class. As of December 31, 1994, there
were $74,923 and $8,831 of unreimbursed distribution expenses with respect to
Class B Shares and Class C Shares respectively, representing 0.10% and 0.01%,
respectively of the Fund's total net assets. If the Distribution Plan were
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.

Because the Fund is a sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts of the Trust. The Distributor will
endeavor to allocate such expenses among such funds in an equitable manner. The
Distributor will not use the proceeds from the contingent deferred sales charge
with respect to a particular class of CDSC Shares to defray distribution related
expenses attributable to any other class of CDSC Shares. Various federal and
state laws prohibit national banks and some state-chartered commercial banks
from underwriting or dealing in the Fund's shares. In addition, state securities
laws on this issue may differ from the interpretations of federal law, and banks
and financial institutions may be required to register as dealers pursuant to
state law. In the unlikely event that a court were to find that these laws
prevent such banks from providing such services described above, the Fund would
seek alternate providers and expects that shareholders would not experience any
disadvantage.

- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus and is qualified by reference to the additional federal income
tax discussion included in the Statement of Additional Information.

42
<PAGE> 361

year to its shareholders at least 90% of its net investment income (which
includes net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses) in
each year, it will not be required to pay federal income taxes on any income
distributed to shareholders. The Fund will not be subject to federal income tax
on any net capital gains distributed to shareholders. As a sub-trust of a
Massachusetts business trust, the Fund will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company for federal income tax purposes.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. Some of the Fund's
investment practices are subject to special provisions of the Code that, among
other things, may affect the amount, timing and character of distributions to
shareholders.

DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to shareholders as ordinary income whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming such shares are held as a capital asset). The Fund will
inform shareholders of the source and tax status of all distributions promptly
after the close of each calendar year. A portion of the distributions from the
Fund will be eligible for the dividends received deduction for corporations if
the Fund receives qualifying dividends during the year and if certain other
requirements of the Code are satisfied.

Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.

SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such shares
have been held for more than one year. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such shares. For purposes of determining whether shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.

43
<PAGE> 362

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

- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------

SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
Upon written or telephone request to the Fund, however, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent share certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and to obtain
a Surety Bond in a form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.

44
<PAGE> 363

sales charge, in order to purchase shares at the same time that shares are being
redeemed upon which a sales charge may already have been paid. Therefore, the
Fund will not knowingly permit a shareholder to make additional investments in
shares of less than $5,000 if at the same time such shareholder is making
systematic withdrawals at a rate greater than the distribution being paid on
such shareholder's shares. The Fund reserves the right to amend or terminate the
systematic withdrawal program on thirty days' notice, and a shareholder may
withdraw from the program at any time.

EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares or
money market fund shares of other Van Kampen Merritt mutual funds distributed by
the Distributor that offer an exchange privilege. Under the exchange privilege,
the Fund will offer to exchange its Class A Shares for ISC Shares or money
market fund shares, as the case may be, of such other funds on the basis of
relative net asset value per share. Any ISC Shares exchanged into the Fund that
have been charged a sales load lower than the sales load applicable to Class A
Shares of the Fund will be charged the applicable sales load differential upon
exchange. ISC Shares of the Van Kampen Merritt Money Market Fund and Van Kampen
Merritt Tax Free Money Fund which have not previously been charged a sales load
(except for shares purchased via the reinvestment option) will be charged the
applicable sales load upon exchange into the Fund.

45
<PAGE> 364

that offers an exchange privilege. The Fund, the Distributor, the Transfer Agent
and NFDS seek to employ procedures reasonably believed to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring a person attempting to exchange shares by telephone to provide, on a
recorded line, the name on the account, a social security or tax identification
number or such additional information as may be deemed necessary or appropriate.
An investor agrees that no such person will be liable for any loss, liability,
cost or expense arising out of any request reasonably believed to be genuine,
including any fraudulent request. This service may be amended or terminated at
any time by the Transfer Agent or the Fund. If a shareholder has certificates
for any shares being exchanged, such certificates must be surrendered prior to
the exchange in the same manner as in redemption of such shares. See "Redemption
of Shares--Telephone Redemptions." Any shares exchanged between the Fund and any
of the other funds will begin earning dividends on the next business day after
the exchange is effected. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.

AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).

2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.

46
<PAGE> 365

3. Dividend Diversification. Monthly distributions and any net long-term
capital gain distributions to a shareholder's account may be invested in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE,
upon election by a shareholder. This election may be made on the account
application bound in this Prospectus, by written notice to the Transfer Agent or
by calling the Fund directly at 1-800-341-2911 during the hours of 7:00 a.m. to
7:00 p.m. Central Standard Time. For inquiries through Telecommunications Device
for the Deaf (TDD) dial 1-800-772-8889. In order to qualify for this privilege,
a shareholder must have established an account in the other mutual fund prior to
electing this privilege. This privilege may be modified or terminated by the
Fund at any time.

4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
account application or the EASESM application which is available from the
Transfer Agent, the Fund, such shareholder's broker or dealer or the
Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASESM program, a shareholder may
change the monthly amount or terminate participation at any time by writing or
calling the Transfer Agent. Shareholders in the EASESM program will receive a
confirmation of these transactions from the Fund monthly, and their regular bank
account statements will show the debit transaction each month.

By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the Application in performing such services by either
withdrawing funds for deposit in the Fund pursuant to the EASESM Plan or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.

REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or Shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.

47
<PAGE> 366

Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:

- Individual Retirement Accounts (IRA's) for individuals.

- Simplified Employee Pension Plans (SEP's) for employees.

- Qualified plans for self-employed individuals.

- Qualified corporate pension and profit-sharing plans for employees.

48
<PAGE> 367

year contributions. Generally, those contributions cannot exceed the lesser of
$30,000 or 15% of the participant's compensation for the year. A participating
employee may also make his or her IRA contribution to the same account.
Generally, earnings on accounts held in an IRA established pursuant to a SEP are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2.

Shares of the Fund may also be purchased by all types of employer sponsored
tax-qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through securities brokers,
dealers, financial intermediaries, the Fund or the Distributor for employers
(including individuals) who desire to start or amend a retirement plan. The form
of this standardized plan has been determined to be "qualified" under the
Internal Revenue Code. An employer may use this prototype to establish a profit
sharing plan, a money purchase pension plan or both for its eligible employees.
The cost for the use of the prototype plan is $50, and there are no annual fees.
The adopting employer determines within the prescribed limits the eligibility
standards, rate of contributions and other significant provisions of the
prototype plan. The Distributor, as sponsor of this prototype plan, reserves the
right to amend such plan from time to time to assure its continued qualification
under the Internal Revenue Code or for other reasons. Employers adopting this
prototype plan will be bound by such amendments.

Investors considering establishing a retirement plan or purchasing shares of
the Fund in connection with a retirement plan should consult with their attorney
or tax adviser with respect to plan requirements and tax aspects pertaining to
them.

- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications. From time
to time, the Fund may compare its overall performance to certain securities and
unmanaged indices which may have different risk/reward characteristics than the
Fund and also may compare its performance in certain sectors to the Lehman
Non-Dollar Global Government Index, the Lehman U.S. Government Five Year Plus
Index and the Lehman High Yield Corporate Index. Such characteristics may
include, but are not limited to, tax features, guarantees, insurance and the
fluctuation of principal and/or return. In addition, from time to time, the Fund
may utilize sales literature that includes hypotheticals.

49
<PAGE> 368

From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.

Please consult the Statement of Additional Information for more information
regarding the Fund's performance.

- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------

State Street Bank and Trust Company, c/o National Financial Data Services, Van
Kampen Merritt Funds, P.O. Box 419001, Kansas City, MO 64141-6001, transfer
agent for the Fund, performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. When an initial
investment is made in the Fund, an account will be opened for each shareholder
on the Fund's books and shareholders will receive a confirmation of the opening
of the account. Shareholders will receive quarterly statements giving details of
all activity in their account(s) and will also receive a statement whenever an
investment or withdrawal is made in or from their account. Information for
federal income tax purposes will be provided at the end of the year. Such
statements will present separately information with respect to each class of the
Fund's Shares. It is expected that the transfer agency costs attributable to the
Class B Shares and the Class C Shares will be higher than the transfer agency
costs attributable to the Class A Shares.

- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------

50
<PAGE> 369

shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."

Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of shares is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights, except with respect to the conversion
of Class B Shares into Class A Shares as described above. In the event of
liquidation, each share of the Fund is entitled to its pro rata portion of all
of the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B Shares and Class C Shares pay higher distribution expenses, the
liquidation proceeds to Class B Shareholders and Class C Shareholders are likely
to be lower than to other shareholders.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------

The fiscal year of the Fund ends on June 30 of each year. The Fund sends to
its shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
Independent Auditors, is sent to shareholders each year. After the end of each
year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.

Shareholder inquiries should be directed to Van Kampen Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 Attn: Correspondence. Its
telephone number is 1-800-341-2911.

For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.

51
<PAGE> 370

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

52
<PAGE> 371

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344

VAN KAMPEN MERRITT
STRATEGIC INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Transfer Agent
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt Funds

Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606

Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 372

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT
OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED APRIL 28, 1995

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN MERRITT STRATEGIC INCOME FUND

The Van Kampen Merritt Strategic Income Fund (the "Fund") is a non-diversified
mutual fund. The Fund's primary investment objective is to seek to provide its
shareholders with high current income. The Fund has a secondary investment
objective of seeking capital appreciation. The Fund will seek to achieve its
investment objectives by investing primarily in a portfolio of income securities
selected by Van Kampen American Capital Investment Advisory Corp., the Fund's
investment adviser, from the following market sectors: U.S. government
securities; U.S. investment grade income securities; U.S. lower grade income
securities; foreign investment grade income securities; and foreign lower grade
income securities. The Adviser will allocate the Fund's investments among these
market sectors based on its evaluation of the relative investment opportunities
and investment risks presented by such sectors from time to time. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
U.S. dollar-denominated income securities and at least 40% of the Fund's total
assets will be invested in U.S. government securities and investment grade rated
income securities. A substantial portion of the Fund's assets may be invested in
lower grade income securities, including securities of issuers in emerging
market countries and securities rated in the lowest rating category. The Fund
intends to borrow for investment purposes which will create the opportunity for
increased return but also involves special risks. The Fund is also allowed to
invest in derivative mortgage back securities without limitation. In addition,
the Fund may invest up to 20% in defaulted bank loans. There can be no assurance
that the Fund will achieve its investment objectives. The Fund is a separate
sub-trust of Van Kampen Merritt Trust, a Massachusetts business trust (the
"Trust").

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling 1-800-341-2911, ext. 6504. This Statement of Additional Information
incorporates by reference the entire Prospectus.

The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Description of Securities Ratings.................................................... B-26
Officers and Trustees................................................................ B-33
Investment Advisory and Other Services............................................... B-36
Custodian and Independent Auditors................................................... B-38
Portfolio Transactions and Brokerage Allocation...................................... B-38
Tax Status of the Fund............................................................... B-39
The Distributor...................................................................... B-42
Legal Counsel........................................................................ B-43
Performance Information.............................................................. B-43
Unaudited Financial Statements....................................................... B-45
Notes to Unaudited Financial Statements.............................................. B-53
Independent Auditors' Report......................................................... B-58
Audited Financial Statements......................................................... B-59
Notes to Audited Financial Statements................................................ B-66
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.

<PAGE> 373

THE FUND AND THE TRUST

The Fund is a separate non-diversified sub-trust of the Trust, an open-end
management investment company. The Fund was established pursuant to a
Designation of Sub-Trust on October 14, 1993. At present, the Fund, Van Kampen
Merritt Short-Term Global Income Fund, Van Kampen Merritt High Yield Fund, Van
Kampen Merritt Adjustable Rate U.S. Government Fund and Van Kampen Merritt
Emerging Markets Income Fund are the only sub-trusts of the Trust, although
other sub-trusts may be organized and offered in the future. Mutual funds sell
their shares to investors and invest the proceeds in a portfolio of securities.
A mutual fund allows investors to pool their money with that of other investors
in order to obtain professional investment management. Mutual funds generally
make it possible for investors to obtain greater diversification of their
investments and to simplify their recordkeeping.

The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 19,
1986. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts and indemnifies
shareholders against any such liability.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the Investment Company Act of 1940, as amended (the "1940 Act") or
other applicable law) and except that the Trustees cannot amend the Declaration
of Trust to impose any liability on shareholders, make any assessment on shares
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.

Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.

INVESTMENT POLICIES AND RESTRICTIONS

The investment objectives of the Fund are set forth in the Prospectus under
the caption "Investment Objectives and Policies." There can be no assurance that
the Fund will achieve its investment objectives.

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. Invest 25% or more of the value of its total assets in any single industry.
(Neither the U.S. government nor any of its agencies or instrumentalities
will be considered an industry for purposes of this restriction.)

2. Issue senior securities, borrow money or enter into reverse repurchase
agreements or dollar rolls in the aggregate in excess of 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing); provided
that the Fund may, with respect to up to an additional 5% of its total
assets, borrow from and enter into reverse repurchase agreements and dollar
rolls with, any entity for temporary purposes. The Fund will not mortgage,
pledge or hypothecate any assets other than in connection with borrowings,
reverse repurchase agreements, dollar rolls, and Strategic Transactions.

B-2
<PAGE> 374

3. Make loans of money or property to any person, except (i) to the extent the
securities in which the Fund may invest are considered to be loans, (ii)
through the loan of portfolio securities or the acquisition of securities
subject to repurchase agreements, and (iii) to the extent that the Fund may
lend money or property in connection with maintenance of the value of, or
the Fund's interest with respect to, the securities owned by the Fund.

4. Buy securities "on margin." Neither the deposit of initial or maintenance
margin in connection with Strategic Transactions, short term credits as may
be necessary for the clearance of transactions nor borrowing, entering into
reverse repurchase agreements or dollar rolls consistent with investment
restriction 2. above is considered the purchase of a security on margin.

5. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

6. Make investments for the purpose of exercising control or participation in
management of any company other than a CMO issuer, except to the extent
that exercise by the Fund of its rights under agreements related to
portfolio securities would be deemed to constitute such control or
participation.

7. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except as permitted under
the 1940 Act.

8. Invest in oil, gas or mineral leases or in equity interests in oil, gas, or
other mineral exploration or development programs except pursuant to the
exercise by the Fund of its rights under agreements relating to portfolio
securities.

9. Purchase or sell real estate, commodities or commodity contracts, except to
the extent that the securities that the Fund may invest in are considered
to be interests in real estate, commodities or commodity contracts or to
the extent the Fund exercises its rights under agreements relating to
portfolio securities (in which case the Fund may liquidate real estate
acquired as a result of a default on a mortgage), and except to the extent
that Strategic Transactions the Fund may engage in are considered to be
commodities or commodities contracts.

The Fund may not change any of these investment restrictions as they apply to
the Fund or the Fund's fundamental investment objectives without the approval of
the lesser of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of
the Fund's outstanding Shares present at a meeting at which the holders of more
than 50% of the outstanding shares are present in person or by proxy. As long as
the percentage restrictions described above are satisfied at the time of the
investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed.

In addition, to comply with federal tax requirements for qualifications as a
"regulated investment company," the Fund's investments will be limited in a
manner such that at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
These tax-related limitations may be changed by the Trustees to the extent
necessary to comply with changes to applicable tax requirements.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that its annual portfolio turnover rate will normally be less than
200%. Portfolio turnover will be calculated by dividing the lesser of purchases
or sales of portfolio securities by the monthly average value of the securities
in the portfolio during the year. Securities, including options, whose maturity
or expiration date at the time of acquisition were one year or less will be
excluded from such calculation. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Fund and its Shareholders.

B-3
<PAGE> 375

ADDITIONAL INVESTMENT CONSIDERATIONS

The following information supplements the information provided in the
Prospectus under the headings "Investment Objective and Policies" and "Other
Investment Practices."

PORTFOLIO SECURITIES

U.S. GOVERNMENT SECURITIES. U.S. government securities include securities
issued by the U.S. government, such as U.S. Treasury securities, and securities
issued or guaranteed by agencies of the U.S. government. U.S. Treasury
securities are generally fixed rate securities. The Fund may invest in both
adjustable rate and fixed rate securities issued or guaranteed by agencies of
the U.S. government, including, but not limited to, Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) and Federal
Home Loan Mortgage Corporation (FHLMC) securities. In the case of securities not
backed by the full faith and credit of the United States, the Fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.

U.S. government securities are considered among the most creditworthy of fixed
income investments. The yields available from U.S. government securities are
generally lower than the yields available from corporate debt securities. The
values of U.S. government securities will change as interest rates fluctuate. To
the extent U.S. government securities are not adjustable rate securities, these
changes in value in response to changes in interest rates generally will be more
pronounced. During periods of falling interest rates, the values of outstanding
long-term fixed rate U.S. government securities generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally
decline. The magnitude of these fluctuations will generally be greater for
securities with longer maturities. Although changes in the value of U.S.
government securities will not affect investment income from those securities,
they may affect the net asset value of the Fund.

MORTGAGE-BACKED SECURITIES. "Mortgage-Backed Securities" are securities that
directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans secured by real property. There are currently three
basic types of Mortgage-Backed Securities: (i) those issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities, such as GNMA, FNMA
and FHLMC; (ii) those issued by private issuers that represent an interest in or
are collateralized by Mortgage-Backed Securities issued or guaranteed by the
U.S. government or one of its agencies or instrumentalities; and (iii) those
issued by private issuers that represent an interest in or are collateralized by
whole mortgage loans or Mortgage-Backed Securities without a government
guarantee but usually having some form of private credit enhancement.

Mortgage-Backed Securities may represent an undivided ownership interests in
pools of mortgages. The mortgages backing these securities may include
conventional 30-year fixed rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The U.S. Government
or the issuing agency guarantees the payment of the interest on and principal of
these securities. However, the guarantees do not extend to the securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Fund's shares.
These securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the principal
amounts of such underlying mortgages may generally be prepaid in whole or in
part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-Backed Securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying mortgage obligations. The remaining maturity of a
Mortgage-Backed Security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Adviser on the basis of
assumed prepayment rates with respect to such mortgages. The remaining expected
average life of a pool of mortgages underlying a Mortgage-Backed Security is a
prediction of when the mortgages will be repaid and is based upon a variety of
factors such as the demographic and geographic characteristics of the borrowers
and the mortgaged properties, the length of time that each of the mortgages has
been outstanding, the interest rates payable on the mortgages and the current
interest rate

B-4
<PAGE> 376

environment. While the timing of prepayments of graduated payment mortgages
differs somewhat from that of conventional mortgages, the prepayment experience
of graduated payment mortgages is basically the same as that of the conventional
mortgages of the same maturity dates over the life of the pool.

The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal prepayments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Stripped Mortgage-Backed Securities (defined herein)
which are highly sensitive to changes in prepayment and interest rates.

The Fund's yield may also be affected by the yields on instruments in which
the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full.

During periods of declining interest rates, prepayment of mortgages underlying
Mortgage-Backed Securities can be expected to accelerate. When the mortgage
obligations are prepaid, the Fund reinvests the prepaid amounts in other income
producing securities, the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
Mortgage- Backed Securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid Mortgage-Backed Securities. Moreover, prepayments of
mortgages which underlie securities purchased by the Fund at a premium would
result in capital losses.

Guaranteed Mortgage Pass-Through Securities. The Fund may invest in mortgage
pass-through securities representing participation interest in pools of
residential mortgage loans originated by U.S. governmental or private lenders or
guaranteed, to the extent provided in such securities, by the U.S. government or
one of its agencies or instrumentalities. Mortgage pass-through securities
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayment) made by the individual
borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of
such securities and the servicer of the underlying mortgage loans.

The guaranteed mortgage pass-through securities that the Fund may invest in
include those issued or guaranteed by GNMA, FNMA and FHLMC. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to security holders. GNMA
and FNMA also guarantee timely distribution of scheduled principal. FHLMC
guarantees only ultimate collection of principal on the underlying loans, which
collection may take up to one year. The Fund may also invest in other agency
securities, including but not limited to securities issued by the Small Business
Administration, Export-Import Bank of the United States, Federal Housing
Administration, Farm Credit Administration, Federal Home Loan Banks, General
Services Administration, U.S. Department of Transportation, U.S. Department of
Housing and Urban Development, and Student Loan Marketing Association. These
securities generally are not backed by the full faith and credit of the United
States.

B-5
<PAGE> 377

Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement.

Each FNMA Certificate will represent a pro rata interest in one or more pools
of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage loans that
are not insured or guaranteed by any governmental agency) of the following
types: (i) fixed rate level payment mortgage loans; (ii) fixed rate growing
equity mortgage loans; (iii) fixed rate graduated payment mortgage loans; (iv)
variable rate California mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed rate loans secured by multifamily projects.

B-6
<PAGE> 378

The principal activity of FHLMC currently consists of the purchase of first
lien, conventional, residential mortgage loans and participation interests in
such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily Freddie Mac Certificates.

Collateralized Mortgage Obligations and Multiclass Pass-Through Securities.
Collateralized mortgage obligations ("CMOs") are debt obligations which are
secured by mortgage loans or other Mortgage-Backed Securities (such collateral
is collectively hereinafter referred to as "Mortgage Assets"). Multiclass pass-
through securities are equity interests in a trust composed of Mortgage Assets.
Unless the context indicates otherwise, all references herein to CMOs include
multiclass pass-through securities. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income thereon, provide the funds to pay
debt service on the CMOs or make scheduled distributions on the multiclass
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. The
issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage
Investment Conduit (a "REMIC"). All future references to CMOs shall also be
deemed to include REMICs.The Fund will not invest in REMIC residuals or other
CMO residuals.

In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the underlying Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates. Interest is paid or accrues on all classes of a CMO
on a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of a
CMO in many ways. By investing in particular tranches of a CMO with specified
cash flows, the Fund may gain more predictability of cash flows than if it had
invested in the underlying Mortgage Assets. Generally, the more predictable the
cash flow of a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
Mortgage-Backed Securities. As part of the process of creating more predictable
cash flows on most of the tranches in a series of CMOs, one or more tranches
generally must be created that absorb most of the volatility in the cash flows
on the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on Mortgage-Backed Securities with similar
average lives. Because of the uncertainty of the cash flows on these tranches,
and the sensitivity thereof to changes in prepayment rates on the underlying
Mortgage Assets, the market prices of and yield on these tranches tend to be
more volatile.

One or more tranches of a CMO may have coupon rates which reset periodically
at a specified increment over an index such as LIBOR. These adjustable rate
tranches are known as "floating rate CMOs," "inverse floating CMOs" and
"interest only CMOs". Floating rate CMOs may be backed by fixed rate or
adjustable

B-7
<PAGE> 379

rate mortgages; to date, fixed rate mortgages have been more commonly utilized
for this purpose. Floating rate CMOs are typically issued with lifetime caps on
the coupon rate thereon. These caps, similar to the caps on adjustable rate
mortgages, represent a ceiling beyond which the coupon rate on a floating rate
CMO may not be increased regardless of increases in the interest rate index to
which the floating rate CMO is geared. Floating rate CMOs pay interest at rates
that vary inversely with changes in market rates of interest and may pay a rate
of interest determined by applying a multiple to the floating rate. Accordingly,
when market rates of interest decrease, the change in value of inverse floating
CMOs owned by the Fund will have a positive effect on the net asset value of the
Fund and when market rates of interest increase, the change in value of inverse
floating rate CMOs owned by the Fund will have a negative effect on the net
asset value of the Fund. In addition, the extent of increases and decreases in
the net asset value of the Fund in response to changes in market rates of
interest generally will be larger than comparable changes in the net asset value
of the Fund if the Fund held an equal principal amount of a fixed rate CMO
security having similar credit quality, redemption provisions and maturity.

In reliance on an SEC interpretation, the Fund's investment in certain
qualifying collateralized mortgage obligations (CMOs), including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are
not subject to the 1940 Act's limitation on acquiring interests in other
investment companies. In order to be able to rely on the SEC's interpretation,
the CMOs and REMICs must be unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue redeemable securities,
(c) operate under general exemptive orders exempting them from all provisions of
the 1940 Act, and (d) are not registered or regulated under the 1940 Act as
investment companies. To the extent that the Fund selects CMOs or REMICs that do
not meet the above requirements, the Fund may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.

Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities are
derivative multi-class mortgage securities. Stripped Mortgage-Backed Securities
may be issued by agencies or instrumentalities of the U.S. government, or by
private originators of, or investors in, mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Stripped Mortgage-Backed
Securities issued by parties other than agencies or instrumentalities of the
U.S. Government are considered, under current guidelines of the staff of the
Securities and Exchange Commission (the "SEC"), to be illiquid securities.

Stripped Mortgage-Backed Securities are structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving a small portion of the interest and a larger
portion of the principal from the Mortgage Assets, while the other classes will
receive primarily interest and only a small portion of the principal. In the
most extreme case, one class will receive all of the interest (the interest-only
or "IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yields to maturity on IOs and POs are
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and principal payments may have a material
effect on yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may not fully recoup
its initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected. The market value of such Stripped
Mortgage-Backed Securities, including adjustable rate U.S. government IOs, are
subject to greater risk of fluctuation in response to changes in market interest
rates than other adjustable rate securities, and such greater risk of
fluctuation may adversely affect the ability of the Fund to achieve its
investment objective of maintaining a relatively stable net asset value.

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<PAGE> 380

Types of Credit Support. To lessen the effect of failures by obligors on
underlying mortgages to make payments, ARMS and other Mortgage-Backed Securities
may contain elements of credit support. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.

Adjustable Rate Mortgage-Backed Securities. Adjustable rate Mortgage-Backed
Securities are debt securities having interest rates which are adjusted or reset
at periodic intervals ranging, in general, from one month to three years, based
on a spread over a specific interest rate or interest rate index. There are
three main categories of indices: (i) those based on U.S. Government Securities,
(ii) those derived from a calculated measure such as a cost of funds index and
(iii) those based on a moving average of interest rates, including mortgage
rates. Commonly utilized indices include, for example, the One Year Constant
Maturity Treasury Index, the London Interbank Offered Rate (LIBOR), the Federal
Home Loan Bank Cost of Funds, the prime rate and commercial paper rates.

The Fund may invest in adjustable rate securities with interest rates that
adjust or vary inversely to changes in market interest rates. Such securities,
which are referred to as "inverse floating obligations," provide opportunities
for high current income, but the market value of such securities may be more
volatile in response

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to changes in market interest rates. Certain of such inverse floating
obligations have coupon rates that adjust to changes in market interest rates to
a greater degree than the change in the market rate and accordingly have
investment characteristics similar to investment leverage. As a result, the
market value of such inverse floating obligations are subject to greater risk of
fluctuation than other adjustable rate securities which do not vary inversely to
changes in market interest rates, and such greater risk of fluctuation may
adversely affect the ability of the Fund to achieve its investment objective of
maintaining a relatively stable net asset value.

ASSET-BACKED SECURITIES. "Asset-Backed Securities" have structural
characteristics similar to Mortgage-Backed Securities but have underlying assets
that are not mortgage loans or interests in mortgage loans. Through the use of
trusts and special purpose corporations, various types of assets, primarily
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or in a pay-through structure similar to the CMO structure. In
general, these types of loans are of shorter average life than mortgage loans
and are less likely to have substantial prepayments.

Asset-Backed Securities present certain risks that are not presented by
Mortgage-Backed Securities, including the risk that these securities do not have
the benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of which
give such debtors the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issues of Asset-Backed Securities backed
by automobile receivables permit the servicers of such receivable to retain
possession of the underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related Asset-Backed
Securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirement under state laws, the trustee for the
holders of Asset-Backed Securities backed by automobile receivables may not have
a proper security interest in the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.

FLOATING AND VARIABLE RATE INCOME SECURITIES. Income securities may provide
for floating or variable rate interest or dividend payments. The floating or
variable rate may be determined by reference to a known lending rate, such as a
bank's prime rate, a certificate of deposit rate or the London Inter Bank
Offered Rate (LIBOR). Alternatively, the rate may be determined through an
auction or remarketing process. The rate may also be indexed to changes in the
values of interest rate or securities indexes, currency exchange rates or other
commodities. The amount by which the rate paid on an income security may
increase or decrease may be subject to periodic or lifetime caps. Floating and
variable rate income securities include derivative securities whose rates vary
inversely with changes in market rates of interest. Such securities may also pay
a rate of interest determined by applying a multiple to the variable rate. The
extent of increases and decreases in the value of securities whose rates vary
inversely with changes in market rates of interest generally will be larger than
comparable changes in the value of an equal principal amount of a fixed rate
security having similar credit quality, redemption provisions and maturity.

DISCOUNT, ZERO COUPON SECURITIES AND PAYMENT-IN-KIND SECURITIES. The Fund may
invest in securities sold at a substantial discount from their value at
maturity. Such securities include "zero coupon" and payment-in-kind securities
of governmental or private issuers. Zero coupon securities generally pay no cash
interest (or dividends in the case of preferred stock) to their holders prior to
maturity. Payment-in-kind securities allow the issuer, at its option, to make
current interest payments on such securities either in cash or additional
securities. Accordingly, such securities usually are issued and traded at a deep
discount from their face or par value and generally are subject to greater
fluctuations of market value in response to changing interest rates than
securities of comparable maturities and credit quality that pay cash interest
(or dividends in the case of preferred stock) on a current basis.

Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security and to include the
"interest" on payment-in-kind securities as income each year, even though the
holder receives no interest payment on the security during the year. Federal tax
law also requires that entities such as the Fund which seek to qualify for
pass-through federal income tax treatment as regulated

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investment companies distribute substantially all of their net investment income
each year, including non-cash income. Accordingly, although the Fund will
receive no payments on its zero coupon or payment-in-kind securities prior to
their maturity or disposition, it will have income attributable to such
securities, and it will be required, in order to maintain the desired tax
treatment, to include in its dividends an amount equal to the income
attributable to its zero coupon and payment-in-kind securities. Such dividends
will be paid from the cash assets of the Fund, from borrowings or by liquidation
of portfolio securities, if necessary, at a time that the Fund otherwise might
not have done so. To the extent the proceeds from any such dispositions are used
by the Fund to pay distributions, the Fund will not be able to purchase
additional income-producing securities with such proceeds, and as a result the
Fund's current income ultimately may be reduced. See "Taxation."

PREMIUM SECURITIES. The fund may invest in income securities bearing coupon
rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. The Fund will not amortize the premium paid for such securities in
calculating its net investment income. As a result, in such cases the purchase
of such securities provides the Fund a higher level of investment income
distributable to shareholders on a current basis than if the Fund purchased
securities bearing current market rates of interest. Although such securities
bear coupon rates higher than prevailing market rates, because they are
purchased at a price in excess of par value, the yield earned by the Fund on
such investments may not exceed prevailing market yields. If an issuer were to
redeem securities held by a Fund during a time of declining interest rates, the
Fund may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed. If securities purchased by a Fund
at a premium are called or sold prior to maturity, the Fund will recognize a
capital loss to the extent the call or sale price is less than the purchase
price. Additionally, the Fund will recognize a capital loss if it holds such
securities to maturity.

CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted into or exchanged for
a specified amount of common stock of the same or a different issuer within a
particular period of time and at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (i) have higher yields
than common stocks, but lower yields than comparable non-convertible income
securities, (ii) are less subject to fluctuation in value than the underlying
stock since they have fixed income characteristics, and (iii) provide the
potential for capital appreciation if the market price of the underlying common
stock increases. Most convertible securities currently are issued by domestic
companies, although a substantial Eurodollar convertible securities market has
developed, and the markets for convertible securities denominated in local
currencies are increasing.

The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.

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commodities. Warrants do not carry with them the right to dividends or voting
rights with respect to the securities that they entitle their holder to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, warrants may be considered more speculative than certain other types of
investments.

PREFERRED STOCK. Preferred stock generally has a preference as to dividends
and upon liquidation over an issuer's common stock but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions.

COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund will focus both on the security's dividend paying capacity
and on its potential for appreciation.

BRADY BONDS. The Fund may invest in Brady Bonds and other sovereign debt of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issuer under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
The Brady Plan framework contemplates the exchange of commercial bank debt for
newly issued Brady Bonds. Brady Bonds may also be issued in respect of new money
being advanced by existing lenders in connection with the debt restructuring.
Certain Brady Bonds have been collateralized as to principal due at maturity by
U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of
such Brady Bonds.

Brady Plan debt restructurings totalling more than $80 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina and the Philippines and, in addition, Brazil has announced intentions
to issue Brady Bonds. Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Agreements implemented under the
Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. Brady Bonds
issued to date include bonds issued at 100% of face value of such debt, which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.

In light of the risk of Brady Bonds including, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with terms of the Brady Bonds. Many of the Brady Bonds and other income
securities in which the Fund invests are likely to be acquired at a discount.
See "Taxation."

The Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of Brady Bonds with returns in other bond markets.

OTHER SOVEREIGN-RELATED DEBT. In addition to Brady Bonds, the Fund may invest
in sovereign or sovereign-related income securities. Such obligations may
include, but are limited to, participations and assignments in sovereign bank
loans, restructured external debt that has not undergone a Brady-style debt
exchange, and

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internal government debt such as Mexican Treasury Bills known as Certificados de
la Tesoreira ("CETES"), Argentine Bonos del Tesoro ("BOTE"), Bonos de Inversion
y Crecimiento-Quinta Serie ("BIC V") and Venezuelan zero coupon notes.

The sovereign related income securities in which the Fund may invest generally
consist of obligations issued or backed by national, state or provincial
governments or similar political subdivisions or central banks in foreign
countries. Sovereign related income securities also include debt obligations of
supranational entities, which include international organizations designated or
backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
World Bank), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.

Sovereign related income securities also include income securities of
"quasi-governmental agencies" and income securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit ("ECU"). An ECU
represents specified amounts of the currencies of certain member states of the
European Economic Community. The specific amounts of currencies comprising the
ECU may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies. European
supranational entities, in particular, issue ECU-denominated obligations. Income
securities of quasi-governmental agencies are issued by entities owned by either
a national, state or equivalent government or are obligations of a political
unit that is not backed by the national government's full faith and credit and
general taxing powers.

DEPOSITORY RECEIPTS. Some of the securities in the Fund may be in the form of
depository receipts. Depository receipts usually represent common stock or other
equity securities of non-domestic issuers deposited with a custodian in a
depository. The underlying securities are usually withdrawable at any time by
surrendering the depository receipt. Depository receipts are usually denominated
in U.S. dollars and dividends and other payments from the issuer are converted
by the custodian into U.S. dollars before payment to receipt holders. In other
respects depository receipts for foreign securities have the same
characteristics as the underlying securities. Depository receipts that are not
sponsored by the issuer may be less liquid and there may be less readily
available public information about the issuer.

STRUCTURED INVESTMENTS. The Fund may invest a portion of its assets in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of other income securities,
including income securities issued by foreign governments. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. The Fund may invest in a class of Structured
Investments that is subordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments.

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securities held by the Fund were required to be registered under the securities
laws of any jurisdiction prior to being resold, the Fund may be required to bear
the expenses of registration.

INDEXED INCOME SECURITIES. The Fund may invest in income securities issued by
banks and other business entities that are indexed to certain specific foreign
currency exchange rates, interest rates or other reference rates. The terms of
such securities provide that their principal amount is adjusted upwards or
downwards (but ordinarily not below zero) at maturity to reflect changes in the
exchange rate between two currencies (or other rates) while the obligations are
outstanding. While such securities offer the potential for an attractive rate of
return, they also entail the risk of loss of principal.

INVESTMENT IN OTHER INVESTMENT COMPANIES. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the 1940 Act, the Fund may invest up
to 10% of its total assets in securities of other investment companies. In
addition, under the 1940 Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies,
stockholders would bear both their proportionate share of expenses in the Fund
(including investment advisory and administrative fees) and, indirectly, the
expenses of such investment companies (including investment advisory and
administrative fees).

SPECIAL RISK FACTORS

INVESTMENT IN LOWER GRADE INCOME SECURITIES. A substantial portion of the
Fund's assets may be invested in lower grade securities. Debt securities rated
BB or lower by S&P or Ba or lower by Moody's are deemed by S&P and Moody's to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
The lower grade income securities in which the Fund may invest may include
securities having the lowest ratings assigned by S&P or Moody's and, together
with comparable unrated securities, may include securities in default or that
face the risk of default with respect to the payment of principal or interest.
The Fund may invest in income securities rated in the lowest rating categories.
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing. See the Statement of Additional
Information for a more complete description of S&P and Moody's ratings.

Lower grade income securities generally offer a higher yield than that
available from higher grade income securities. However, lower grade income
securities involve higher risks, in that they are especially subject to adverse
changes in general economic conditions, the industries in which the issuers are
engaged, the financial condition of the issuers and prevailing interest rates.
Issuers of lower grade securities are often highly leveraged and may not have
available to them more traditional methods of financing. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and interest and increase the possibility of default. The
issuer's ability to service its debt obligations may also be adversely affected
by specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business or revenue forecasts. Similarly, certain
emerging market governments that issue lower grade income securities are among
the largest debtors to commercial banks, foreign governments and supranational
organizations and may not be able or willing to obtain additional financing.

Lower grade income securities frequently have call or buy-back features which
permit an issuer to call or repurchase the security prior to maturity. If an
issuer exercises these provisions in a declining interest rate environment, the
Fund may have to reinvest in lower yielding securities, resulting in a decrease
in income earned by the Fund. The risk of loss due to default by the issuer is
also significantly greater for the holders of lower grade securities because
such securities are generally unsecured and are often subordinated to other
income securities of the issuer. To the extent the Fund is required to seek
recovery upon a default in the payment of principal or interest on its portfolio
holdings, the Fund may incur additional expenses and, with respect to foreign
lower grade income securities, may have limited legal recourse in the event of a
default.

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generally greater with respect to investment in emerging market countries.
Investments in foreign income securities involve risks relating to political and
economic developments abroad. The economies of individual foreign emerging
market countries may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency and balance of payments
position. Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may continue
to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade. These economies also have
been and may continue to be adversely affected by changes in the economic
conditions in the countries with which they trade.

With respect to many foreign countries, there is the possibility of
nationalization, expropriation or confiscatory taxation, political instability,
increased governmental regulation, social instability or diplomatic developments
(including armed conflict) which could adversely affect the economies of such
countries or the value of the Fund's investments in those countries.

Foreign investment in certain countries is restricted or controlled to varying
degrees. These restrictions or controls may at times limit or preclude foreign
investment in certain emerging income securities and increase the costs and
expenses of the Fund. Certain countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than the classes available for purchase by domiciliaries of the countries
and/or impose additional taxes on foreign investors. Certain countries may also
restrict investment opportunities in industries deemed important to national
interests. In addition, certain countries may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. If a deterioration occurs in an emerging market
country's balance of payments, the country might impose temporary restrictions
on foreign capital remittances. Investing in local markets in certain countries
may require the Fund to adopt special procedures, seek local government
approvals or take other actions, each of which may involve additional costs to
the Fund.

Disclosure and regulatory standards in many respects are less stringent in
many countries than in the U.S. There also may be a lower level of monitoring
and regulation of securities markets and the activities of investors in such
markets, and enforcement of existing regulations has in many instances been
limited. Many of the foreign income securities held by the Fund will not be
registered with the SEC, nor will the issuers thereof be subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers than is available concerning domestic
companies. Foreign companies, and in particular, companies in emerging market
countries are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to domestic companies.

Because the Fund may invest in non-U.S. dollars-denominated securities,
changes in foreign currency exchange rates will affect the Fund's net asset
value, the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income to be distributed to
shareholders. If the value of a foreign currency rises against the U.S. dollar,
the value of Fund assets denominated in such currency will increase;
correspondingly, if the value of a foreign currency declines against the U.S.
dollar, the value of Fund assets denominated in such currency will decrease. The
exchange rates between the U.S. dollar and other currencies can be volatile. In
addition, there may be less timely and accurate information with respect to
general economic conditions and trends in countries in which issuers of foreign
income securities are located, particularly in emerging market countries.

The costs associated with investing in foreign income securities frequently
are higher than those attributable to domestic investing. Investment income on
certain foreign securities in which the Fund may invest may be subject to
foreign withholding or other government taxes.

Foreign markets also have different clearance and settlement procedures, and
in certain markets settlement may fail to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested

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and no return is earned thereon. The inability of the Fund to make intended
security purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result in losses to the Fund due to
subsequent declines in the value of such portfolio security.

SOVEREIGN DEBT. Certain countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payment and trade
difficulties and extreme poverty and unemployment. The issuer of sovereign debt
or the governmental authorities that control the repayment of sovereign debt may
be unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt. Sovereign debt differs from debt obligations issued
by private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore limited.

Certain emerging market countries are among the largest debtors to commercial
banks and foreign governments. At times certain emerging market countries have
declared moratoria on the payment of principal and interest on external debt;
such moratoria are currently in effect in certain Latin American countries.
Since 1982, certain emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of sovereign debt,
including the Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to sovereign debtors. The interests of holders
of sovereign debt could be adversely affected in the course of restructuring
arrangements. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.

INVESTMENT PRACTICES

STRATEGIC TRANSACTIONS. The Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates, currency exchange rates and broad or specific market
movements) or to manage the effective maturity or duration of the Fund's income
securities or to enhance potential gain. Such strategies are generally accepted
by modern portfolio managers and are regularly utilized by many mutual funds and
other institutional investors. Techniques and instruments may change over time
as new instruments and strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, equity and income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.

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Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers", or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of "A-1" from S&P
or "P-1" from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.

The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on domestic and foreign
securities exchanges and in the over-the-counter markets and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold. In selling calls on securities not owned by the Fund, the Fund

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may be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligations with respect to the call.

The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures or individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.

GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency, equity or income market changes,
for duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid,
to assume a position in a futures contract and obligates the seller to deliver
such option.

The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.

The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Fund may be subject may further restrict the Fund's ability to engage
in transactions in futures contracts and related options. The segregation
requirements with respect to futures contracts and options thereon are described
below.

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call,

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or is less than, in the case of a put, the exercise price of the option (except
if, in the case of an OTC option, physical delivery is specified). This amount
of cash is equal to the excess of the closing price of the index over the
exercise price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in return for the premium received, to
make delivery of this amount. The gain or loss on an option on an index depends
on price movements in the instruments making up the market, market segment,
industry or other composite on which the underlying index is based, rather than
price movements in individual securities, as is the case with respect to options
on securities.

CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holding denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of such
Counterparties have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Adviser.

The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the Adviser
believes that that the value of schillings will decline against the U.S. dollar,
the Adviser may enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions

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imposed by governments. These can result in losses to the Fund if it is unable
to deliver or receive currency or funds in settlement of obligations and could
also cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interest of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the Investment Company Act of 1940 and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least "A" by S&P or Moody's or has an
equivalent equity rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.

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EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and income
instruments are linked.

RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.

OTC options entered into by the Fund, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.

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securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.

With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.

REPURCHASE AGREEMENTS. The Fund may use up to 20% of its assets to enter into
repurchase agreements with selected commercial banks and broker-dealers, under
which the Fund acquires securities and agrees to resell the securities at an
agreed upon time and at an agreed upon price. The Fund accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Fund enters into a repurchase agreement,
the value of the underlying security including accrued interest will be equal to
or exceed the value of the repurchase agreement and, for repurchase agreements
that mature in more than one day, the seller will agree that the value of the
underlying security including accrued interest will continue to be at least
equal to the value of the repurchase agreement. The Adviser will monitor the
value of the underlying security in this regard. The Fund will enter into
repurchase agreements only with commercial banks whose deposits are insured by
the Federal Deposit Insurance Corporation and whose assets exceed $500 million
or broker-dealers who are registered with the SEC. In determining whether to
enter into a repurchase agreement with a bank or broker-dealer, the Fund will
take into account the credit-worthiness of such party and will monitor its
credit-worthiness on an ongoing basis. In the event of default by such party,
the delays and expenses potentially involved in establishing the Fund's rights
to, and in liquidating, the security may result in loss to the Fund. The Fund's
ability to invest in repurchase agreements that mature in more than seven days
is subject to an investment policy that limits the Fund's investments in
"illiquid" securities, including such repurchase agreements, to 15% of the
Fund's net assets.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to or is earned by the Fund on portfolio securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher or lower than yields on the such securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or high-grade portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase securities on such basis
only with the intention of actually acquiring these securities, but the Fund may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific

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limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when issued" or "delayed delivery" basis.

SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both to obtain capital gains from anticipated declines in securities
and as a form of hedging to offset potential declines in long positions in the
same or similar securities. The short sale of a security is considered a
speculative investment technique.

When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.

The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its Custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer. If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the borrowed security,
the Fund will incur a loss; conversely, if the price declines, the Fund will
realize a capital gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.

The market value of the securities sold short of any one issuer will not
exceed either 5% of the Fund's total assets or 5% of such issuer's voting
securities. The Fund will not make a short sale, if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value of
its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.

LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. Such
loans must be callable at any time and be continuously secured by collateral
deposited by the borrower in a segregated account with the Fund's custodian
consisting of cash or of securities issued or guaranteed by the U.S. government
or its agencies, which collateral is equal at all times to at least 100% of the
value of the securities loaned, including accrued interest. The Fund will
receive amounts equal to earned income for having made the loan. Any cash
collateral pursuant to these loans will be invested in short-term instruments.
The Fund is the beneficial owner of the loaned securities in that any gain or
loss in the market price during the loan inures to the Fund and its
shareholders. Thus, when the loan is terminated, the value of the securities may
be more or less than their value at the beginning of the loan. In determining
whether to lend its portfolio securities to a bank or broker-dealer, the Fund
will take into account the credit-worthiness of such borrower and will monitor
such credit-worthiness on an ongoing basis in as much as default by the other
party may cause delays or other collection difficulties. The Fund may pay
finders' fees in connection with loans of its portfolio securities.

BORROWINGS AND OTHER TECHNIQUES. The Fund may enter into reverse repurchase
agreements with respect to securities which could otherwise be sold by the Fund.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price which is greater than the sales price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities. Reverse repurchase agreements involve the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of

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securities under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities. Reverse
repurchase agreements will be treated as borrowings for the purposes of the
Fund's investment restriction on borrowings.

In order to seek high current income, the Fund may enter into dollar rolls in
which the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase, typically in 30 or 60 days,
substantially similar (same type and coupon) securities on a specified future
date from the same party at an agreed upon price which is less than the sales
price. During the roll period, the Fund forgoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The cash proceeds from the sale will be maintained by the Fund in
a segregated account with its custodian in which cash, U.S. government
securities or other liquid high-grade debt obligations will be equal in value to
its obligations. Because such assets are maintained in a segregated account, the
Fund will not treat such obligations as senior securities for purposes of the
1940 Act. A "covered roll" is a specific type of dollar roll for which there is
an offsetting cash position or cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction.
"Covered rolls" are not subject to these segregation requirements. Dollar rolls
will be treated as borrowings for purposes of the Fund's investment restriction
on borrowings.

DEFENSIVE STRATEGIES. At times conditions in the markets may, in the Adviser's
judgment, make pursuing the Fund's basic investment strategy inconsistent with
the best interests of its shareholders. At such times, the Adviser may use
alternative strategies primarily designed to reduce fluctuations in the value of
the Fund's assets. In implementing these "defensive" strategies, the Fund may
invest to a substantial degree in high-quality, short-term obligations. Such
obligations may include: obligations of the U.S. Government, its agencies or
instrumentalities; other debt securities rated within the four highest grades by
either S&P or Moody's (or comparably rated by any other NRSROs); commercial
paper rated in the highest grade by either rating service (or comparably rated
by any other nationally recognized statistical rating organization);
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other income securities that
the Adviser considers consistent with such strategy. The yield on these
securities generally is lower than the yield on the types of income securities
in which the Fund will invest in normal market conditions.

CREDIT QUALITY. The Fund's policies with respect to credit quality of
portfolio investments will apply only at the time of purchase of a security, and
the Fund will not be required to dispose of a security in the event that S&P or
Moody's (or any other nationally recognized statistical rating organization) or,
in the case of unrated income securities, the Adviser, downgrades its assessment
of the credit characteristics of a particular issuer. In determining whether the
Fund will retain or sell such a security, the Adviser may consider such factors
as the Adviser's assessment of the credit quality of the issuer of such
security, the price at which such security could be sold and the rating, if any,
assigned to such security by other NRSROs.

LIQUIDITY. The Fund may invest up to 15% of its total assets in illiquid
securities, securities the disposition of which is subject to substantial legal
or contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a

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price lower than similar securities that are not subject to restrictions on
resale. The Fund may, from time to time, adopt a more restrictive limitation
with respect to investment in illiquid and restricted securities in order to
comply with the most restrictive state securities law, currently 10%. The Fund
may invest in income securities not registered under the Securities Act of 1933
(the "Securities Act"), but eligible for resale pursuant to Rule 144A under the
Securities Act. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
have developed as a result of Rule 144A, providing both readily ascertainable
values for restricted securities and the ability to liquidate an investment.
Such markets include automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
("NASD"). An insufficient number of qualified buyers interested in purchasing
Rule 144A-eligible restricted securities held by the Fund, however, could affect
adversely the marketability of such portfolio securities and the Fund might be
unable to dispose of such securities promptly or at favorable prices. The Fund's
limitations with respect to investment in illiquid and restricted securities
does not include restricted securities eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as amended, which the Board of Trustees or the
Fund's investment adviser has determined under Board-approved guidelines to be
liquid. The Fund's policy with respect to investment in illiquid and restricted
securities is not a fundamental policy and may be changed by the Board of
Trustees, in consultation with the Adviser, without obtaining shareholder
approval.

DESCRIPTION OF SECURITIES RATINGS

STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings (as
published by S&P follows):

DEBT

The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.

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

The ratings are based, in varying degrees, on the following
considerations:

1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation:

2. Nature of and provisions of the obligation:

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.

LONG-TERM DEBT--INVESTMENT GRADE

AAA: Debt rated "AAA" has the highest rating assigned by S&P. 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 highest rated issues only in small degree.

B-26
<PAGE> 398

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 the 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.

LONG-TERM DEBT--SPECULATIVE GRADE

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

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

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

PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

C: The letter 'c' indicates that the holder's option to tender the security
for purchase may be canceled under certain prestated conditions enumerated in
the tender option documents.

I: The letter 'i' indicates the rating is implied. Such ratings are assigned
only on request to entities that do not have specific debt issues to be rated.
In addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.

L: The letter 'L' indicates that the rating pertains to the principal amount
of these bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the cast of certificates
of deposit, the letter 'L' indicates that the deposit, combined with other
deposits being held in the

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<PAGE> 399

same right and capacity, will be honored for principal and accrued pre-default
interest up to the federal insurance limits within 30 days after closing of the
insured institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.

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

* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and
cash flows.

NR: Not rated.

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

BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ('AAA', 'AA', 'A,' 'BBB', commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.

COMMERCIAL PAPER

An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1".

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.

B Issues rated "B" are regarded as having only speculative capacity
for timely payment.

C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.

A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer or obtained from other sources it considers reliable. The ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information.

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<PAGE> 400

VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, 'AAA/A+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').

NOTES

-- Amortization schedule (the longer the final maturity relative to other
maturities the more likely the issue is to be treated as a note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong safety characteristics will be given a
plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.

SP-3 Speculative capacity to pay principal and interest.

PREFERRED STOCK

The preferred stock ratings are based on the following considerations:

2. Nature of, and provisions of, the issuer.

3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.

AAA This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.

AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated 'AAA'.

A An issue rated 'A' is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.

B-29
<PAGE> 401

BBB An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to make payments for a preferred stock in this category than for issues
in the 'A' category.

BB Preferred stock rated 'BB', 'B', and 'CCC' are regarded, on balance,
as predominantly speculative with respect to the issuer's
B capacity to pay preferred stock obligations. 'BB' indicates the lowest
degree of speculation and 'CCC' the highest degree of speculation.
CCC While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

CC The rating 'CC' is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.

C A preferred stock rated 'C' is a non-paying issue.

D A preferred stock rated 'D' is a non-paying issue with the issuer in
default on debt instruments.

PLUS (+) or MINUS (-): To provide more detailed indications of
preferred stock quality, the ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing within
the major rating categories.

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

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

MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's Investor Service) follows:

LONG-TERM DEBT

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 risks appear somewhat larger than Aaa securities.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment 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.

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<PAGE> 402

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.

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

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

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

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

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

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

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

SHORT-TERM DEBT

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

--Leading market positions in well-established industries.

--High rates of return on funds employed.

--Conservative capitalization structure with moderate reliance on debt
and ample asset protection.

--Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

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

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<PAGE> 403

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

PREFERRED STOCK

Preferred stock rating symbols and their definitions are as follows:

aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.

aa: An issue which is rated 'aa' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in the
foreseeable future.

a: An issue which is rated 'a' is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the 'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.

baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over
any great length of time.

ba: An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.

b: An issue which is rated 'b' generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.

caa: An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.

ca: An issue which is rated 'ca' is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payment.

c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from "aa" through "b" in its preferred stock rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.

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<PAGE> 404

OFFICERS AND TRUSTEES

DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc., and Van Kampen American Capital, Inc.

Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.

PHILIP P. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, Managing Director and Manager of Municipal Bond
Department, W.H. Newbold's Son & Co.

DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.

JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President, Nelson Investment Planning Services, Inc., a financial planning
company.

WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.

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<PAGE> 405

PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President, Chief Investment Officer and Portfolio Manager of
Van Kampen American Capital Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.

General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March, 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.

SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.

Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.

WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181

Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.

JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.

STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ---------------
* Interested persons of each respective Fund as defined in the 1940 Act.

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<PAGE> 406

The compensation of the officers and Trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
Trustees of the Fund. During the next year, the Fund expects to pay Trustees who
are not affiliated persons of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. $2,500 annually, and
$250 per meeting of the Board of Trustees, plus expenses. Under the Fund's
retirement plan, trustees who are not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc., have
at least ten years of service and retire at or after attaining the age of 60,
are eligible to receive a retirement benefit equal to the annual retainer for
each of the ten years following such trustee's retirement. Under certain
conditions, reduced benefits are available for early retirement. Under the
Fund's deferred compensation plan, a trustee who is not affiliated with the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc. can elect to defer receipt of all or a portion of the trustee's
fees earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
Van Kampen Merritt mutual funds advised by the Adviser as selected by the
trustee. To the extent permitted by the 1940 Act, the Fund may invest in
securities of other Van Kampen Merritt mutual funds advised by the Adviser in
order to match the deferred compensation obligation. The deferred compensation
plan is not funded and obligations thereunder represent general unsecured claims
against the general assets of the Fund.

COMPENSATION TABLE(1)

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

(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant. As of
December 31, 1994 no amounts had been accrued for retirement benefits
because such amounts were considered to be immaterial to the net assets of
the Registrant at such time. The Registrant will accrue amounts for
retirement benefits by the end of fiscal year 1995.

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<PAGE> 407

Compensation of each of these 20 mutual funds in the Fund Complex during the
calendar year ended December 31, 1994. The Adviser also serves as investment
adviser for other investment companies; however, with the exception of Messrs.
Merritt, McDonnell and Whalen, the Trustees are not trustees of such
investment companies. Combining the Fund Complex with other investment
companies advised by the Adviser, Mr. Whalen received Total Compensation of
$161,850 during the calendar year ended December 31, 1994.

As of April 13, 1995, the trustees and officers as a group own less than 1% of
the shares of the Fund.

No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.

To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Edward D. Jones and Co., F/A/O, Edward D.
Jones & Co. Custodian, FBO Herman L. Dunning IRA, EDJ #271-90019-1-5, P.O. Box
2500, Maryland Heights, MO 63043-8500, 10%; Raymond James & Associates, Inc.
C/F, Fredrick E. Starn IRA, 219 Thornton Dr., Palm Beach Gardens, FL 33418-8036,
9%; Joseph E. Mullaney and Frances J. Mullaney, 107 Timber Ridge Road, Newtown,
PA 18940-2807, 5%; Rabun O. Smith and Kimberly Smith Harris, 305 Tanglewood Ct.,
Warner Robins, GA 31093-2110, 5%; Felipe G. Sanchez, Mexico DF Enrique, Rebsamen
No. 314, Col Narvarte, MX 03100, 9%; Mer & Co. FBO, Don Sykes, P.O. Box 1447,
Terre Haute, IN 47808-1447, 5%; and Donaldson, Lufkin, Jenrette Securities
Corporation Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, 6%.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates
L.P., are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto
Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E.
Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc. own, in the aggregate, not more than 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 10% of the common stock of VK/AC Holding, Inc.

The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative services, and permits its officers and employees to
serve without compensation as officers of the Fund and trustees of the Trust if
duly elected to such positions.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.

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<PAGE> 408

The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a sub-trust, to whom the
Adviser renders periodic reports of the Fund's investment activities.

The Adviser will utilize at its own expense, credit analysis and research
services provided by its affiliate, McCarthy, Crisanti and Maffei, Inc. ("MCM").
MCM and Fintrend S.A. ("Fintrend"), a wholly-owned subsidiary of MCM, are
providers of specialized on-line Financial Information and analysis relating to
domestic and international debt and currency markets. MCM's services include
CorporateWatch(C), which is the leading provider of up-to-the-minute information
regarding the new issue corporate securities market; MoneyWatch(C), which
provides on-going analysis of developments in the U.S. Treasury, agency and
money markets; CurrencyWatch(C), which provides analysis of intraday
developments in currency markets; and YieldWatch(R), which analyzes intraday
developments in the global bond markets. MCM and its subsidiaries produce and
distribute electronic information services worldwide with offices in New York,
London, Paris, Singapore and Tokyo.

The investment advisory agreement for the Fund will continue in effect from
year to year if specifically approved by the trustees of the Trust, of which the
Fund is a separate sub-trust (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.

For the year ended June 30, 1994, the Fund recognized advisory expenses of
$306,119.

OTHER AGREEMENTS

SUPPORT SERVICES AGREEMENT. Under a support services agreement with Van
Kampen American Capital Distributors, Inc. (the "Distributor") the Fund receives
support services for shareholders, including the handling of all written and
telephonic communications, except initial order entry and other distribution
related communications. Upon entering into such agreement, the Fund realized a
reduction in the fee which would have been paid to the Transfer Agent if the
Transfer Agent had provided such services. Payment by the Fund for such services
is made on cost basis for the employment of the personnel and the equipment
necessary to render the support services. The Fund, and the other Van Kampen
Merritt mutual funds distributed by the Distributor, share such costs
proportionately among themselves based upon their respective net asset values.

For the year ended June 30, 1994, the Fund recognized expenses of
approximately $2,800, representing the Distributor's cost of providing certain
support services.

FUND ACCOUNTING AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares equally, together with the other Van Kampen Merritt mutual funds
distributed by the Distributor, in 25% of the cost of providing such services,
with the remaining 75% of such cost being paid by the Fund and such other funds
based proportionally on their respective net assets.

B-37
<PAGE> 409

For the year ended June 30, 1994, the Fund recognized expenses of
approximately $2,800, representing the Adviser's cost of providing accounting
services.

LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services
Agreement pursuant to which Van Kampen American Capital, Inc. provides legal
services, including without limitation: maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. Payment by the Fund for such services is
made on a cost basis for the salary and salary related benefits, including but
not limited to bonuses, group insurances and other regular wages for the
employment of personnel, as well as overhead and the expenses related to the
office space and the equipment necessary to render the legal services. The Fund,
and the other Van Kampen Merritt mutual funds for whom the Adviser acts as
investment adviser share one half (50%) of such costs equally. The remaining one
half (50%) of such costs are allocated to specific funds based on specific time
allocations, or in the event services are attributable only to types of funds
(i.e. closed-end or open-end), the relative amount of time spent on each type of
fund and then further allocated between funds of that type based upon their
respective net asset values.

For the year ended June 30, 1994, the Fund recognized expenses of
approximately $6,000, representing Van Kampen American Capital, Inc.'s cost of
providing legal services.

CUSTODIAN AND INDEPENDENT AUDITORS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of such services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and

B-38
<PAGE> 410

clients and the amount of securities to be purchased or sold. Although it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned, it is also
possible that the ability to participate in volume transactions and to negotiate
lower brokerage commissions will be beneficial to the Fund.

State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.

TAX STATUS OF THE FUND

The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Statement of Additional Information.

FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated
investment company, the Fund must comply with certain requirements of the Code
relating to, among other things, the source of its income and diversification of
its assets. Included among such requirements is the requirement that the Fund
must derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stocks, securities or foreign currencies or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stocks, securities or currencies.
For purposes of this requirement, the Treasury Department is authorized to issue
(but has not yet issued) regulations excluding from qualifying income foreign
currency gains that are not directly related to a regulated investment company's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities). The Fund expects that all of its foreign
currency gains will be directly related to its principal business of investing
in securities.

If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (which includes net short-term capital
gain, but not net capital gains, which are the excess of net long-term capital
gains over net short-term capital losses) in each year, it will not be required
to pay federal income taxes on any income distributed to Shareholders. The Fund
intends to distribute at least the minimum amount of net investment income
necessary to satisfy the 90% distribution requirement. The Fund will not be
subject to federal income tax on any net capital gains distributed to
Shareholders. As a sub-trust of a Massachusetts business trust, the Fund will
not be subject to any excise or income taxes in Massachusetts as long as it
qualifies as a regulated investment company for federal income tax purposes.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.

B-39
<PAGE> 411

(even if such income were distributed to its Shareholders) and all distributions
out of earnings and profits would be taxed to Shareholders as ordinary income.
To qualify again as a regulated investment company in a subsequent year, the
Fund may be required to pay an interest charge on 50% of its earnings and
profits attributable to non-regulated investment company years and would be
required to distribute such earnings and profits to Shareholders (less any
interest charge). In addition, if the Fund failed to qualify as a regulated
investment company for its first taxable year or, if immediately after
qualifying as a regulated investment company for any taxable year, it failed to
qualify for a period greater than one taxable year, the Fund would be required
to recognize any net built-in gains (the excess of aggregate gains, including
items of income, over aggregate losses that would have been realized if it had
been liquidated) in order to qualify as a regulated investment company in a
subsequent year.

Some of the Fund's investment practices (including those involving certain
risk management transactions and foreign currency transactions) may be subject
to special provisions of the Code that, among other things, defer the use of
certain losses of the Fund and affect the holding period of the securities held
by the Fund and the character of the gains or losses realized by the Fund. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as if they were closed out), which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to secure as income each year a portion of this discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.

The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months.

PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may invest in the stock of
"passive foreign investment companies" ("PFICs"). 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 or (2) an average of at least 50% of its
assets produced, or are held for the production of passive income. Under certain
circumstances, a regulated investment company that holds stock of a PFIC will be
subject to federal income tax, on a portion of any "excess distribution"
received on the stock or of any gain or disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the regulated investment company
distributes the PFIC income as a taxable dividend to its stockholders. The
balance of the PFIC income will be included in the regulated investment
company's investment company taxable income and, accordingly, will not be
taxable to it 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 would
be required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain, which most likely
would have to be distributed to satisfy the 90% distribution requirement and the
distribution requirement for avoiding income and excise taxes. In most instances
it will be very difficult to make this election due to certain requirements
imposed with respect to the election.

Pursuant to proposed regulations, the Fund would be entitled to elect to
"mark-to-market" its stock in certain PFICs. "Marking-to-market," in this
context, means recognizing as gain for each taxable year the excess as of the
end of that year, of the fair market value of the PFIC's stock over the owner's
adjusted basis in that stock (including mark-to-market gain for each prior year
for which an election was in effect). These regulations, if adopted, would be
effective for taxable years ending after their promulgation as final
regulations.

B-40
<PAGE> 412

DISTRIBUTIONS. Distribution of the Fund's net investment income are taxable to
Shareholders as ordinary income whether paid in cash or reinvested in additional
Shares. Distributions of the Fund's net capital gains ("capital gains
dividends"), if any, are taxable to Shareholders at the rates applicable to
long-term capital gains regardless of the length of time Shares of the Fund have
been held by such Shareholders. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's Shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming such Shares are held as a capital asset). The Fund will
inform Shareholders of the source and tax status of all distributions promptly
after the close of each calendar year. A portion of the distributions from the
Fund will be eligible for the dividends received deduction for corporations if
the Fund receives qualifying dividends during the year and if certain other
requirements of the Code are satisfied.

Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date.

Although dividends generally will be treated as distribution when paid,
dividends declared in October, November, or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.

The Fund is required, is certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.

FOREIGN TAXES. It is expected that a portion of the interest earned by the
Fund from non-U.S. resident issuers and in certain circumstances gains realized
by the Fund will be subject to foreign withholding taxes. The tax rate to which
such interest and gains will be subject will vary depending on the country or
countries having taxing jurisdiction over a particular non-U.S. resident issuer
and may be affected by the existence of an income tax treaty with the United
States. If more than 50% of the value of the Fund's total assets at the close of
any taxable year consists of stocks or securities of "foreign corporations," the
Fund may elect and currently intends to elect, for United States federal income
tax purposes, to treat any foreign taxes paid by the Fund that can be treated as
foreign income taxes under United States federal income tax principles as paid
by its Shareholders. The Fund expects that it will be able to treat some, but
not necessarily all, of the foreign taxes it will have to pay as foreign income
taxes for United States federal income tax purposes. In addition, the Fund
currently intends to treat investments in securities that are issued by, or that
are treated under relevant United States federal income tax principles as issued
by, foreign governments as not constituting securities of "foreign corporations"
for purposes of meeting the 50% test described above. Accordingly, the Fund may
not qualify for this election in all of its taxable years. For any year that the
Fund so qualifies and makes such an election, the amount of foreign taxes paid
by the Fund that can be treated as foreign income taxes for United States
federal income tax purposes would be included in the income of its Shareholders
(in addition to other taxable dividends received) and (subject to certain
limitations) Shareholders would be entitled to credit their portions of these
amounts against their United States federal income tax due, if any, or to deduct
their portions from their United States taxable income, if any. A Shareholder
who does not itemize deductions may not claim a deduction for foreign taxes. The
Fund will notify each Shareholder within 60 days after the close of the Fund's
taxable year as to whether the foreign income taxes paid by the Fund will
qualify for "pass-through" treatment for that year and, if so, such notification
will designate (i) each Shareholder's pro rata portion of the foreign income
taxes paid and (ii) the portion of distributions that represents income derived
from foreign sources.

Generally, a foreign tax credit is subject to the limitation that it may not
exceed the Shareholder's United States tax (before the credit) attributable to
the Shareholder's total taxable income from foreign sources. For this purpose,
the Shareholder's proportionate share of dividends paid by the Fund that
represent income

B-41
<PAGE> 413

derived from foreign sources will be treated as foreign source income. The
Fund's gains and losses from the sale of securities and certain currency gains
and losses generally will be treated as derived from United States sources. The
limitation on the foreign tax credit applies separately to specific categories
of foreign source income, including "passive income," a category that includes
the portion of dividends received from the Fund that qualifies as foreign source
income. The foregoing limitation may prevent a Shareholder from claiming a
credit for the full amount of his proportionate share of the foreign income
taxes paid by the Fund.

SALES OF SHARES. The sale of Shares (including transfers in connection with a
redemption or repurchase of Shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
Shares and the amount received. If such Shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such Shares
have been held for more than one year. Any loss realized upon a taxable
disposition of Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such Shares. For purposes of determining whether Shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.

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

THE DISTRIBUTOR

Shares of the Fund are offered through the Distributor, One Parkview Plaza,
Oakbrook Terrace, IL 60181. The Distributor is a wholly owned subsidiary of Van
Kampen American Capital, Inc., which is a subsidiary of VK/AC Holding, Inc., a
Delaware corporation that is controlled through an ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C & D LP."), a Connecticut limited partnership. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc., and its subsidiaries own, in the aggregate not more than 6% of
the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc. C & D LP. is managed by Clayton, Dubilier & Rice, Inc.
Clayton & Dubilier Associates IV Limited Partnership ("C & D Associates LP.") is
the general partner of C & D LP. Pursuant to a distribution agreement, the
Distributor will purchase shares of the Fund for resale to the public, either
directly or through securities dealers, and is obligated to purchase only those
shares for which it has received purchase orders. A discussion of how to
purchase and redeem the Fund's shares and how the Fund's shares are priced is
contained in the Prospectus.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and banks who are acting as brokers (collectively, "Selling
Agreements") that may provide for their customers or clients certain services or
assistance, which may include, but not be limited to, processing purchase and
redemption transactions, establishing and maintaining shareholder accounts
regarding the Fund, and such other services as may be agreed to from time to
time and as may be permitted by applicable statute, rule or regulation. Brokers,
dealers and banks that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."

B-42
<PAGE> 414

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a sub-trust, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Distribution Plan provides
that it will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. The Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to either class of shares without approval by a vote of a majority of
the outstanding voting shares of such class, and all material amendments of the
Plans must be approved by the Trustees and also by the disinterested Trustees.
The Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.

For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $34,468, $208,286 and $9,351 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $28,816 and $51,047 represent payments to
financial intermediaries under the Selling Agreements for Class A Shares and
Class B Shares, respectively. For the year ended June 30, 1994, the Fund has
reimbursed the Distributor $822 and $1,211 for advertising expenses, and $4,930
and $9,941 for compensation of the Distributor's sales personnel for the Class A
Shares and Class B Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.

PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 4.00% and 1.00%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.

B-43
<PAGE> 415

subsequent given date. Cumulative non-standardized total return is calculated by
measuring the value of an initial investment in a given class of shares of the
Fund at a given time, deducting the maximum initial sales charge, if any,
determining the value of all subsequent reinvested distributions, and dividing
the net change in the value of the investment as of the end of the period by the
amount of the initial investment and expressing the result as a percentage.
Non-standardized total return will be calculated separately for each class of
shares. Non-standardized total return calculations do not reflect the imposition
of a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC Shares imposed at the time of redemption were
reflected, it would reduce the performance quoted.

From time to time the Fund may compare its performance to certain indices or
utilize such indices to illustrate market trends in U.S. interest rates,
including indices with respect to interest rates on 90 day U.S. Treasury bills
and 30 year Treasury bonds.

CLASS A SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 9.39%. In determining the Fund's net investment income for a
stated 30-day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 9.55%.

The Fund's average total return for the six month period from December 31,
1993, the commencement of investment operations for Class A Shares of the Fund,
through June 30, 1994 was (30.94%).

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 9.08%. In determining the Fund's net investment income for a
stated 30-day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 9.12%.

The Fund's average total return for the six month period from December 31,
1993, the commencement of investment operations for Class B Shares of the Fund,
through June 30, 1994 was (30.38%).

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 9.08%. In determining the Fund's net investment income for a
stated 30-day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 9.12%.

The Fund's average total return for the six month period from December 31,
1993, the commencement of investment operations for Class C Shares of the Fund,
through June 30, 1994 was (26.12%).

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<PAGE> 416
Van Kampen Merritt Strategic Income Fund
Portfolio of Investments
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity US$ Market Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corporate Bonds (U.S.) 32.8%
Beverage, Food & Tobacco 2.8%
1,000 Fleming Cos. Inc. Var Rate Cpn....... BB+ Ba1 8.688% 12/15/01 $ 1,000,000
1,200 Pilgrims Pride Corp. <F2>............ B- B3 10.875 8/01/03 1,128,000
----------------
2,128,000
----------------
Containers, Packaging & Glass 2.5%
1,000 Atlantis Group Inc. <F2>............. B- B2 11.000 2/15/03 960,000
1,000 Stone Container Corp................. B B1 9.875 2/01/01 945,000
----------------
1,905,000
----------------
Ecological 0.7%
620 Envirosource <F2>.................... B- B3 9.750 6/15/03 539,400
----------------
Entertainment 2.5%
2,000 NEWS American Holdings Inc. <F2>..... BBB- Ba1 8.875 4/26/23 1,872,238
----------------
Finance 5.3%
2,000 Associates Corp. <F2>................ A+ A2 8.150 8/01/09 2,018,504
1,928 Jet Equipment Trust.................. NR NR 8.080 6/15/96 1,925,764
----------------
3,944,268
----------------
Healthcare 1.4%
1,000 Ornda Health Corp. <F2>.............. B- B2 11.375 8/15/04 1,025,000
----------------
Home & Office Furnishings 0.6%
500 Health O Meter....................... B- B3 13.000 8/15/02 450,000
----------------
Hotels, Motels, Inns and Gaming 1.0%
1,000 Trump Plaza Funding <F2>............. B B3 10.875 6/15/01 755,000
----------------
Leisure & Amusement 0.3%
250 Plitt Theatres....................... B B3 10.875 6/15/04 232,500
----------------
Mining 1.4%
1,000 Carbide/Graphite Group <F2>.......... B+ B3 11.500 9/01/03 1,017,500
----------------
Oil & Gas 2.6%
1,000 Dreyfus Natural <F2>................. BB+ Ba3 9.250 6/15/04 949,100
1,000 Plains Resources Inc. <F2>........... B- B3 12.000 10/01/99 970,000
----------------
1,919,100
----------------
Personal-Food 1.9%
690 Flagstar Corp. <F2>.................. B B2 10.750 9/15/01 645,150
1,000 Sola Group Ltd....................... B B1 6.000 12/15/03 765,000
----------------
1,410,150
----------------
Rail & Shipping 1.2%
1,000 Eletson Holdings Inc. <F2>........... BB Ba2 9.250 11/15/03 900,000
----------------
Telecommunications 2.3%
2,000 GTE Corp. <F2>....................... BBB+ Baa1 7.830 5/01/23 1,754,592
----------------
</TABLE>

See Notes to Financial Statements

B-45
<PAGE> 417

Van Kampen Merritt Strategic Income Fund
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)

Total Corporate Bonds (U.S.) .......................................................... 24,601,918
----------------
Foreign Bonds and Debt Securities 66.1%
Argentina 20.1%
3,000 Argentina Discount Bond - US$ ................... NR NR 5.813 3/31/23 1,830,000
1,000 Argentina Floating Rate Bond - US$ .............. NR NR 6.500 3/31/05 637,500
3,000 Argentina Par Bond - US$ ........................ BB- B1 8.375 12/20/03 2,205,000
1,000 Banco Rio De La Plata Yankee - US$ .............. BB- B1 8.500 7/15/98 866,300
1,000 Banco Rio De La Plata Yankee - US$ .............. BB- B1 8.750 12/15/03 712,910
2,000 Bayerische Landesbank CD - Linked to risk premium
associated with Argentina ....................... NR NR 16.000 4/05/95 1,600,000
1,000 Bridas Corp. - US$ .............................. BB- B1 12.500 11/18/99 945,000
1,000 Central Terminica Guemes ........................ NR NR 12.000 11/29/96 982,500
1,000 Empressa Distribuidora - US$ .................... NR NR 8.888 5/17/96 985,000
2,000 Goldman Sachs Argentine Bocones Trust ........... NR NR 13.375 8/15/01 1,675,000
1,000 Sodigas Rampeana ................................ NR NR 10.500 7/06/99 875,000
2,000 Telecom Argent - US$ ............................ NR Ba3 8.375 10/18/00 1,720,000
----------------
15,034,210
----------------
Australia 1.9%
500 New South Wales Domestic Bond - AU$ ............ NR Aaa 11.500 7/01/99 404,303
1,250 New South Wales Global Bond - AU$ ............... AAA Aaa 11.500 7/01/99 1,010,330
Australian Dollar ............................... 24
----------------
1,414,657
----------------
Brazil 1.1%
980 Brazil IDU - US$ .................................. NR B2 6.063 1/01/01 818,300
----------------
Canada 3.3%
1,400 Canadian Government - CA$ ......................... NR Aaa 5.750 3/01/99 887,226
1,500 Canadian Government - CA$ ......................... NR Aaa 6.500 6/01/04 893,926
1,000 Rogers Cable Systems - CA$ ........................ BB+ Ba3 9.650 1/15/14 614,842
Canadian Dollar ................................... 81,088
----------------
2,477,082
----------------
0 China 1.1%
1,000 Guangdong Enterprise - US$ ...................... BB Baa3 8.750 12/15/03 820,390
----------------
</TABLE>

See Notes to Financial Statements

B-46
<PAGE> 418

Van Kampen Merritt Strategic Income Fund
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity US$ Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
Costa Rica 0.8%
1,000 Banco Central Costa Rica - US$ ...................... NR NR 6.250% 5/21/10 $ 560,000
----------------
Republic of Czech 0.8%
15,060 Czech Electric Company - KR ......................... BBB+ Baa2 14.375 1/27/01 575,126
----------------
Ecuador 0.8%
109 Ecuador Government Interest Equalization Bond - US$ . NR NR 7.688 12/21/04 71,668
1,000 Ecuador Government - US$ <F3> ....................... NR NR 6.151 10/31/96 481,250
----------------
552,918
----------------
Finland 1.6%
6,000 Finnish Government - FIM ............................ NR NR 9.500 3/15/04 1,223,104
----------------
Germany 2.2%
1,200 Bundes - Obligation - DEM <F2> ...................... AAA Aaa 8.375 1/20/97 798,129
1,500 Deutschland Republic - DEM .......................... NR NR 6.000 9/15/03 868,772
----------------
1,666,901
----------------
Hungary 0.9%
1,000 National Bank of Hungary - US$ ...................... BB+ Ba1 8.875 11/01/13 692,360
----------------
Indonesia 2.3%
1,000 PT Astra International - US$ ........................ NR NR 9.750 4/29/01 915,000
1,000 PT Indorayon Utama - US$ ............................ BB NR 9.125 10/15/00 820,000
----------------
1,735,000
----------------
India 2.1%
1,600 Essar Gujarat ....................................... NR NR 8.030 7/15/99 1,592,000
----------------
Italy 0.7%
1,000,000 Republic of Italy ................................... AA A1 8.500 4/01/99 548,525
----------------
Korea 1.3%
1,150 Korea Electric Power - US$ ......................... A+ A1 7.750 4/01/13 987,287
----------------
New Zealand 3.0%
1,000 Carter Holt Harvey - US$ ............................ BBB Baa2 8.875 12/01/04 1,007,503
2,000 New Zealand Government - NZ$ ........................ AA- Aa2 9.000 11/15/96 1,269,991
----------------
2,277,494
----------------
Nigeria 1.0%
2,000 Nigeria Par Bond with Warrants - US$ ................ NR NR 5.500 11/15/20 770,000
----------------
Philippines 7.8%
1,000 Philippines Government - US$ ........................ NR NR 4.000 6/01/08 723,750
1,500 Philippines Long Distance - US$ ..................... BB- Ba3 10.625 6/02/04 1,441,500
3,000 San Miguel Corp. .................................... NR NR 9.000 4/27/00 2,891,100
966 Subic Power Corp. - US$ ............................. NR NR 9.500 12/28/08 817,069
----------------
5,873,419
----------------
</TABLE>

See Notes to Financial Statements

B-47
<PAGE> 419

Van Kampen Merritt Strategic Income Fund
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity US$ Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
Poland 0.5%
1,039 Poland RSTA Par Bonds - US$ ............................... NR NR 2.750% 10/27/24 $ 371,443
----------------
Russia 1.1%
1,500 Vnesheconombank - DM ....................................... NR NR 7.000 3/29/96 857,883
----------------
Spain 2.7%
265,000 Spanish Government - ESP ................................... AA Aa2 11.00 6/15/97 2,000,406
----------------
Sweden 1.9%
3,500 Swedish Government - SEK ................................... NR NR 11.000 1/21/99 471,044
7,500 Swedish Government - SEK ................................... NR NR 10.250 5/05/03 980,815
----------------
1,451,859
----------------
Thailand 1.3%
25,000 ABN/AMRO Bank - THB ........................................ AA- Aa1 9.100 8/05/97 959,072
----------------
United Kingdom 3.4%
350 UK Treasury Bonds - GBP .................................... AAA Aaa 6.000 8/10/99 493,071
1,425 UK Treasury Bonds - GBP <F2> .............................. NR Aaa 7.000 11/06/01 2,031,177
----------------
2,524,248
----------------
Venezuela 1.2%
2,000 Venezuelan Par Bond with Oil Obligation Certificates - US$ . B+ Ba3 6.750 3/31/20 915,000
----------------
Multi-Country Interest Rate Indexed 1.2%
1,000 Goldman Sachs Group - (Italy/Sweden) - US$ ................. A1 P1 9.120 1/06/95 860,200
----------------
Total Foreign Bonds and Debt Securities ................................................................ 49,558,884
----------------
Government and Agencies (U.S.) 42.3%
2,161 FHLMC 1647 B Support Bond .................................. AAA Aaa 6.500 11/15/08 1,820,134
3,370 FHLMC 15OZ PZ PAC <F2> ..................................... AAA Aaa 7.000 8/15/22 2,599,689
4,504 FNMA REMIC #93-180SB Inverse Fltg .......................... AAA Aaa 6.880 9/25/00 3,068,385
75 FNMA REMIC #93-55M PAC Interest Only ..................... AAA Aaa 727.220 9/25/06 2,353,500
2,000 FNMA REMIC #92-33S Inverse Fltg. ........................... AAA Aaa 9.630 3/25/22 1,400,000
5,000 FNMA REMIC #93-206SE Inverse Fltg. ......................... AAA Aaa 7.020 11/25/23 1,250,000
1,930 FNMA REMIC #94-35A PAC Principal Only ..................... AAA Aaa 4.860 1/25/24 583,360
2,926 FNMA REMIC #94-15SD Inverse Fltg. ......................... AAA Aaa 5.200 2/25/24 853,207
5,000 U.S. Treasury Notes ........................................ AAA Aaa 7.125 9/30/99 4,860,930
5,000 U.S. Treasury Notes ........................................ AAA Aaa 7.750 11/30/99 4,982,805
30,000 U.S. Treasury Strips ....................................... AAA Aaa * 11/15/11 7,913,400
----------------
Total Government and Agencies (U.S.) .................................................................... 31,685,410
----------------
</TABLE>

See Notes to Financial Statements

B-48
<PAGE> 420

Van Kampen Merritt Strategic Income Fund
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)

<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is $121,954,861;
the aggregate gross unrealized appreciation is $530,067 and the aggregate gross
unrealized depreciation is $11,884,160, resulting in net unrealized
depreciation on investments, foreign currency translation and open option and
future transactions of $11,354,093.
<F2>Assets segregated for open option and futures transactions and borrowings
of the Fund.
<F3>Item represents a bank loan participation currently in default with the
potential to be restructured at a future date. As of December 31, 1994, item is
a non-income producing security.
</FN>

</TABLE>

See Notes to Financial Statements

B-49
<PAGE> 421
Van Kampen Merritt Strategic Income Fund
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $121,954,861) <F1>....................................... $ 110,584,154
Cash........................................................................................ 58,390
Receivables:
Interest.................................................................................... 2,565,919
Fund Shares Sold............................................................................ 158,970
Investments Sold............................................................................ 55,833
Margin on Futures <F5>...................................................................... 1,510
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 95,946
Options at Market Value (Net premiums paid of $29,702) <F5> ................................ 22,266
Other....................................................................................... 177
--------------
Total Assets................................................................................ 113,543,165
--------------
Liabilities:
Payables:
Reverse Repurchase Agreement <F8> .......................................................... 17,868,750
Bank Borrowing <F8>......................................................................... 17,520,729
Investments Purchased....................................................................... 2,002,068
Income Distributions ....................................................................... 362,636
Fund Shares Repurchased..................................................................... 334,058
Investment Advisory Fee <F2>................................................................ 101,462
Accrued Expenses............................................................................ 380,320
--------------
Total Liabilities........................................................................... 38,570,023
--------------
Net Assets.................................................................................. $ 74,973,142
--------------
Net Assets Consist of:
Paid in Surplus <F3> ....................................................................... $ 94,114,123
Accumulated Distributions in Excess of Net Investment Income <F1>........................... (224,706)
Accumulated Net Realized Loss on Investments ............................................... (7,562,182)
Net Unrealized Depreciation on Investments and Foreign Currency............................. (11,354,093)
--------------
Net Assets.................................................................................. $ 74,973,142
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $24,736,320 and
2,261,501 shares of beneficial interest issued and outstanding) <F3>........................ $ 10.94
Maximum sales charge (4.65%* of offering price)............................................. .53
--------------
Maximum offering price to public ........................................................... $ 11.47
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $47,850,979 and
4,372,973 shares of beneficial interest issued and outstanding) <F3>........................ $ 10.94
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $2,385,843 and
217,968 shares of beneficial interest issued and outstanding) <F3>.......................... $ 10.95
--------------
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.

See Notes to Financial Statements

B-50

<PAGE> 422
Van Kampen Merritt Strategic Income Fund
Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest (Net of foreign withholding taxes of $11,569).................................................... $ 4,523,519
Net Realized Gain on Foreign Currency and Foreign Currency Forward Contracts.............................. 178,437
Fee Income................................................................................................ 125,781
Amortization of Discount.................................................................................. 109,369
------------
Total Income.............................................................................................. 4,937,106
------------
Expenses:
Investment Advisory Fee <F2> ............................................................................. 385,765
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $38,914, $246,611 and $11,637,
respectively) <F7> .................................................................................... 297,162
Shareholder Services ..................................................................................... 70,434
Trustees Fees and Expenses <F2>........................................................................... 12,900
Amortization of Organizational Expenses and Initial Registration Costs <F1> .............................. 12,092
Legal <F2>................................................................................................ 11,040
Other..................................................................................................... 132,853
------------
Total Operating Expenses.................................................................................. 922,246
Interest Expense <F8>..................................................................................... 710,859
------------
Net Investment Income..................................................................................... $ 3,304,001
------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments (Including realized loss on closed and
expired option transactions of $752,456 and realized gain on futures transactions of $1,192,954).......... $ (3,977,789)
------------
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency:
Beginning of the Period................................................................................... (8,751,995)
End of the Period (Including unrealized depreciation on open option transactions of $7,436 and unrealized
appreciation on open futures transactions and foreign currency translation of $10,647 and $13,403,
respectively).......................................................................................... (11,354,093)
------------
Net Unrealized Depreciation on Investments and Foreign Currency During the Period......................... (2,602,098)
------------
Net Realized and Unrealized Loss on Investments and Foreign Currency...................................... $ (6,579,887)
------------
Net Decrease in Net Assets from Operations................................................................ $ (3,275,886)
------------
</TABLE>

See Notes to Financial Statements

B-51
<PAGE> 423
Van Kampen Merritt Strategic Income Fund
Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994 and the Period December 31, 1993
(Commencement of Investment Operations) through June 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Period Ended
December 31, 1994 June 30, 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................................... $ 3,304,001 $ 2,698,691
Net Realized Loss on Investments.................................................... (3,977,789) (3,584,393)
Net Unrealized Depreciation on Investments and Foreign Currency During the Period... (2,602,098) (8,751,995)
---------------- --------------
Change in Net Assets from Operations ............................................... (3,275,886) (9,637,697)
---------------- --------------
Distributions from Net Investment Income:
Class A Shares...................................................................... (1,319,622) (927,849)
Class B Shares...................................................................... (2,272,085) (1,532,147)
Class C Shares...................................................................... (106,902) (68,793)
---------------- --------------
Total Distributions................................................................. (3,698,609) (2,528,789)
---------------- --------------
Net Change in Net Assets from Investment Activities................................. (6,974,495) (12,166,486)
---------------- --------------
From Capital Transactions <F3>:
Proceeds from Shares Sold........................................................... 15,768,653 89,237,622
Net Asset Value of Shares Issued Through Dividend Reinvestment...................... 1,609,129 1,072,183
Cost of Shares Repurchased.......................................................... (8,429,196) (5,148,558)
---------------- --------------
Net Change in Net Assets from Capital Transactions ................................. 8,948,586 85,161,247
---------------- --------------
Total Increase in Net Assets........................................................ 1,974,091 72,994,761
Net Assets:
Beginning of the Period............................................................. 72,999,051 4,290
---------------- --------------
End of the Period (Including undistributed net investment income
of $(224,706) and $169,902, respectively) .......................................... $ 74,973,142 $ 72,999,051
---------------- --------------
</TABLE>

See Notes to Financial Statements

B-52
<PAGE> 424

Van Kampen Merritt Strategic Income Fund

Notes to Financial Statements
December 31, 1994 (Unaudited)

1. Significant Accounting Policies
Van Kampen Merritt Strategic Income Fund (the "Fund") is organized as a
sub-trust of Van Kampen Merritt Trust (the "Trust"), a Massachusetts business
trust, and is registered as a non-diversified open-end management investment
company under the Investment Company Act of 1940, as amended. The Fund commenced
investment operations on December 31, 1993, with three classes of common shares,
Class A, Class B and Class C shares.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.

A. Security Valuation-Investments are stated at value using market quotations,
prices provided by market makers or, if such valuations are not available,
estimates obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established in good faith
by the Board of Trustees. Foreign investments are stated at value using the last
available bid price or yield equivalents obtained from dealers in the OTC or
interbank market. Short- term securities with remaining maturities of less than
60 days are valued at amortized cost.

B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.

C. Investment Income-Interest income is recorded on an accrual basis. Original
issue discount is amortized over the expected life of each applicable security.

D. Currency Translation Assets and liabilities denominated in foreign
currencies and commitments under forward foreign exchange currency contracts are
translated into U.S. dollars at the mean of the quoted bid and ask prices of
such currencies against the U.S. dollar. Purchases and sales of portfolio
securities are translated at the rate of exchange prevailing when such
securities were acquired or sold. Income and expenses are translated at rates of
exchange prevailing when accrued. For financial reporting purposes, realized
gain/loss on foreign currency and foreign currency forward contracts are
included in net investment income.

E. Organizational Expenses and Initial Registration Costs-The Fund will
reimburse Van Kampen American Capital Distributors, Inc. or its
affiliates ("VKAC") for costs incurred in connection with the Fund's
organization and initial registration in the amount of $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
December 31, 1998. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by VKAC are redeemed during the amortization period, the
Fund will be reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

Net realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.

B-53
<PAGE> 425
Van Kampen Merritt Strategic Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

H. Bank Loan Participation-The Fund invests in participation interests of loans
to foreign entities. When the Fund purchases a participation of a foreign loan
interest, the Fund typically enters into a contractual agreement with the lender
or other third party selling the participation, but not with the borrower
directly. As such, the Fund assumes credit risk for the borrower, selling
participant or other persons interpositioned between the Fund and the borrower.

2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
Average Managed Assets % Per Annum
- -----------------------------------
<S> <C>
First $500 million.... .75 of 1%
Next $500 million..... .70 of 1%
Over $1 billion....... .65 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.

For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $21,500 representing VKAC's cost of providing certain accounting,
legal and shareholder services to the Fund.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.

At December 31, 1994, VKAC owned 100 shares each of Classes A, B, and C.

3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized.

At December 31, 1994, paid in surplus aggregated $31,290,751, $59,886,549 and
$2,936,823 for Classes A, B and C, respectively. For the six months ended
December 31, 1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 511,897 $ 6,011,072
Class B....................... 771,915 9,082,255
Class C....................... 58,114 675,326
--------- --------------
Total Sales................... 1,341,926 $ 15,768,653
--------- --------------
Dividend Reinvestment:
Class A....................... 42,876 $ 496,989
Class B....................... 90,395 1,047,011
Class C....................... 5,637 65,129
--------- --------------
Total Dividend Reinvestment... 138,908 $ 1,609,129
--------- --------------
Repurchases:
Class A....................... (340,835) $ (3,954,378)
Class B....................... (364,251) (4,226,710)
Class C....................... (21,468) (248,108)
--------- --------------
Total Repurchases............. (726,554) $ (8,429,196)
--------- --------------
</TABLE>

B-54
<PAGE> 426

Van Kampen Merritt Strategic Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

At June 30, 1994, paid in surplus aggregated $28,737,068, $53,983,993 and
$2,444,476 for Classes A, B and C, respectively. For the period ended June 30,
1994, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 2,215,561 $ 30,883,579
Class B........................ 4,015,167 55,799,231
Class C........................ 184,146 2,554,812
--------- --------------
Total Sales.................... 6,414,874 $ 89,237,622
--------- --------------
Dividend Reinvestment:
Class A........................ 27,966 $ 349,478
Class B........................ 55,412 691,148
Class C........................ 2,535 31,557
--------- --------------
Total Dividend Reinvestment ... 85,913 $ 1,072,183
--------- --------------
Repurchases:
Class A........................ (196,064) $ (2,497,419)
Class B........................ (195,765) (2,507,816)
Class C........................ (11,096) (143,323)
--------- --------------
Total Repurchases.............. (402,925) $ (5,148,558)
--------- --------------
</TABLE>

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.

Contingent Deferred
Sales Charge
<TABLE>
<CAPTION>
Year of Redemption Class B Class C
- ------------------------------------------
<S> <C> <C>
First ................. 4.00% 1.00%
Second ................. 3.75% None
Third .................. 3.50% None
Fourth ................. 2.50% None
Fifth ................. 1.50% None
Sixth .................. 1.00% None
Seventh and Thereafter . None None
</TABLE>

For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$22,900 and CDSC on the redeemed shares of Classes B and C of approximately
$105,700. Sales charges do not represent expenses of the Fund.

4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, including dollar
rolls and excluding short-term notes, for the period ended December 31, 1994,
were $163,527,906 and $153,548,614, respectively.

5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio, manage the portfolio's effective yield, foreign currency exposure,
maturity and duration or generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of gain
or loss is postponed until the disposal of the security underlying the option
contract.

Summarized below are the specific types of derivative financial instruments used
by the Fund.

B-55

<PAGE> 427

Van Kampen Merritt Strategic Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

Transactions in options for the six months ended December 31, 1994, were as
follows:

<TABLE>
<CAPTION>
Contracts Premium
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994 ........ 254 $ (412,000)
Options Written and Purchased (Net) . 1,331 (1,100,188)
Options Terminated in Closing
Transactions (Net) .................. (755) 953,002
Options Expired (Net) ............... (780) 529,484
-------- -------------
Outstanding at December 31, 1994 .... 50 $ (29,702)
-------- -------------
</TABLE>

The related futures contracts of the outstanding option transactions as of
December 31, 1994, and the descriptions and market values are as follows:

<TABLE>
<CAPTION>
Exp. Month/ Market Value
Contracts Exercise Price of Option
- ---------------------------------------------------------------
<S> <C> <C> <C>
March 1995 US
Treasury Bond Futures
Purchased Calls ..... 25 Mar/100 $ 25,781
Written Calls ....... 25 Mar/104 (3,515)
-- ---------
50 $ 22,266
-- ---------
</TABLE>

B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and typically closes
the contract prior to the delivery date. These contracts are generally used to
manage the portfolio's effective maturity and duration.

The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.

Transactions in futures contracts for the six months ended
December 31, 1994, were as follows:

<TABLE>
<CAPTION>
Contracts
---------
<S> <C>
Outstanding at June 30, 1994....... 1,594
Futures Opened..................... 1,726
Futures Closed .................... (3,275)
-------
Outstanding at December 31, 1994... 45
-------
</TABLE>

The futures contracts outstanding as of December 31, 1994, and the descriptions
and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
------------
<S> <C> <C>
2-Year US Treasury Note Futures
Mar 1995 - Buys to Open ..... 20 $ 16,506
Fed Funds 30 Day Futures
Jan 1995 - Buys to Open...... 25 (5,859)
------- -----------
45 $ 10,647
------- -----------
</TABLE>

C. Swap Transactions-These transactions are identified in the portfolio of
investments and represent an agreement between two parties to exchange a series
of cash flows at specified intervals. The cash flows can be indexed to various
indices including interest rates, currencies, equities (such as the S&P 500
index) or a combination of indices.

The difference in the cash flows is recorded as increases or decreases in
interest income.

D. Indexed Securities These instruments are identified in the portfolio of
investments.

An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed rate security. These instruments
are typically used by the Fund to enhance the yield of the portfolio.
U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of
Securities) are securities issued by the U.S. Treasury department which evidence
ownership in either the bond principal or interest payments. These securities
are used by the Fund to manage the portfolio's duration.

Interest Rate Linked or Multi-Country Interest Rate Linked securities contain
one or more embedded links to various countries' interest rates which cause a
security's valuation to fluctuate based upon the value of the linked interest
rate or rates.

B-56
<PAGE> 428

Van Kampen Merritt Strategic Income Fund

Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)

6. Mortgage Backed Securities

A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies--Federal National Mortgage Association (FNMA) or Federal Home
Loan Mortgage Corporation (FHLMC).

A Collateralized Mortgage Obligation (CMO) is a bond which is collateralized by
a pool of MBS's. The Fund also invests in REMIC's (Real Estate Mortgage
Investment Conduit) which are simply another form of CMO. These MBS pools are
divided into classes or tranches with each class having its own characteristics.
For instance, a PAC (Planned Amortization Class) is a specific class of
mortgages with the most stable cash flows and the lowest prepayment risk. Any
unscheduled prepayments made on these mortgages are first applied to the Support
Bond associated with the PAC.

A MBS may also be stripped to create an Interest Only (IO) or a Principal Only
(PO) security. An IO represents ownership in the cash flows of the interest
payments made from a specific pool of MBS. The cash flow on this instrument
decreases as the mortgage principal balance is repaid by the borrower.
Conversely, a PO represents an ownership interest in the cash flows of the
principal payments made from a specified pool of MBS. The cash flows on this
instrument would increase in a declining interest rate environment as
prepayments on the underlying mortgages increase. IO's and PO's are typically
used to manage interest rate exposure in the Fund's portfolio.

7. Distribution and Service Plans

The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% for Class A shares and 1.00% each for
Class B and Class C shares are accrued daily. Included in these fees for the six
months ended December 31, 1994, are payments to VKAC of approximately $202,900.

8. Borrowings

In accordance with its investment policies, the Fund may borrow money from banks
or enter into reverse repurchase agreements or dollar rolls for investment
purposes in an amount up to 33.3% of its total assets.

The Fund has entered into a $40,000,000 revolving credit agreement which expires
on February 15, 1995. Interest is charged under the agreement at a rate of 1.10%
above the federal funds rate. The interest rate in effect at December 31, 1994
was 7.000%. An annual commitment fee of 1/4 of 1% is charged on the unused
portion of the credit line.

The Fund has entered into reverse repurchase agreements under which the Fund
sells securities and agrees to repurchase them at a mutually agreed upon date
and price. At December 31, 1994, the average interest rate in effect for reverse
repurchase agreements was 6.04%.

The average daily balance of bank borrowings and reverse repurchase agreements
for the six month period ended December 31, 1994, was $25,118,000 with an
average interest rate of 5.66%.

The Fund has also entered into dollar rolls under which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar securities (same type, coupon and maturity) on
a specified future date from the same party at an agreed upon price which is
less than the sales price. The Fund is compensated by the difference between the
current sales price and the forward price for the future purchase. At December
31, 1994, there were no open dollar roll transactions.

At December 31, 1994, these agreements represented 31.2% of the Fund's total
assets.

B-57
<PAGE> 429

Van Kampen Merritt Strategic Income Fund
- -------------------------------------------------------------------------
Independent Auditors' Report
- -------------------------------------------------------------------------

The Board of Trustees and Shareholders of
Van Kampen Merritt Strategic Income Fund:

We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt Strategic Income Fund (the "Fund"), including
the portfolio of investments, as of June 30, 1994, and the related
statement of operations, the statement of changes in net assets and
the financial highlights for the period from December 31, 1993 (com-
mencement of investment operations) through June 30, 1994. These
financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion
on these financial statements and financial highlights based on our
audit.

We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of June 30, 1994, by
correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt Strategic Income Fund as of June 30,
1994, the results of its operations, the changes in its net assets, and
the financial highlights for the period from December 31, 1993 (com-
mencement of investment operations) through June 30, 1994, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
August 23, 1994

B-58
<PAGE> 430
Van Kampen Merritt Strategic Income Fund
- -------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity US $ Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corporate Bonds (U.S.) 29.7%
Beverage, Food & Tobacco 2.6%
2,000 Pilgrims Pride Corp............................. B B3 10.875% 08/01/03 $ 1,900,000
-----------
Buildings & Real Estate 1.3%
1,000 Orchard Supply <F3>............................. B B2 9.375 02/15/02 917,500
-----------
Ecological 0.8%
620 Envirosource <F3>............................... B - B3 9.750 06/15/03 564,200
-----------
Entertainment 2.6%
2,000 NEWS American Holdings Inc <F3>................. NR Ba1 8.875 04/26/23 1,905,218
-----------
Finance & Banking 1.8%
2,000 Toyota Motor Credit Corp........................ NR NR 15.000 10/11/95 1,340,000
-----------
Grocery 1.4%
1,000 Stater Brothers <F3>............................ B + B3 11.000 03/01/01 992,500
-----------
Hotels, Motels, Inns and Gaming 1.1%
1,000 Trump Plaza Funding............................. B B3 10.875 06/15/01 830,000
-----------
Machinery 1.3%
1,000 Joy Technologies Inc <F3>....................... B B1 10.250 09/01/03 955,000
-----------
Mining 1.4%
1,000 Carbide/Graphite Group <F3>..................... B B3 11.500 09/01/03 1,027,500
-----------
Natural Gas Pipeline and Distribution 1.4%
1,000 Sodigas Pampeana................................ NR NR 10.500 07/06/99 984,140
-----------
Oil & Gas 2.7%
1,000 Dreyfus National <F3>........................... NR NR 9.250 06/15/04 961,840
1,000 Plains Resources Inc <F3>....................... B - B3 12.000 10/01/99 1,012,500
-----------
1,974,340
-----------
Paper 2.8%
2,000 Georgia Pacific <F3>............................ BBB - Baa3 9.500 05/15/22 2,068,432
-----------
Personal-Food 2.0%
1,500 Flagstar Corp <F3>.............................. B B1 10.750 09/15/01 1,451,250
-----------
Rail & Shipping 1.3%
1,000 Eletson Holdings Inc <F3>....................... BB Ba2 9.250 11/15/03 955,000
-----------
Telecommunications 2.5%
2,000 GTE Corp <F3>................................... BBB + Baa1 7.830 05/01/23 1,808,552
-----------
Utilities 2.7%
2,000 Midland Funding Corp II <F3>.................... B - B2 11.750 07/23/05 1,993,654
-----------
Total Corporate Bonds (U.S.)................................................................. 21,667,286
-----------
</TABLE>

See Notes to Financial Statements

B-59
<PAGE> 431

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity US $ Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Government and Agencies (U.S.) 50.1%
10.000 FHLMC........................................... AAA Aaa 7.000% 01/01/99 $ 9,312,500
1,932 FNMA REMIC #94-3SA.............................. AAA Aaa 5.423 01/25/24 705,889
2,944 FNMA REMIC #94-15SD............................. AAA Aaa 6.026 02/25/24 1,115,980
4,704 FNMA REMIC #93-180SB............................ AAA Aaa 8.321 09/25/00 3,638,368
2,000 FNMA REMIC #92-33S.............................. AAA Aaa 10.110 03/25/22 1,200,000
5,000 FNMA REMIC #93-206SE............................ AAA Aaa 8.326 11/25/23 1,700,000
7,737 GNMA <F3>....................................... AAA Aaa 9.000 Various 8,003,414
5,000 Residential Funding Mortgage.................... AAA Aaa 7.500 11/25/07 4,775,000
15,111 Salomon Mortgage Backed-Interest Only........... AAA NR 2.290 03/25/24 982,220
5,000 U.S. Treasury Bonds............................. AAA Aaa 8.375 08/15/00 5,142,150
-----------
Total Government and Agencies (U.S.)............................................................... 36,575,521
-----------
Foreign Bonds and Debt Securities 61.7%
Argentina 13.0%
3,500 Argentina Floating Rate Bond - US$.......... BB - NR 5.000 03/31/05 2,498,125
3,000 Argentina Republic Government Bond - US$.... BB - B1 8.375 12/20/03 2,463,750
1,000 Banco Rio De La Plata Yankee - US$.......... BB - B1 8.500 07/15/98 930,000
1,000 Banco Rio De La Plata Yankee - US$.......... BB - B1 8.750 12/15/03 830,000
1,000 Empressa Distribuidora - US$................ NR NR 8.763 05/17/96 1,002,500
2,000 Telecom Argentina - US$..................... NR NR 8.375 10/18/00 1,800,000
-----------
9,524,375
-----------
Australia 2.0%
1,750 New South Wales Corp - AU$................... NR Aaa 11.500 07/01/99 1,437,962
-----------
Canada 4.9%
1,400 Canadian Government - CA$.................... NR NR 5.750 03/01/99 892,348
3,500 Canadian Government - CA$.................... NR NR 6.500 06/01/04 2,081,495
1,000 Rogers Cable Systems - CA$................... BB + Ba3 9.650 01/15/14 605,743
-----------
3,579,586
-----------
China 1.2%
1,000 Guangdong Enterprise - US$................... BB Baa3 8.750 12/15/03 903,270
-----------
Costa Rica 0.9%
1,000 Banco Central Costa Rica - US$............... NR NR 6.250 05/21/10 640,000
-----------
Republic of Czech 0.8%
15,060 Czech Electric Company - KR.................. BBB + NR 14.375 01/27/01 565,478
-----------
Denmark 1.1%
5,000 Denmark Government - DKK..................... NR NR 9.000 11/15/00 835,409
-----------
Ecuador 0.7%
1,000 Ecuador Government - US$.................... NR NR <F2> <F2> 522,500
-----------
</TABLE>

See Notes to Financial Statements

B-60
<PAGE> 432

Van Kampen Merritt Strategic Income Fund

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity US $ Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
Finland 1.5%
6,000 Finnish Government - FIM..................... NR NR 9.500% 03/15/04 $ 1,125,665
-----------
Germany 5.0%
1,200 Bundes-Obligation - DEM <F3>................ AAA Aaa 8.375 01/20/97 797,489
1,500 Deutschland Republic - DEM.................. NR NR 6.000 09/15/03 883,013
1,300 Treuhan-Obligation - DEM.................... NR NR 5.000 01/14/99 777,416
2,000 Treuhandanstalt Government -DEM............. AAA Aaa 6.250 03/04/04 1,194,259
-----------
3,652,177
-----------
Hungary 1.1%
1,000 National Bank of Hungary - US$............... NR Ba1 8.875 11/01/13 805,000
-----------
Indonesia 2.6%
1,000 PT Astra International - US$................ NR NR 9.750 04/29/01 971,250
1,000 PT Indorayon Untama - US$................... BB NR 9.125 10/15/00 892,500
-----------
1,863,750
-----------
Italy 4.2%
5,000,000 Italian BTPS ITL <F3>........................ NR Aa 8.500 01/01/97 3,047,950
-----------
Ivory Coast 0.2%
5,500 Republic of Ivory Coast - FRF............... NR NR <F2> <F2> 171,944
-----------
Korea 0.2%
150 Korea Electric Power - US$................... A + A1 7.750 04/01/13 131,250
-----------
Mexico 2.0%
1,000 Mexican Par Bond with oil obligation
certificates - US$......................... BB + Ba3 6.250 12/31/19 635,000
1,000 Mexican Par Bond - US$...................... BB + Ba3 5.438 12/31/19 818,750
-----------
1,453,750
-----------
Morocco 1.0%
1,000 Moroccan Restructuring & Consolidation - US$. NR NR 4.500 01/01/09 707,500
-----------
Nigeria 1.1%
2,000 Nigeria Par Bond with attached oil
warrants - US$............................... NR NR 5.500 11/15/20 805,000
-----------
Philippines 4.1%
1.000 Philippines Government - US$................. BB - NR 5.250 12/01/17 625,000
1,500 Philippines Long Distance - US$.............. BB - Ba3 10.625 06/02/04 1,485,000
1,000 Subic Power Corp - US........................ NR NR 9.500 12/28/08 900,000
-----------
3,010,000
-----------
Poland 0.5%
1,000 Poland RSTA Loan Agreement - US$............ NR NR <F2> <F2> 360,000
-----------
</TABLE>

See Notes to Financial Statements

B-61
<PAGE> 433

Van Kampen Merritt Strategic Income Fund

<TABLE>
<CAPTION>
Local
Currency
Par
Amount S&P Moody's
(000) Description Rating Rating Coupon Maturity US $ Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
Russia 1.6%
1,500 Vnesheconombank - DM........................ NR NR 7.000% 03/29/96 $ 757,098
1,500 Vnesheconombank Bank Loan - US$............. NR NR <F2> <F2> 442,500
-----------
1,199,598
-----------
Spain 2.8%
270,000 Spanish Government ESP <F3>................. NR NR 9.000 02/28/97 2,038,886
-----------
Sweden 2.0%
3,500 Swedish Government - SEK..................... NR NR 11.000 01/21/99 480,614
7,500 Swedish Government - SEK..................... NR NR 10.250 05/05/03 994,450
-----------
1,475,064
-----------
Turkey 1.2%
1,000 Republic of Turkey - US$.................. B + Ba3 9.000 06/15/99 840,000
-----------
United Kingdom 3.5%
350 UK Treasury Bonds - GBP................... NR Aaa 6.000 08/10/99 494,602
1,425 UK Treasury Bonds - GBP................... NR Aaa 7.000 11/06/01 2,039,262
-----------
2,533,864
-----------
Venezuela 1.3%
2,000 Venezuelan Par Bond with oil obligation
certificates - US$.......................... NR Ba2 6.750 03/31/20 972,500
-----------
Multi-Country Interest Rate Indexed 1.2%
1,000 Goldman Sachs Group (Italy/Sweden) - US$.... NR NR 9.120 01/06/95 878,700
-----------
Total Foreign Bonds and Debt Securities...................................................... 45,081,178
-----------
Swaps (0.8%)
Bankers Trust Corp., $1,000,000 Notional amount, termination payment based upon value of Mexican Par Bond,
Fund pays US LIBOR. Fund receives 10% fixed, expires 02/07/95................................................ (615,767)
-----------
Total Long-Term Investments 140.7%
(Cost $112,317,435) <F1>..................................................................................... 102,708,218
Liabilities in Excess of Other Assets (40.7%)................................................................. (29,709,167)
-----------
Net Assets 100.0%............................................................................................. $ 72,999,051
-----------
<FN>
<F1> At June 30, 1994, cost for federal income tax purposes is $112,317,435; the aggregate gross unrealized
appreciation is $2,730,700 and the aggregate gross unrealized depreciation is $11,482,695, resulting in
net unrealized depreciation on investments, foreign currency translation and open option and future tran-
sactions of $8,751,995.
<F2> Item represents a bank loan participation currently in default with the potential to be restructured at a
future date. As of 06/30/94, item is a non-income producing security.
<F3> Asset segregated for open option and futures transactions or borrowings of the Fund.
</TABLE>

See Notes to Financial Statements

B-62
<PAGE> 434

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at Market Value (Cost $112,317,435) (Note 1)................................... $102,708,218
Cash........................................................................................ 23,987
Receivables:
Interest.................................................................................. 2,040,237
Investments Sold.......................................................................... 963,155
Margin on Futures......................................................................... 554,456
Fund Shares Sold.......................................................................... 474,024
Options at Market Value (Net premiums paid of $412,000)..................................... 187,694
Forward Currency Contracts.................................................................. 119,852
Unamortized Organizational Expenses and Initial Registration Costs (Note 1)................. 108,039
Other....................................................................................... 716
------------
Total Assets............................................................................... 107,180,378
------------
Liabilities:
Payables:
Bank Borrowing (Note 6)................................................................... 15,364,968
Investments Purchased..................................................................... 13,524,425
Reverse Repurchase Agreement (Note 6)..................................................... 4,210,000
Income Distributions...................................................................... 326,425
Fund Shares Repurchased................................................................... 210,146
Investment Advisory Fee (Note 2).......................................................... 138,870
Accrued Expenses............................................................................ 406,493
------------
Total Liabilities.......................................................................... 34,181,327
------------
Net Assets.................................................................................. $ 72,999,051
------------
Net Assets Consist of:
Paid in Surplus (Note 3).................................................................... $ 85,165,537
Accumulated Undistributed Net Investment Income............................................. 169,902
Net Unrealized Depreciation on Investments and Foreign Currency............................. (8,751,995)
Accumulated Net Realized Loss on Investments................................................ (3,584,393)
------------
Net Assets.................................................................................. $ 72,999,051
------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share based on net assets of $24,520,453 and
2,047,563 shares of beneficial interest issued and outstanding) (Note 3)................... $ 11.98
Maximum sales charge (4.65%* of offering price)............................................ .58
------------
Maximum offering price to public........................................................... $ 12.56
------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $46,376,388 and
3,874,914 shares of beneficial interest issued and outstanding) (Note 3)................... $ 11.97
------------
Class C Shares,
Net asset value and offering price per share (based on net assets of $2,102,210 and
175,685 shares of beneficial interest issued and outstanding) (Note 3)................. $ 11.97
------------
*On sales of $100,000 or more, the offering price will be reduced.
</TABLE>

See Notes to Financial Statements

B-63

<PAGE> 435

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Statement of Operations
For the Period December 31, 1993 (Commencement of Investment
Operations) through June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Interest (Net of foreign withholding taxes of $12,821)...................................... $ 3,795,893
Fee Income.................................................................................. 198,438
Amortization of Discount.................................................................... 17,864
Net Realized Loss on Foreign Currency and Foreign Currency Forward Contracts................ (207,498)
-------------
Total Income............................................................................... 3,804,697
-------------
Expenses:
Investment Advisory Fee (Note 2)............................................................ 306,119
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $34,468, $208,286
and $9,351, respectively) (Note 5)........................................................ 252,105
Shareholder Services........................................................................ 63,492
Amortization of Organizational Expenses and Initial Registration Costs (Note 1)............. 11,961
Legal (Note 2).............................................................................. 10,920
Trustees Fees and Expenses (Note 2)......................................................... 9,100
Other....................................................................................... 134,615
-------------
Total Operating Expenses................................................................... 788,312
Interest Expense (Note 6).................................................................. 317,694
-------------
Net Investment Income....................................................................... $ 2,698,691
-------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments (Including realized gain on closed and expired option and
futures transactions of $265,738 and $2,317,715, respectively)............................ $ (3,584,393)
-------------
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency
Beginning of the Period.................................................................... -0-
End of the Period (Including unrealized depreciation on open option transactions of
$224,306 and unrealized appreciation on open futures transactions and foreign
currency translation of $1,072,018 and $9,510, respectively)........................... (8,751,995)
-------------
Net Unrealized Depreciation on Investments and Foreign Currency During the Period........... (8,751,995)
-------------
Net Realized and Unrealized Loss on Investments and Foreign Currency........................ $(12,336,388)
-------------
Net Decrease in Net Assets from Operation................................................... $ (9,637,697)
-------------
</TABLE>

See Notes to Financial Statements

B-64
<PAGE> 436

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Period December 31, 1993 (Commencement of Investment
Operations) through June 30, 1994
- -------------------------------------------------------------------------

<TABLE>
<CAPTION>
<S> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................................... $ 2,698,691
Net Realized Loss on Investments............................................................ (3,584,393)
Net Unrealized Depreciation on Investments and Foreign Currency During the Period........... (8,751,995)
-------------
Change in Net Assets from Operations........................................................ (9,637,697)
-------------
Distributions from Net Investment Income:
Class A Shares............................................................................. (927,849)
Class B Shares............................................................................. (1,532,147)
Class C Shares............................................................................. (68,793)
-------------
Total Distributions........................................................................ (2,528,789)
-------------
Net Change in Net Assets from Investment Activities......................................... (12,166,486)
-------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold................................................................... 89,237,622
Net Asset Value of Shares Issued Through Dividend Reinvestment.............................. 1,072,183
Cost of Shares Repurchased.................................................................. (5,148,558)
-------------
Net Change in Net Assets from Capital Transactions.......................................... 85,161,247
-------------
Total Increase in Net Assets................................................................ 72,994,761
Net Assets:
Beginning of the Period..................................................................... 4,290
-------------
End of the Period (Including undistributed net investment income of $169,902)............... $ 72,999,051
-------------
</TABLE>

See Notes to Financial Statements

B-65
<PAGE> 437

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- -------------------------------------------------------------------------

1. Significant Accounting Policies

Van Kampen Merritt Strategic Income Fund (the "Fund") is organized
as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a Massa-
chusetts business trust, and is registered as a non-diversified open-
end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment opera-
tions on December 31, 1993, with three classes of common shares,
Class A, Class B and Class C shares. Class C shares were initially
introduced as Class D shares and subsequently renamed Class C
shares on March 7, 1994.

The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.

A. Security Valuation-Investments are stated at value using
market quotations, prices provided by market makers or, if such
valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of
Trustees. Foreign investments are stated at value using the last
available bid price or yield equivalents obtained from dealers in the
OTC or interbank market. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost.

B. Security Transactions-Security transactions are recorded
on a trade date basis. Realized gains and losses are determined on
an identified cost basis. The Fund may purchase and sell securities
on a "when issued" and "delayed delivery" basis, with settlement
to occur at a later date. The value of the security so purchased is
subject to market fluctuations during this period. The Fund will main-
tain in a segregated account with its custodian assets having an
aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made.

C. Investment Income-Interest income is recorded on an
accrual basis. Original issue discount is amortized over the expected
life of each applicable security.

D. Currency Translation-Assets and liabilities denominated in
foreign currencies and commitments under forward foreign exchange
currency contracts are translated into U.S. dollars at the mean of the
quoted bid and ask prices of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were acquired or
sold. Income and expenses are translated at rates of exchange
prevailing when accrued. For financial reporting purposes, realized
gain/loss on foreign currency and foreign currency forward contracts
are included in net investment income.

E. Organizational Expenses and Initial Registration
Costs-The Fund will reimburse Van Kampen Merritt Inc. ("Van
Kampen Merritt") for costs incurred in connection with the Fund's
organization and initial registration in the amount of $120,000. These
costs are being amortized on a straight line basis over the 60 month
period ending December 31, 1998. Van Kampen Merritt Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of
the initial shares of the Fund originally purchased by Van Kampen
Merritt are redeemed by the Fund during the amortization period, the
Fund will be reimbursed for any unamortized organizational expenses
and initial registration costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the
time of redemption.

Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of post October 31 losses
which are not recognized for tax purposes until the first day of the
following fiscal year.

G. Distribution of Income and Gains-The Fund declares
daily and pays monthly dividends from net investment income. Net
investment income for federal income tax purposes includes gains
and losses realized on transactions in options on foreign currencies.
These realized gains and losses are included as net realized gains or
losses for financial accounting purposes.

B-66
<PAGE> 438

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- -------------------------------------------------------------------------

Net realized gains on securities, if any, are distributed annually.
Distributions from net realized gains for book purposes may include
short-term capital gains which are included in ordinary income for
tax purposes.

H. Option and Futures Transactions-Premiums received
from call options written are recorded as deferred credits. The posi-
tion is marked to market daily with any difference between the
options' current market value and premiums received recorded as an
unrealized gain or loss. If the options are not exercised, premiums
received are realized as a gain at expiration date. If the position
is closed prior to expiration, a gain or loss is realized based on
premiums received less the cost of the closing transaction. When
options are exercised, premiums received are added to the proceeds
from the sale of the underlying securities and a gain or loss is
realized accordingly. These same principles apply to the sale of
put options.

Futures contracts are marked to market daily with fluctuations in
value settled daily in cash through a margin account. Gains or losses are
realized at the time the position is closed out or the contract expires.

I. Bank Loan Participations-The Fund invests in participation
interests of loans to foreign entities. When the Fund purchases a
participation of a foreign loan interest, the Fund typically enters into a
contractual agreement with the lender or other third party selling the
participation, but not with the borrower directly. As such, the Fund
assumes credit risk for the borrower, selling participant or other
persons interpositioned between the Fund and the borrower.

2. Investment Advisory Agreement and Other Transactions
with Affiliates

Under the terms of the Fund's Investment Advisory Agreement, the
Adviser will provide investment advice and facilities to the Fund for
an annual fee payable monthly as follows:

<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------------------------------
<S> <C>
First $500 million............................ .75 of 1%
Next $500 million............................. .70 of 1%
Over $1 billion............................... .65 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate,
Meagher & Flom, counsel to the Fund, of which a trustee of the
Fund is an affiliated person.

For the period ended June 30, 1994, the Fund recognized
expenses of approximately $11,600 representing Van Kampen
Merritt's or the Adviser's cost of providing certain accounting, legal
and shareholder services to the Fund.

At June 30, 1994, Van Kampen Merritt owned 100 shares each
of Classes A, B and C.

B-67
<PAGE> 439

Van Kampen Merritt Strategic Income Fund

- -------------------------------------------------------------------------
Notes to Finacial Statements (Continued)
June 30, 1994
- -------------------------------------------------------------------------

3. Capital Transactions

The Fund has outstanding three classes of common share, Classes
A, B and C. There are an unlimited number of shares of each class
without par value authorized. At June 30, 1994, paid in surplus
aggregated $28,737,068, $53,983,993 and $2,444,476 for Classes A,
B and C, respectively. For the period ended June 30, 1994,
transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------
<S> <C> <C>
Sales:
Class A 2,215,561 $ 30,883,579
Class B 4,015,167 55,799,231
Class C 184,146 2,554,812
--------- ------------
Total Sales 6,414,874 $ 89,237,622
--------- ------------
Dividend Reinvestment:
Class A 27,966 $ 349,478
Class B 55,412 691,148
Class C 2,535 31,557
--------- ------------
Total Dividend Reinvestment 85,913 $ 1,072,183
--------- ------------
Repurchases:
Class A (196,064) $(2,497,419)
Class B (195,765) (2,507,816)
Class C (11,096) (143,323)
--------- ------------
Total Repurchases (402,925) $(5,148,558)
--------- ------------
</TABLE>

Class B and C shares are offered without a front end sales
charge, but are subject to a contingent deferred sales charge (CDSC).
The CDSC will be imposed on most redemptions made within six
years of the purchase for Class B and one year of the purchase for
Class C as detailed in the following schedule. The Class B and C
shares bear the expense of their respective deferred sales arrange-
ments, including higher distribution and service fees and incremental
transfer agency costs.

Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
- --------------------------------------------------------
<S> <C> <C>
First.............................. 4.00% 1.00%
Second............................. 3.75% None
Third.............................. 3.50% None
Fourth............................. 2.50% None
Fifth.............................. 1.50% None
Sixth.............................. 1.00% None
Seventh and Thereafter............. None None
</TABLE>

For the period ended June 30, 1994, Van Kampen Merritt, as
Distributor for the Fund, received net commissions on sales of the
Fund's Class A shares of approximately $2,400 and CDSC on the
redeemed shares of Classes B and C of approximately $53,000. Sales
charges do not represent expenses of the Fund.

4. Investment Transactions

Aggregate purchases and cost of sales of investment securities,
including dollar rolls and excluding short-term notes, for the period
ended June 30, 1994, were $271,726,813 and $157,122,711,
respectively.

Transactions in options for the period ended June 30, 1994,
were as follows:

Contracts Premium
- --------------------------------------------------------
<S> <C> <C>
Options Written
and Purchased (Net)............... 654 $ (124,675)
Options Terminated In Closing
Purchase Transactions (Net)....... (250) (326,125)
Options Expired (Net)............. (150) 38,800
-------------
Outstanding at June 30, 1994....... 254 $ (412,000)
-------------
</TABLE>

B-68
<PAGE> 440

Van Kampen Merritt Strategic Income Fund

The descriptions and market values of the option contracts
outstanding at June 30, 1994, were as follows:

<TABLE>
<CAPTION>
No of Expiration Strike Market
Description Contracts Date Price Value
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Buys to Open:
Mexican Par Bond Put...... 1 07/13/94 66.38 $156,250
Binary Option Contracts
Japanese Yen............. 1 08/08/94 109.75 2,000
Japanese Yen............. 1 06/11/94 109.45 900
Japanese Yen............. 1 08/11/94 109.75 1,200
Sept Treasury Bond Call... 250 08/20/94 108.00 27,344
--- --------
254 $187,694
--- --------
</TABLE>

The futures contracts outstanding at June 30, 1994, and the
descriptions and unrealized appreciation/depreciation are as follows:

Unrealized
Appreciation/
Contracts Depreciation
- ------------------------------------------------------------------
<S> <C> <C>
Treasury Bond Futures
September 1994 Sells to Open........ 950 $ 2,145,424
December 1994 Buys to Open.......... 565 (1,221,531)
September 1994 10-Year
Sells to Open...................... 79 148,125
----- -----------
1,594 $ 1,072,018
----- -----------
</TABLE>

The Fund may enter into forward exchange currency contracts in
order to hedge its exposure to changes in foreign currency exchange
rates on its foreign portfolio holdings. A forward exchange contract is
a commitment to purchase or sell a foreign currency at a future date
at a negotiated forward rate. The gain or loss arising from the
difference between the original contracts and the closing of such con-
tracts is included in income as a component of realized gain/loss on
foreign currency and foreign currency forward contracts.

At June 30, 1994, the Fund had realized gains on closed but
unsettled forward exchange currency contracts of $119,852, sched-
uled to settle between July 1, 1994 and September 30, 1994.

5. Distribution and Service Plans

Annual fees under the Plans of up to .30% for Class A
shares and 1.00% each for Class B and Class C shares are accrued
daily. Included in these fees for the period ended June 30, 1994, are
payments to Van Kampen Merritt of approximately $172,000.

6. Borrowings

In accordance with its investment policies, the Fund may borrow
money from banks or enter into reverse repurchase agreements or
dollar rolls for investment purposes in an amount up to 33.3% of its
total assets.

The Fund has entered into a $40,000,000 revolving credit agree-
ment which expires on February 15, 1995. Interest is charged under
the agreement at a rate of 1.10% above the federal funds rate. The
interest rate in effect at June 30, 1994 was 5.625%. An annual com-
mitment fee of 1/4 of 1% is charged on the unused portion of the
credit line. The average daily balance of bank borrowing during the
period was approximately $4,421,000 or $.856 per share.

The Fund has entered into reverse repurchase agreements under
which the Fund sells securities and agrees to repurchase them at a
mutually agreed upon date and price. At June 30, 1994, the interest
rate in effect for reverse repurchase agreements was 4.25%.

The Fund has also entered into dollar rolls under which
the Fund sells securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar securities
(same type and coupon) on a specified future date at a price which is
less than the sales price. During the roll period, the Fund foregoes
interest paid on the securities. At June 30, 1994, open dollar roll
transactions amounted to approximately $9.8 million.

At June 30, 1994, these agreements represented 27.4% of the
Fund's total assets.

B-69
<PAGE> 441

PART C: OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.

List all financial statements and exhibits as part of the Registration
Statement.

(A) FINANCIAL STATEMENTS:

For Van Kampen Merritt High Yield Fund, Van Kampen Merritt Short-Term
Global Income Fund, Van Kampen Merritt Adjustable Rate U.S. Government Fund
and Van Kampen Merritt Strategic Income Fund:

Included in Part A of the Registration Statement:

Financial Highlights

Included in Part B of the Registration Statement:

Unaudited Financial Statements

Notes to Unaudited Financial Statements

Independent Auditors' Report

Audited Financial Statements

Notes to Audited Financial Statements

For Van Kampen Merritt Emerging Markets Income Fund are not included
herein because such fund is a new registrant.

(B) EXHIBITS:
(1)(a) Agreement and Declaration of Trust(1)
(b) Establishment and Designation of Subtrust
(i) Van Kampen Merritt High Yield Fund, as amended and
restated(22)
(ii) Van Kampen Merritt Short-Term Global Income Fund, as
amended and restated(22)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund, as amended and restated(22)
(iv) Van Kampen Merritt Strategic Income Fund(22)
(v) Form of Van Kampen Merritt Emerging Markets Income
Fund, as amended and restated(23)
(c) Form of Certificate of Vote creating Class B Shares(8)
(2) By-Laws (1)
(4) Specimen of Stock Certificates
(i) Van Kampen Merritt High Yield Fund
(a) Class A Shares(14)
(b) Class B Shares(14)
(c) Class C Shares(20)
(ii) Van Kampen Merritt Short-Term Global Income Fund
(a) Class A Shares(8)
(b) Class B Shares(8)
(c) Class C Shares(20)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(9)
(a) Class A Shares(9)
(b) Class B Shares(9)
(c) Class C Shares(22)
(iv) Van Kampen Merritt Strategic Income Fund
(a) Class A Shares(17)
(b) Class B Shares(17)
(c) Class C Shares(22)
(v) Van Kampen Merritt Emerging Markets Income Fund
(a) Class A Shares(23)
(b) Class B Shares(23)
(c) Class C Shares(23)

C-1
<PAGE> 442

(5)(a) Form of Investment Advisory Agreement, as amended
(i) Van Kampen Merritt High Yield Fund(13)
(ii) Van Kampen Merritt Short-Term Global Income Fund(13)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(13)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as
amended and restated(23)
(b) Form of Investment Sub-Advisory Agreement
(i) Van Kampen Merritt Emerging Markets Income Fund(23)
(6)(a) Form of Distribution and Service Agreement for
(i) Van Kampen Merritt High Yield Fund, as amended and
restated(14)
(ii) Van Kampen Merritt Short-Term Global Income Fund, as
amended and restated(14)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund, as amended and restated(14)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as
amended and restated(21)
(b) Form of Dealer Agreement, as amended(22)
(c) Form of Broker Agreement, as amended(22)
(d) Form of Bank Agreement, as amended(22)
(e) Form of Underwriting Agreement(2)
(f) Form of Selected Dealer Agreement(2)
(g) Form of Agreement Between Underwriters(2)
(8)(a) Form of Custodian Agreement
(i) Van Kampen Merritt High Yield Fund(1)
(ii) Van Kampen Merritt Short-Term Global Income Fund(5)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(9)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as
amended and restated(21)
(b) Form of Transfer Agency Agreement
(i) Van Kampen Merritt High Yield Fund(1)
(ii) Van Kampen Merritt Short-Term Global Income Fund(5)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(9)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as
amended and restated(21)
(9)(a) Form of Support Service Agreement(3)
(b) Fund Pricing Agreement(12)
(c) Form of Amended Accounting Service Agreement(12)
(d) Form of Amended Legal Services Agreement(12)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen Merritt High Yield Fund(14)
(b) Van Kampen Merritt Short-Term Global Income Fund(14)
(c) Van Kampen Merritt Adjustable Rate U.S. Government Fund(14)
(d) Van Kampen Merritt Strategic Income Fund(17)
(e) Van Kampen Merritt Merritt Emerging Markets Income Fund(23)
(11) Consent of KPMG Peat Marwick LLP

(a) Van Kampen Merritt High Yield Fund+

(b) Van Kampen Merritt Short-Term Global Income Fund+

(d) Van Kampen Merritt Strategic Income Fund+

(e) Van Kampen Merritt Emerging Markets Income Fund(18)
(13) Letter of Understanding relating to initial capital(2)

C-2
<PAGE> 443

(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1, as
amended(22)
(b) Form of Shareholder Assistance Agreement(14)
(c) Form of Administrative Services Agreement(14)
(d) Form of Service Plan(22)
(16)(a) List of Affiliated Companies(1)
(b) Computation of Performance Quotations
(i) Van Kampen Merritt High Yield Fund(24)
(ii) Van Kampen Merritt Short-Term Global Income
Fund(24)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(24)
(iv) Van Kampen Merritt Strategic Income Fund(24)
(17) List of certain investment companies in response to Item
29(a)+
(18) List of officers and directors of Van Kampen American Capital
Distributors, Inc. in response to Item 29(b)+
(19) Power of attorney(16)

(27) Financial Data Schedules+

- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.

(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(3) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(4) Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(5) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(6) Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(7) Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(8) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(9) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(10) Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(12) Incorporated herein by reference to Post Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(13) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(14) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(15) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(16) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(17) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(18) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

C-3
<PAGE> 444

(19) Incorporated herein by reference to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(20) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(21) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(22) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(23) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(24) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
- ---------------
+ Filed herewith.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.

To the best knowledge of Registrant, no person is controlled by or under
common control with the Registrant.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of April 13, 1995:

<TABLE>
<CAPTION>
(2)
NUMBER
(1) OF
RECORD
TITLE OF CLASS HOLDERS
--------------------------------------------------------- -------
<S> <C>
Shares of Beneficial Interest, without par value
(i) Van Kampen Merritt High Yield Fund*:
Class A Shares................................... 15,059
Class B Shares................................... 2,380
Class C Shares................................... 46
(ii) Van Kampen Merritt Short-Term Global Income
Fund*:
Class A Shares................................... 4,617
Class B Shares................................... 10,309
Class C Shares................................... 17
(iii) Van Kampen Merritt Adjustable Rate U.S.
Government Fund:
Class A Shares................................... 294
Class B Shares................................... 786
Class C Shares................................... 40
(iv) Van Kampen Merritt Strategic Income Fund:
Class A Shares................................... 1,880
Class B Shares................................... 3,158
Class C Shares................................... 58
(v) Van Kampen Merritt Emerging Markets Income Fund*:
Class A Shares................................... 4
Class B Shares................................... 3
Class C Shares................................... 2
-------
</TABLE>

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

* Prior to May 1, 1995, the Fund offered Class D Shares.

C-4
<PAGE> 445

ITEM 27. INDEMNIFICATION.

Please see Article 5.3 of the Registrant's Declaration of Trust (Exhibit 1
(a)). Registrant's directors and officers are covered by an Errors and Omissions
Policy. Section 5 of the current Investment Advisory Agreement between each
sub-trust or the Registrant and Van Kampen American Capital Investment Advisory
Corp. (the "Adviser") provides that, in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of the obligations or duties under
the Investment Advisory Agreement on the part of the Adviser, the Adviser shall
not be liable to the Registrant or to any shareholder for any act or omission in
the course of or connected in any way with rendering services or for any losses
that may be sustained in the purchase, holding or sale of any security. The
Distribution Agreement provides that the Registrant shall indemnify the
Distributor and certain persons related thereto for any loss or liability
arising from any alleged misstatement of a material fact (or alleged omission to
state a material fact) contained in, among other things, the Registration
Statement or Prospectus except to the extent the misstated fact or omission was
made in reliance upon information provided by or on behalf of such Distributor.
(See Section 7 of the Distribution Agreement.)

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, directors, officers and controlling
persons of the Registrant and the investment advisor and distributor 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,
director, officer, or controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such trustee, director,
officer or controlling person or the Distributor in connection with the shares
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 issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.

See "Investment Advisory Services" in the Prospectus and "Officers and
Trustees" in the Statement of Additional Information for information regarding
the business of the Adviser. For information as to the business, profession,
vocation and employment of a substantial nature of directors and officers of the
Adviser, reference is made to the Adviser's current Form ADV (File No.
801-18161) filed under the Investment Advisers Act of 1940, as amended,
incorporated herein by reference.

ITEM 29. PRINCIPAL UNDERWRITERS.

(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17 incorporated by
reference herein.

(b) Van Kampen American Capital Distributors, Inc. is an affiliated person
of an affiliated person of Registrant and is the only principal underwriter for
Registrant. The name, principal business address and positions and offices with
Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 18. Except as disclosed under the
heading, "Officers and Trustees" in Part B of this Registration Statement, none
of such persons has any position or office with Registrant.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.

All accounts, books and other documents required to be maintained by the
Registrant by Section 31 (a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Registrant located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, or at the State Street Bank
and

C-5
<PAGE> 446

Trust Company, 1776 Heritage Drive, North Quincy, MA. All such accounts, books
and other documents required to be maintained by the principal underwriter will
be maintained at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

ITEM 31. MANAGEMENT SERVICES.

Not applicable.

ITEM 32. UNDERTAKINGS.

(a) Not Applicable.

(b) Not Applicable.

Registrant undertakes, if requested to do so by the holders of at least 10%
of the shareholders of the Van Kampen Merritt Emerging Markets Income Fund, a
sub-trust of the Registrant, to call a meeting of such shareholders for the
purpose of voting upon the question of removal of a trustee or trustees, and to
assist in communications with other shareholders to the extent required by
Section 16(c) of the Investment Company Act of 1940, as amended.

C-6
<PAGE> 447

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN MERRITT TRUST,
CERTIFIES THAT IT MEETS ALL THE REQUIREMENTS FOR EFFECTIVENESS TO THIS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933,
HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF OAKBROOK
TERRACE, AND THE STATE OF ILLINOIS, ON THE 27TH DAY OF APRIL, 1995.

VAN KAMPEN MERRITT TRUST

By: /s/ RONALD A. NYBERG
--------------------------------
Vice President and Secretary

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON APRIL 27, 1995 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:

<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- ----------------------------------------------
<S> <C>

Chairman of the Board and Trustee

/s/ DENNIS J. McDONNELL* President and Trustee (Chief Executive
- --------------------------------------------- Officer)
Dennis J. McDonnell

/s/ EDWARD C. WOOD, III* Vice President and Treasurer
- --------------------------------------------- (Chief Financial and Accounting Officer)
Edward C. Wood, III

/s/ R. CRAIG KENNEDY* Trustee
- ---------------------------------------------
R. Craig Kennedy

/s/ PHILIP P. GAUGHAN* Trustee
- ---------------------------------------------
Philip P. Gaughan

/s/ DONALD C. MILLER* Trustee
- ---------------------------------------------
Donald C. Miller

/s/ JACK E. NELSON* Trustee
- ---------------------------------------------
Jack E. Nelson

/s/ JEROME L. ROBINSON* Trustee
- ---------------------------------------------
Jerome L. Robinson

/s/ WAYNE W. WHALEN* Trustee
- ---------------------------------------------
Wayne W. Whalen
</TABLE>
- ---------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney, a copy of which
previously was filed.

/s/ RONALD A. NYBERG
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact

April 27, 1995

C-7
<PAGE> 448

SCHEDULE OF EXHIBITS TO

POST-EFFECTIVE AMENDMENT 30 TO FORM N-1A

SUBMITTED TO THE SECURITIES AND EXCHANGE

COMMISSION ON APRIL 28, 1995

(B) EXHIBITS:

(1)(a) Agreement and Declaration of Trust(1)
(b) Establishment and Designation of Subtrust
(i) Van Kampen Merritt High Yield Fund, as amended and
restated(22)
(ii) Van Kampen Merritt Short-Term Global Income Fund, as
amended and restated(22)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund,
as amended and restated(22)
(iv) Van Kampen Merritt Strategic Income Fund(22)
(v) Form of Van Kampen Merritt Emerging Markets Income Fund, as
amended and restated(23)
(c) Form of Certificate of Vote creating Class B Shares(8)
(2) By-Laws(1)
(4) Specimen of Stock Certificates
(i) Van Kampen Merritt High Yield Fund
(a) Class A Shares(14)
(b) Class B Shares(14)
(c) Class C Shares(20)
(ii) Van Kampen Merritt Short-Term Global Income Fund
(a) Class A Shares(8)
(b) Class B Shares(8)
(c) Class C Shares(20)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund(9)
(a) Class A Shares(9)
(b) Class B Shares(9)
(c) Class C Shares(22)
(iv) Van Kampen Merritt Strategic Income Fund
(a) Class A Shares(17)
(b) Class B Shares(17)
(c) Class C Shares(22)
(v) Van Kampen Merritt Emerging Markets Income Fund
(a) Class A Shares(23)
(b) Class B Shares(23)
(c) Class C Shares(23)
(5)(a) Form of Investment Advisory Agreement
(i) Van Kampen Merritt High Yield Fund(13)
(ii) Van Kampen Merritt Short-Term Global Income Fund(13)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government
Fund(13)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as amended
and restated(23)
(b) Form of Investment Sub-Advisory Agreement
(i) Van Kampen Merritt Emerging Markets Income Fund(23)
(6)(a) Form of Distribution and Service Agreement
(i) Van Kampen Merritt High Yield Fund, as amended and
restated(14)
(ii) Van Kampen Merritt Short-Term Global Income Fund, as
amended and
restated(14)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund as
amended and restated(14)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as amended
and restated(21)
(b) Form of Dealer Agreement as amended(22)
(c) Form of Broker Agreement as amended(22)
(d) Form of Bank Agreement as amended(22)
(e) Form of Underwriting Agreement(2)
<PAGE> 449

(f) Form of Selected Dealer Agreement(2)
(g) Form of Agreement Between Underwriters(2)
(8)(a) Form of Custodian Agreement
(i) Van Kampen Merritt High Yield Fund(1)
(ii) Van Kampen Merritt Short-Term Global Income Fund(5)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund(9)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as amended
and restated(21)
(b) Form of Transfer Agency Agreement
(i) Van Kampen Merritt High Yield Fund(1)
(ii) Van Kampen Merritt Short-Term Global Income Fund(5)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund(9)
(iv) Van Kampen Merritt Strategic Income Fund(17)
(v) Van Kampen Merritt Emerging Markets Income Fund, as amended
and restated(21)
(9)(a) Form of Support Service Agreement(3)
(b) Fund Pricing Agreement(12)
(c) Form of Amended Accounting Service Agreement(12)
(d) Form of Amended Legal Services Agreement(12)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen Merritt High Yield Fund(14)
(b) Van Kampen Merritt Short-Term Global Income Fund(14)
(c) Van Kampen Merritt Adjustable Rate U.S. Government Fund(14)
(d) Van Kampen Merritt Strategic Income Fund(17)
(e) Van Kampen Merritt Emerging Markets Income Fund(23)
(11) Consent of KPMG Peat Marwick LLP

(a) Van Kampen Merritt High Yield Fund+

(b) Van Kampen Merritt Short-Term Global Income Fund+

(d) Van Kampen Merritt Strategic Income Fund+

(e) Van Kampen Merritt Emerging Markets Income Fund(18)
(13) Letter of Understanding relating to initial capital(2)
(15)(a) Form of Distribution Plan pursuant to Rule 12b-1 as amended(22)
(b) Form of Shareholder Assistance Agreement(14)
(c) Form of Administrative Services Agreement(14)
(d) Form of Service Plan(22)
(16)(a) List of Affiliated Companies(1)
(b) Computation of Performance Quotations
(i) Van Kampen Merritt High Yield Fund(24)
(ii) Van Kampen Merritt Short-Term Global Income Fund(24)
(iii) Van Kampen Merritt Adjustable Rate U.S. Government Fund(24)
(iv) Van Kampen Merritt Strategic Income Fund(24)
(17) List of certain investment companies in response to Item 29(a)+
(18) List of officers and directors of Van Kampen American Capital
Distributors, Inc. in response to Item 29(b)+
(19) Power of attorney(16)

(27) Financial Data Schedules+

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

(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(3) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(4) Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(5) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(6) Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
<PAGE> 450

(7) Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(8) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(9) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(10) Incorporated herein by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(12) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(13) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(14) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(15) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(16) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(17) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(18) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(19) Incorporated herein by reference to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(20) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(21) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(22) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(23) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(24) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
- ---------------

+ Filed herewith.

<PAGE> 1
Exhibit 11(a)

[PEAT MARWICK LLP LETTERHEAD]

CONSENT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Van Kampen Merritt High Yield Fund:

We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.

/s/ KPMG Peat Marwick, LLP

Chicago, Illinois
April 21, 1995

<PAGE> 1

Exhibit 11(b)

[PEAT MARWICK LLP LETTERHEAD]

CONSENT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Van Kampen Merritt Short-Term Global Income Fund:

/s/ KPMG Peat Marwick, LLP

Chicago, Illinois
April 21, 1995

<PAGE> 1
Exhibit 11(c)

[PEAT MARWICK LLP LETTERHEAD]

CONSENT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Van Kampen Merritt Adjustable Rate U.S. Government Fund:

/s/ KPMG Peat Marwick, LLP

Chicago, Illinois
April 21, 1995

<PAGE> 1
EXHIBIT 11(d)

[PEAT MARWICK LLP LETTERHEAD]

CONSENT OF INDEPENDENT AUDITORS

The Board of Trustees and Shareholders
Van Kampen Merritt Strategic Income Fund:

/s/ KPMG Peat Marwick, LLP

Chicago, Illinois
April 21, 1995

<PAGE> 1

EXHIBIT 17

INVESTMENT COMPANIES FOR WHICH
VAN KAMPEN/AMERICAN CAPITAL DISTRIBUTORS INC.
ACTS AS PRINCIPAL UNDERWRITER OR DEPOSITOR
APRIL 12, 1995

Van Kampen Merritt U.S. Government Trust
Van Kampen Merritt Tax Free Fund
Van Kampen Merritt Insured Tax Free Income Fund
Van Kampen Merritt Tax Free High Income Fund
Van Kampen Merritt California Insured Tax Free Fund
Van Kampen Merritt Municipal Income Fund
Van Kampen Merritt Limited Term Municipal Income Fund
Van Kampen Merritt Florida Insured Tax Free Income Fund
Van Kampen Merritt New Jersey Tax Free Income Fund
Van Kampen Merritt New York Tax Free Income Fund
Van Kampen Merritt Trust
Van Kampen Merritt High Yield Fund
Van Kampen Merritt Short-Term Global Income Fund
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Van Kampen Merritt Strategic Income Fund
Van Kampen Merritt Emerging Markets Income Fund
Van Kampen Merritt Growth Fund
Van Kampen Merritt Equity Trust
Van Kampen Merritt Growth and Income Fund
Van Kampen Merritt Utility Fund
Van Kampen Merritt Balanced Fund
Van Kampen Merritt Total Return Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Money Market Trust
Van Kampen Merritt Money Market Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Prime Rate Income Trust
Van Kampen Merritt Series Trust
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
<PAGE> 2

<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1
Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 347
Insured Municipals Income Trust (Discount) . . . . . . . . . . . . . . . . . . . . Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) . . . . . . . . . . . . . Series 1 through 98
Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . . . . . . . Series 5 through 83
Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . . . . . . . Series 9 through 79
Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . . . . . Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) . . . . . . . . . Series 1 and 2
Insured Tax Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) . . . . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 89
Investors' Quality Tax-Exempt Trust-Intermediate . . . . . . . . . . . . . . . . . Series 1
Investors' Corporate Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 12
Investors' Governmental Securities Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 7
Van Kampen Merritt International Bond Income Trust . . . . . . . . . . . . . . . . Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1
Alabama Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Arizona Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 12
Arkansas Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1
California Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 138
California Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . Series 1
California Insured Municipals Income Trust (1st Intermediate Series) . . . . . . . Series 1 through 3
California Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1 through 20
California Insured Municipals Income Trust (Intermediate Laddered) . . . . . . . . Series 1 through 18
Colorado Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 73
Colorado Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 18
Connecticut Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 26
Connecticut Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1
Delaware Investor's Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 91
Florida Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) . . . . . . . . . . Series 1 through 12
Georgia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 75
Georgia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Municipals Trust (AMT) . . . . . . . . . . . . . . . . . . . . . Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 54
Louisiana Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . Series 1
Maryland Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 70
Massachusetts Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 30
Massachusetts Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . Series 1
Michigan Financial Institutions Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1
Michigan Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 127
Michigan Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . Series 1
Michigan Insured Municipals Income Trust (1st Intermediate Series) . . . . . . . . Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 30
Minnesota Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 55
Minnesota Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 21
Missouri Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 89
Missouri Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . Series 1
Missouri Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 15
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . Series 1
Nebraska Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 9
</TABLE>
<PAGE> 3

<TABLE>
<S> <C>
New Mexico Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 17
New Jersey Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 101
New Jersey Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 and 4
New York Insured Municipals Income Trust-Intermediate . . . . . . . . . . . . . . . Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 125
New York Insured Tax-Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 15
New York Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1
North Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 81
Ohio Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 96
Ohio Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . . Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . . . . Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Oklahoma Insured Municipal Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 15
Oregon Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 53
Pennsylvania Insured Municipals Income Trust - Intermediate . . . . . . . . . . . . Series 1 through 6
Pennsylvania Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 200
Pennsylvania Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 79
Tennessee Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1-3 and 5-31
Texas Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 39
Texas Insured Municipal Income Trust (Intermediate Ladder) . . . . . . . . . . . . Series 1
Virginia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 64
Van Kampen Merritt Utility Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Van Kampen Merritt Insured Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 45
Van Kampen Merritt Insured Income Trust (Intermediate Term) . . . . . . . . . . . . Series 1 through 44
Van Kampen Merritt Select Equity Trust . . . . . . . . . . . . . . . . . . . . . . Series 1
Van Kampen Merritt Select Equity and Treasury Trust . . . . . . . . . . . . . . . . Series 1
Washington Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1
West Virginia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 5
</TABLE>

<PAGE> 1
EXHIBIT 18
OFFICERS

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.

<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & Chief Executive Officer Houston, TX

William R. Molinari President & Chief Operating Oakbrook Terrace, IL
Officer

Ronald A. Nyberg Executive Vice President & General Oakbrook Terrace, IL
Counsel
William R. Rybak Executive Vice President & Chief Oakbrook Terrace, IL
Financial Officer

Robert A. Broman Sr. Vice President Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
Robert J. Froehlich Sr. Vice President Oakbrook Terrace, IL
Keith K. Furlong Sr. Vice President Oakbrook Terrace, IL
Richard D. Humphrey Sr. Vice President Houston, TX
Robert S. West Sr. Vice President Oakbrook Terrace, IL
John H. Zimmermann, III Sr. Vice President Oakbrook Terrace, IL

Timothy K. Brown 1st Vice President Laguna Niguel, CA
James S. Fosdick 1st Vice President Oakbrook Terrace, IL
Edward F. Lynch 1st Vice President Oakbrook Terrace, IL
Scott E. Martin 1st Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
Mark T. McGannon 1st Vice President Oakbrook Terrace, IL
Charles G. Millington 1st Vice President, Controller Oakbrook Terrace, IL
& Treasurer
Michael L. Stallard 1st Vice President Oakbrook Terrace, IL
David M. Swanson 1st Vice President Oakbrook Terrace, IL

Patricia A. Bettlach Vice President St. Louis, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
Linda Mae Brown Vice President Oakbrook Terrace, IL
William F. Burke, Jr. Vice President Mendham, NJ
Thomas M. Byron Vice President Oakbrook Terrace, IL
Glenn M. Cackovic Vice President Laguna Niguel, CA
Joseph N. Caggiano Vice President New York, NY
Richard J. Charlino Vice President Oakbrook Terrace, IL
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Suzanne Cummings Vice President Houston, TX
David B. Dibo Vice President Oakbrook Terrace, IL
Howard A. Doss Vice President Tampa, FL
Charles Edward Fisher Vice President Oakbrook Terrace, IL
William J. Fow Vice President Redding, CT
Erich P. Gerth Vice President Dallas, TX
John A. Hanhauser Vice President Philadelphia, PA
Eric J. Hargens Vice President Orlando, FL
J. Christopher Jackson Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary

</TABLE>
<PAGE> 2

<TABLE>
<S> <C> <C>
Dana R. Klein Vice President Oakbrook Terrace, IL
Ann Marie Klingenhagen Vice President Oakbrook Terrace, IL
David R. Kowalski Vice President & Director Oakbrook Terrace, IL
of Compliance
S. William Lehew III Vice President Charlotte, NC
Walter Lynn Vice President Flower Mound, TX
Michele L. Manley Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Ruth L. McKeel Vice President Oakbrook Terrace, IL
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Oakbrook Terrace, IL
Walter E. Rein Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
James B. Ross Vice President Oakbrook Terrace, IL
James J. Ryan Vice President Oakbrook Terrace, IL
Heather R. Sabo Vice President Richmond, VA
Lisa A. Schomer Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
William C. Strafford Vice President Granger, IN
James C. Taylor Vice President Oakbrook Terrace, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Jeffrey A. Urbina Vice President Oakbrook Terrace, IL
Sandra A. Waterworth Vice President and Assistant Oakbrook Terrace, IL
Secretary
Steven T. West Vice President Wayne, PA
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
James R. Yount Vice President Seattle, WA
Richard P. Zgonina Vice President Oakbrook Terrace, IL

Eric J. Bridges Asst. Vice President Oakbrook Terrace, IL
Richard B. Callaghan Asst. Vice President Oakbrook Terrace, IL
Stephen M. Cutka Asst. Vice President Oakbrook Terrace, IL
Gerald A. Davis Asst. Vice President Oakbrook Terrace, IL
Jeanette M. Dierkes Asst. Vice President Oakbrook Terrace, IL
Jerome M. Dybzinski Asst. Vice President Oakbrook Terrace, IL
Robert D. Gorski Asst. Vice President Oakbrook Terrace, IL
Susan J. Hill Asst. Vice President Oakbrook Terrace, IL
Natalie N. Hurdle Asst. Vice President New York, NY
Peggy E. Moro Asst. Vice President Oakbrook Terrace, IL
David R. Niemi Asst. Vice President Oakbrook Terrace, IL
Daniel J. O'Keefe Asst. Vice President Oakbrook Terrace, IL
Allison Okun Asst. Vice President Oakbrook Terrace, IL
David B. Partain Asst. Vice President Oakbrook Terrace, IL
Scott M. Pulkrabek Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Michael Quinn Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Thomas J. Sauerborn Asst. Vice President New York, NY
Jeffrey C. Shirk Asst. Vice President Philadelphia, PA
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
</TABLE>

<PAGE> 3

<TABLE>
<S> <C> <C>
Kathleen M. Wennerstrum Asst. Vice President Oakbrook Terrace, IL
Barbara A. Withers Asst. Vice President Oakbrook Terrace, IL

Huey P. Falgout, Jr. Asst. Secretary Houston, TX
Nori L. Gabert Asst. Secretary Houston, TX

David C. Goodwin Asst. Secretary Oakbrook Terrace, IL
Gina M. Scumaci Asst. Secretary Oakbrook Terrace, IL

</TABLE>

<PAGE> 4

DIRECTORS

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.

<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & CEO 2800 Post Oak Blvd.
Houston, TX 77056

William R. Molinari President & COO One Parkview Plaza
Oakbrook Terrace, IL 60181

Ronald A. Nyberg Executive Vice President One Parkview Plaza
& General Counsel Oakbrook Terrace, IL 60181

William R. Rybak Executive Vice President One Parkview Plaza
& CFO Oakbrook Terrace, IL 60181
</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> HIGH YIELD

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 296,150,172<F1>
<INVESTMENTS-AT-VALUE> 285,814,632<F1>
<RECEIVABLES> 8,924,211<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 93,993<F1>
<TOTAL-ASSETS> 294,832,836<F1>
<PAYABLE-FOR-SECURITIES> 8,949,476<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 2,851,844<F1>
<TOTAL-LIABILITIES> 11,801,320<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 358,071,336
<SHARES-COMMON-STOCK> 26,557,239
<SHARES-COMMON-PRIOR> 27,035,544
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 4,158,472<F1>
<ACCUMULATED-NET-GAINS> (109,234,576)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,158,472)<F1>
<NET-ASSETS> 239,021,385
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 14,724,249<F1>
<OTHER-INCOME> 391,404<F1>
<EXPENSES-NET> 2,116,890<F1>
<NET-INVESTMENT-INCOME> 12,998,763<F1>
<REALIZED-GAINS-CURRENT> (16,525,077)<F1>
<APPREC-INCREASE-CURRENT> (735,843)<F1>
<NET-CHANGE-FROM-OPS> (4,262,157)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (13,689,643)<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,691,066
<NUMBER-OF-SHARES-REDEEMED> (2,709,950)
<SHARES-REINVESTED> 540,577
<NET-CHANGE-IN-ASSETS> (21,676,168)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (92,709,499)<F1>
<OVERDISTRIB-NII-PRIOR> 1,435,104<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,093,715<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,116,890<F1>
<AVERAGE-NET-ASSETS> 255,891,785
<PER-SHARE-NAV-BEGIN> 9.643
<PER-SHARE-NII> .420
<PER-SHARE-GAIN-APPREC> (.553)
<PER-SHARE-DIVIDEND> (.510)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.000
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> HIGH YIELD

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 296,150,172<F1>
<INVESTMENTS-AT-VALUE> 285,814,632<F1>
<RECEIVABLES> 8,924,211<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 93,993<F1>
<TOTAL-ASSETS> 294,832,836<F1>
<PAYABLE-FOR-SECURITIES> 8,949,476<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 2,851,844<F1>
<TOTAL-LIABILITIES> 11,801,320<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 46,901,336
<SHARES-COMMON-STOCK> 4,714,259
<SHARES-COMMON-PRIOR> 3,442,385
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 4,158,472<F1>
<ACCUMULATED-NET-GAINS> (109,234,576)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,158,472)<F1>
<NET-ASSETS> 42,430,736
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 14,724,249<F1>
<OTHER-INCOME> 391,404<F1>
<EXPENSES-NET> 2,116,890<F1>
<NET-INVESTMENT-INCOME> 12,998,763<F1>
<REALIZED-GAINS-CURRENT> (16,525,077)<F1>
<APPREC-INCREASE-CURRENT> (735,843)<F1>
<NET-CHANGE-FROM-OPS> (4,262,157)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,926,479)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,689,930
<NUMBER-OF-SHARES-REDEEMED> (492,477)
<SHARES-REINVESTED> 74,421
<NET-CHANGE-IN-ASSETS> 9,251,664
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (92,709,499)<F1>
<OVERDISTRIB-NII-PRIOR> 1,435,104<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,093,715<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,116,890<F1>
<AVERAGE-NET-ASSETS> 38,188,406
<PER-SHARE-NAV-BEGIN> 9.638
<PER-SHARE-NII> .397
<PER-SHARE-GAIN-APPREC> (.565)
<PER-SHARE-DIVIDEND> (.469)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.001
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> HIGH YIELD

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 296,150,172<F1>
<INVESTMENTS-AT-VALUE> 285,814,632<F1>
<RECEIVABLES> 8,924,211<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 93,993<F1>
<TOTAL-ASSETS> 294,832,836<F1>
<PAYABLE-FOR-SECURITIES> 8,949,476<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 2,851,844<F1>
<TOTAL-LIABILITIES> 11,801,320<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,786,197
<SHARES-COMMON-STOCK> 175,267
<SHARES-COMMON-PRIOR> 228,152
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 4,158,472<F1>
<ACCUMULATED-NET-GAINS> (109,234,576)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,158,472)<F1>
<NET-ASSETS> 6,578,315
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 14,724,249<F1>
<OTHER-INCOME> 391,404<F1>
<EXPENSES-NET> 2,116,890<F1>
<NET-INVESTMENT-INCOME> 12,998,763<F1>
<REALIZED-GAINS-CURRENT> (16,525,077)<F1>
<APPREC-INCREASE-CURRENT> (735,843)<F1>
<NET-CHANGE-FROM-OPS> (4,262,157)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (105,950)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69,903
<NUMBER-OF-SHARES-REDEEMED> (127,575)
<SHARES-REINVESTED> 4,788
<NET-CHANGE-IN-ASSETS> (621,716)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (92,709,499)<F1>
<OVERDISTRIB-NII-PRIOR> 1,435,104<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,093,715<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,116,890<F1>
<AVERAGE-NET-ASSETS> 2,139,952
<PER-SHARE-NAV-BEGIN> 9.643
<PER-SHARE-NII> .369
<PER-SHARE-GAIN-APPREC> (.538)
<PER-SHARE-DIVIDEND> (.469)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.005
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 014
<NAME> HIGH YIELD

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 296,150,172<F1>
<INVESTMENTS-AT-VALUE> 285,814,632<F1>
<RECEIVABLES> 8,924,211<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 93,993<F1>
<TOTAL-ASSETS> 294,832,836<F1>
<PAYABLE-FOR-SECURITIES> 8,949,476<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 2,851,844<F1>
<TOTAL-LIABILITIES> 11,801,320<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,235
<SHARES-COMMON-STOCK> 120
<SHARES-COMMON-PRIOR> 120
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 4,158,472<F1>
<ACCUMULATED-NET-GAINS> (109,234,576)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,158,472)<F1>
<NET-ASSETS> 1,080
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 14,724,249<F1>
<OTHER-INCOME> 391,404<F1>
<EXPENSES-NET> 2,116,890<F1>
<NET-INVESTMENT-INCOME> 12,998,763<F1>
<REALIZED-GAINS-CURRENT> (16,525,077)<F1>
<APPREC-INCREASE-CURRENT> (735,843)<F1>
<NET-CHANGE-FROM-OPS> (4,262,157)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (59)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> (78)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (92,709,499)<F1>
<OVERDISTRIB-NII-PRIOR> 1,435,104<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 1,093,715<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 2,116,890<F1>
<AVERAGE-NET-ASSETS> 1,036
<PER-SHARE-NAV-BEGIN> 9.605
<PER-SHARE-NII> .435
<PER-SHARE-GAIN-APPREC> (.580)
<PER-SHARE-DIVIDEND> (.505)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.000
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> SHORT-TERM GLOBAL

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 291,000,765<F1>
<INVESTMENTS-AT-VALUE> 283,524,592<F1>
<RECEIVABLES> 4,918,320<F1>
<ASSETS-OTHER> 39,343<F1>
<OTHER-ITEMS-ASSETS> 25,337<F1>
<TOTAL-ASSETS> 288,507,592<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,769,745<F1>
<TOTAL-LIABILITIES> 4,769,745<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 128,088,406
<SHARES-COMMON-STOCK> 12,575,822
<SHARES-COMMON-PRIOR> 18,126,538
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8,406,518)<F1>
<ACCUMULATED-NET-GAINS> (66,345,293)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (10,967,362)<F1>
<NET-ASSETS> 98,221,643
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 13,769,985<F1>
<OTHER-INCOME> (650,889)<F1>
<EXPENSES-NET> (3,039,229)<F1>
<NET-INVESTMENT-INCOME> 10,079,867<F1>
<REALIZED-GAINS-CURRENT> (130,384,419)<F1>
<APPREC-INCREASE-CURRENT> 1,588,262<F1>
<NET-CHANGE-FROM-OPS> (1,370,290)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (5,086,169)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 102,105
<NUMBER-OF-SHARES-REDEEMED> (6,015,968)
<SHARES-REINVESTED> 363,147
<NET-CHANGE-IN-ASSETS> (49,490,806)
<ACCUMULATED-NII-PRIOR> (5,032,543)<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 979,324<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,039,229<F1>
<AVERAGE-NET-ASSETS> 124,870,964
<PER-SHARE-NAV-BEGIN> 8.15
<PER-SHARE-NII> .19
<PER-SHARE-GAIN-APPREC> (.21)
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.81
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to refund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> SHORT-TERM GLOBAL

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 291,000,765<F1>
<INVESTMENTS-AT-VALUE> 283,524,592<F1>
<RECEIVABLES> 4,918,320<F1>
<ASSETS-OTHER> 39,343<F1>
<OTHER-ITEMS-ASSETS> 25,337<F1>
<TOTAL-ASSETS> 288,507,592<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,769,745<F1>
<TOTAL-LIABILITIES> 4,769,745<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 241,153,334
<SHARES-COMMON-STOCK> 23,733,700
<SHARES-COMMON-PRIOR> 33,355,452
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8,406,518)<F1>
<ACCUMULATED-NET-GAINS> (66,345,293)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (10,967,362)<F1>
<NET-ASSETS> 185,324,896
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 13,769,985<F1>
<OTHER-INCOME> (650,889)<F1>
<EXPENSES-NET> (3,039,229)<F1>
<NET-INVESTMENT-INCOME> 10,079,867<F1>
<REALIZED-GAINS-CURRENT> (13,038,419)<F1>
<APPREC-INCREASE-CURRENT> 1,588,262<F1>
<NET-CHANGE-FROM-OPS> (1,370,290)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (8,360,297)<F1>
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 464,394
<NUMBER-OF-SHARES-REDEEMED> (10,665,038)
<SHARES-REINVESTED> 578,892
<NET-CHANGE-IN-ASSETS> (86,459,718)
<ACCUMULATED-NII-PRIOR> (5,043,542)<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 979,324<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,039,229<F1>
<AVERAGE-NET-ASSETS> 228,277,680
<PER-SHARE-NAV-BEGIN> 8.15
<PER-SHARE-NII> .15
<PER-SHARE-GAIN-APPREC> (.20)
<PER-SHARE-DIVIDEND> (.29)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.81
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to refund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> SHORT-TERM GLOBAL

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 291,000,765<F1>
<INVESTMENTS-AT-VALUE> 283,524,592<F1>
<RECEIVABLES> 4,918,320<F1>
<ASSETS-OTHER> 39,343<F1>
<OTHER-ITEMS-ASSETS> 25,337<F1>
<TOTAL-ASSETS> 288,507,592<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,769,745<F1>
<TOTAL-LIABILITIES> 4,769,745<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 214,229
<SHARES-COMMON-STOCK> 24,326
<SHARES-COMMON-PRIOR> 23,638
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8,406,518)<F1>
<ACCUMULATED-NET-GAINS> (66,345,293)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (10,967,362)<F1>
<NET-ASSETS> 190,338
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 13,769,985<F1>
<OTHER-INCOME> (650,889)<F1>
<EXPENSES-NET> (3,039,229)<F1>
<NET-INVESTMENT-INCOME> 10,079,867<F1>
<REALIZED-GAINS-CURRENT> (13,038,419)<F1>
<APPREC-INCREASE-CURRENT> 1,588,262<F1>
<NET-CHANGE-FROM-OPS> (1,370,290)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (7,334)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,233
<NUMBER-OF-SHARES-REDEEMED> (2,456)
<SHARES-REINVESTED> 911
<NET-CHANGE-IN-ASSETS> (2,587)
<ACCUMULATED-NII-PRIOR> (5,032,543)<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 979,324<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,039,229<F1>
<AVERAGE-NET-ASSETS> 202,129
<PER-SHARE-NAV-BEGIN> 8.16
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> (.27)
<PER-SHARE-DIVIDEND> (.29)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.82
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to refund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 024
<NAME> SHORT-TERM GLOBAL

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 291,000,765<F1>
<INVESTMENTS-AT-VALUE> 283,524,592<F1>
<RECEIVABLES> 4,918,320<F1>
<ASSETS-OTHER> 39,343<F1>
<OTHER-ITEMS-ASSETS> 25,337<F1>
<TOTAL-ASSETS> 288,507,592<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,769,745<F1>
<TOTAL-LIABILITIES> 4,769,745<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,051
<SHARES-COMMON-STOCK> 124
<SHARES-COMMON-PRIOR> 123
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8,406,518)<F1>
<ACCUMULATED-NET-GAINS> (66,345,293)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (10,967,362)<F1>
<NET-ASSETS> 970
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 13,769,985<F1>
<OTHER-INCOME> (650,889)<F1>
<EXPENSES-NET> (3,039,229)<F1>
<NET-INVESTMENT-INCOME> 10,079,867<F1>
<REALIZED-GAINS-CURRENT> (13,038,419)<F1>
<APPREC-INCREASE-CURRENT> 1,588,262<F1>
<NET-CHANGE-FROM-OPS> (1,370,290)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> 42
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 36
<ACCUMULATED-NII-PRIOR> (5,043,542)<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 979,324<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 3,039,229<F1>
<AVERAGE-NET-ASSETS> 990
<PER-SHARE-NAV-BEGIN> 8.16
<PER-SHARE-NII> .44
<PER-SHARE-GAIN-APPREC> (.46)
<PER-SHARE-DIVIDEND> (.32)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.82
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to refund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630<F1>
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 6,997,376
<SHARES-COMMON-STOCK> 710,220
<SHARES-COMMON-PRIOR> 753,223
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 6,522,682
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (174,010)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77,270
<NUMBER-OF-SHARES-REDEEMED> (134,285)
<SHARES-REINVESTED> 14,012
<NET-CHANGE-IN-ASSETS> (556,817)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 6,921,814
<PER-SHARE-NAV-BEGIN> 9.399
<PER-SHARE-NII> .241
<PER-SHARE-GAIN-APPREC> (.223)
<PER-SHARE-DIVIDEND> (.233)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.184
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 24,312,356
<SHARES-COMMON-STOCK> 2,492,656
<SHARES-COMMON-PRIOR> 2,937,451
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 22,906,032
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (541,377)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 353,120
<NUMBER-OF-SHARES-REDEEMED> (836,917)
<SHARES-REINVESTED> 39,002
<NET-CHANGE-IN-ASSETS> (4,715,706)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 25,443,963<F1>
<PER-SHARE-NAV-BEGIN> 9.403
<PER-SHARE-NII> .209
<PER-SHARE-GAIN-APPREC> (.226)
<PER-SHARE-DIVIDEND> (.197)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.189
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> ADJUSTABLE RATE U.S. GOVERNMENT FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 31,905,802<F1>
<INVESTMENTS-AT-VALUE> 33,195,172<F1>
<RECEIVABLES> 397,630<F1>
<ASSETS-OTHER> 21,245<F1>
<OTHER-ITEMS-ASSETS> 940<F1>
<TOTAL-ASSETS> 33,614,987<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 246,277<F1>
<TOTAL-LIABILITIES> 246,277<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,163,383
<SHARES-COMMON-STOCK> 429,040
<SHARES-COMMON-PRIOR> 429,090
<ACCUMULATED-NII-CURRENT> 29,815<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (715,827)<F1>
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,418,393)<F1>
<NET-ASSETS> 3,939,996
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,068,395<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 238,427<F1>
<NET-INVESTMENT-INCOME> 829,968<F1>
<REALIZED-GAINS-CURRENT> (321,195)<F1>
<APPREC-INCREASE-CURRENT> (538,840)<F1>
<NET-CHANGE-FROM-OPS> (30,067)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (86,659)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 121,041
<NUMBER-OF-SHARES-REDEEMED> (128,101)
<SHARES-REINVESTED> 7,010
<NET-CHANGE-IN-ASSETS> (94,597)
<ACCUMULATED-NII-PRIOR> 1,893<F1>
<ACCUMULATED-GAINS-PRIOR> (394,632)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 110,360<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 403,967<F1>
<AVERAGE-NET-ASSETS> 4,035,008
<PER-SHARE-NAV-BEGIN> 9.403
<PER-SHARE-NII> .185
<PER-SHARE-GAIN-APPREC> (.208)
<PER-SHARE-DIVIDEND> (.197)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.183
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> VKM STRATEGIC INCOME FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 121,954,861<F1>
<INVESTMENTS-AT-VALUE> 110,584,154<F1>
<RECEIVABLES> 2,782,232<F1>
<ASSETS-OTHER> 96,123<F1>
<OTHER-ITEMS-ASSETS> 80,656<F1>
<TOTAL-ASSETS> 113,543,165<F1>
<PAYABLE-FOR-SECURITIES> 2,002,068<F1>
<SENIOR-LONG-TERM-DEBT> 35,389,479<F1>
<OTHER-ITEMS-LIABILITIES> 1,178,476<F1>
<TOTAL-LIABILITIES> 38,570,023<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,290,751
<SHARES-COMMON-STOCK> 2,261,501
<SHARES-COMMON-PRIOR> 2,047,563
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (224,706)<F1>
<ACCUMULATED-NET-GAINS> (7,562,182)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (11,354,093)<F1>
<NET-ASSETS> 24,736,320
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 4,523,519<F1>
<OTHER-INCOME> 413,587<F1>
<EXPENSES-NET> 1,633,075<F1>
<NET-INVESTMENT-INCOME> 3,304,001<F1>
<REALIZED-GAINS-CURRENT> (3,977,789)<F1>
<APPREC-INCREASE-CURRENT> (2,602,098)
<NET-CHANGE-FROM-OPS> (3,275,886)
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,319,622)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 511,897
<NUMBER-OF-SHARES-REDEEMED> (340,835)
<SHARES-REINVESTED> 42,876
<NET-CHANGE-IN-ASSETS> 215,867
<ACCUMULATED-NII-PRIOR> 169,902<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 385,765<F1>
<INTEREST-EXPENSE> 710,859<F1>
<GROSS-EXPENSE> 1,633,105<F1>
<AVERAGE-NET-ASSETS> 25,471,594<F1>
<PER-SHARE-NAV-BEGIN> 11.975
<PER-SHARE-NII> .531
<PER-SHARE-GAIN-APPREC> (.968)
<PER-SHARE-DIVIDEND> (.600)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.938
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 25,118,000<F1>
<AVG-DEBT-PER-SHARE> 3,666<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis not on a class basis.
</FN>

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> VKM STRATEGIC INCOME FUND

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 121,954,861<F1>
<INVESTMENTS-AT-VALUE> 110,584,154<F1>
<RECEIVABLES> 2,782,232<F1>
<ASSETS-OTHER> 96,123<F1>
<OTHER-ITEMS-ASSETS> 80,656<F1>
<TOTAL-ASSETS> 113,543,165<F1>
<PAYABLE-FOR-SECURITIES> 2,002,068<F1>
<SENIOR-LONG-TERM-DEBT> 35,389,479<F1>
<OTHER-ITEMS-LIABILITIES> 1,178,476<F1>
<TOTAL-LIABILITIES> 38,570,023<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 59,886,549
<SHARES-COMMON-STOCK> 4,372,973
<SHARES-COMMON-PRIOR> 3,874,914
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (224,706)<F1>
<ACCUMULATED-NET-GAINS> (7,562,182)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (11,354,093)<F1>
<NET-ASSETS> 47,850,979
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 4,523,519<F1>
<OTHER-INCOME> 413,587<F1>
<EXPENSES-NET> 1,633,075<F1>
<NET-INVESTMENT-INCOME> 3,304,001<F1>
<REALIZED-GAINS-CURRENT> (3,977,789)<F1>
<APPREC-INCREASE-CURRENT> (2,602,098)
<NET-CHANGE-FROM-OPS> (3,275,886)
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,272,085)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 771,915
<NUMBER-OF-SHARES-REDEEMED> (364,251)
<SHARES-REINVESTED> 90,395
<NET-CHANGE-IN-ASSETS> 1,474,591
<ACCUMULATED-NII-PRIOR> 169,902<F1>
<ACCUMULATED-GAINS-PRIOR> (3,584,393)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 385,765<F1>
<INTEREST-EXPENSE> 710,859<F1>
<GROSS-EXPENSE> 1,633,105<F1>
<AVERAGE-NET-ASSETS> 47,850,979
<PER-SHARE-NAV-BEGIN> 11.968
<PER-SHARE-NII> .489
<PER-SHARE-GAIN-APPREC> (.969)
<PER-SHARE-DIVIDEND> (.546)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 10.942
<EXPENSE-RATIO> 3
<AVG-DEBT-OUTSTANDING> 25,118,000<F1>
<AVG-DEBT-PER-SHARE> 3,666<F1>
<FN>
<F1>This Item relates to the Fund on a composite basis not on a class basis.
</FN>

</TABLE>