VAN KAMPEN MERRITT TRUST /IL, 485BPOS, 1995-09-01

VAN KAMPEN MERRITT TRUST /IL
485BPOS, 1995-09-01

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1995

REGISTRATION NOS. 33-4410
811-4629
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 36 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 37 /X/
</TABLE>

VAN KAMPEN AMERICAN CAPITAL 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)

Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Secretary
Van Kampen American Capital, Inc.
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
------------------------

Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.

It is proposed that this filing will become effective: (check appropriate
box)
/ / immediately upon filing pursuant to paragraph (b)

/X/ on September 5, 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

If appropriate check the following:

/ / this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.

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, 1996 on or before August 31, 1996.

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<PAGE> 2

EXPLANATORY NOTE

This Post-Effective Amendment No. 36 to the Registration Statement contains
two Prospectuses and two Statements of Additional Information describing two of
the five series of the Registrant. The Registration Statement is organized as
follows:

Facing Page

Cross Reference Sheet with respect to Van Kampen American Capital High
Yield Fund

Cross Reference Sheet with respect to Van Kampen American Capital Strategic
Income Fund

Prospectus Relating to Van Kampen American Capital High Yield Fund

Statement of Additional Information Relating to Van Kampen American Capital
High Yield Fund

Prospectus Relating to Van Kampen American Capital Strategic Income Fund

Statement of Additional Information Relating to Van Kampen American Capital
Strategic Income Fund

Part C Information

Exhibits

The Prospectus and Statement of Additional Information with respect to Van
Kampen American Capital Short-Term Global Income Fund, a series of the
Registrant, included in Post-Effective Amendment No. 35 to the Registration
Statement are incorporated herein by reference in their entirety and no changes
to the Prospectus or Statement of Additional Information are effected by this
Post-Effective Amendment No. 36.

The Prospectus and Statement of Additional Information with respect to Van
Kampen American Capital Adjustable Rate U.S. Government Fund, a series of the
Registrant, included in Post-Effective Amendment No. 32 to the Registration
Statement are incorporated herein by reference in their entirety and no changes
to the Prospectus or Statement of Additional Information are effected by this
Post-Effective Amendment No. 36.

The Prospectus and Statement of Additional Information with respect to Van
Kampen American Capital Emerging Markets Income Fund, a series of the
Registrant, included in Post-Effective Amendment No. 27 to the Registration
Statement are incorporated herein by reference in their entirety and no changes
to the Prospectus or Statement of Additional Information are effected by this
Post-Effective Amendment No. 36.

<PAGE> 3

VAN KAMPEN AMERICAN CAPITAL HIGH YIELD FUND

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; ADDITIONAL INFORMATION
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; INVESTMENT
PRACTICES; 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; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND; ADDITIONAL
INFORMATION
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES
Item 8. Redemption or
Repurchase........... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; 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: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status............. Contained in the Prospectus under captions: TAX STATUS;
SHAREHOLDER SERVICES; Tax Status of the Fund
Item 21. Underwriters........... The Distributor
Item 22. Calculations of
Performance Data..... Contained in the Prospectus under the caption: FUND PER-
FORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under captions: FINANCIAL HIGH-
LIGHTS; 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 AMERICAN CAPITAL STRATEGIC INCOME FUND

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
-------------- -------------------
<C> <S> <C>
PART A INFORMATION REQUIRED IN A PROSPECTUS

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; ADDITIONAL INFORMATION
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; INVESTMENT PRACTICES; SHAREHOLDER
SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND; ADDITIONAL
INFORMATION
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; SHAREHOLDER SERVICES; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
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
-------------- ----------------------
<C> <S> <C>
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
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: ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; 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; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER SERVICES;
REDEMPTION OF SHARES
Item 20. Tax Status............. Contained in the Prospectus under the caption: TAX STATUS;
SHAREHOLDER SERVICES; 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

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VAN KAMPEN AMERICAN CAPITAL

HIGH YIELD FUND
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Van Kampen American Capital High Yield Fund, formerly known as Van Kampen
Merritt High Yield Fund (the "Fund"), is a separate diversified series of Van
Kampen American Capital 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."

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. Lower grade corporate debt securities are considered to
be more speculative with respect to the payment of interest and return of
principal than higher grade corporate debt securities. Investment in foreign
securities involves certain risks in addition to those associated with the
domestic securities in which the Fund may invest. See "Investment Objective and
Policies." Investment in the Fund may not be appropriate for all investors.
Purchasers should carefully assess the risks associated with an investment in
this Fund.
(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 September 5, 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 (800) 421-5666 or for
Telecommunication Device for the Deaf at (800) 772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL (SM)
------------------

THIS PROSPECTUS IS DATED SEPTEMBER 5, 1995.

<PAGE> 8

(Continued from previous page.)

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) 421-5666.

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 0.25% 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 "Alternative Sales Agreements" and "Purchase of Shares."

2
<PAGE> 9

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TABLE OF CONTENTS

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<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
Investment Advisory Services................................... 24
Alternative Sales Arrangements................................. 25
Purchase of Shares............................................. 27
Shareholder Services........................................... 36
Redemption of Shares........................................... 41
The Distribution and Service Plans............................. 44
Distributions from the Fund.................................... 46
Tax Status..................................................... 47
Fund Performance............................................... 49
Description of Shares of the Fund.............................. 51
Additional Information......................................... 52
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> 10

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PROSPECTUS SUMMARY

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

MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares"),

INVESTMENT OBJECTIVE. The Fund's primary investment objective is to provide a
high level of current income. As a secondary objective, the Fund seeks capital
appreciation.

INVESTMENT POLICIES. 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

4
<PAGE> 11

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
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."

INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."

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

5
<PAGE> 12

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 million 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."

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 0.25% 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 CDSC 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 CDSC 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.

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

6
<PAGE> 13

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 $100
or less. See "Redemption of Shares."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser. See "Investment Advisory Services."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

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."

The above is qualified in its entirety by reference to the more detailed

information appearing elsewhere in this Prospectus.

7
<PAGE> 14

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

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 original purchase price
or redemption proceeds)...... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--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 $100,000 or more. See "Purchase of Shares -- Class
A Shares."

(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a CDSC 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> 15

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

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)........................... 0.22%(2) 1.00% 1.00%
Other expenses (as a percentage of average
daily net assets)........................... 0.30% 0.29% 0.37%
Total expenses (as a percentage of average
daily net assets)........................... 1.27% 2.04% 2.12%
</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. As of June 30, 1995, the Board of Trustees of the
Trust reduced 12b-1 and service fees for the Fund's Class A Shares to 0.25%.
See "The Distribution and Service Plans."

(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 0.25% 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> 16

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 1.27% for Class A Shares,
2.04% for Class B Shares, and 2.12% for the
Class C Shares, (ii) a 5% annual return and
(iii) redemptions at the end of each time
period.
Class A Shares........................... $60 $86 $ 114 $ 194
Class B Shares........................... $61 $99 $ 125 $ 208*
Class C Shares........................... $32 $66 $ 114 $ 245
You would pay the following expenses on the
same $1,000 investment assuming no redemption
at the end of each period:
Class A Shares........................... $60 $86 $ 114 $ 194
Class B Shares........................... $21 $64 $ 110 $ 208*
Class C Shares........................... $22 $66 $ 114 $ 245
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

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> 17

--------------------------------------------------------------------------------
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
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
----------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............................. $ 9.643 $10.380 $ 9.896 $ 9.202 $ 9.960 $12.980
-------- ------- ------- ------- ------- -------
Net Investment Income........................................... .844 .908 1.118 1.169 1.256 1.608
Net Realized and Unrealized Gain/Loss on Investments and Foreign
Currency...................................................... (.099) (.595) .566 .813 (.604) (2.970)
-------- ------- ------- ------- ------- -------
Total from Investment Operations................................. .745 .313 1.684 1.982 .652 (1.362)
-------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment Income....... .815 .950 1.129 1.189 1.297 1.608
Distributions from Net Realized Gain on Investments............. .000 .000 .000 .000 .000 .000
Return of Capital Distributions................................. .175 .100 .071 .099 .113 .050
-------- ------- ------- ------- ------- -------
Total Distributions.............................................. .990 1.050 1.200 1.288 1.410 1.658
-------- ------- ------- ------- ------- -------
Net Asset Value, End of Period................................... $ 9.398 $ 9.643 $10.380 $ 9.896 $ 9.202 $ 9.960
========== ======== ======== ======== ======== ========
Total Return (Non-annualized).................................... 8.50% 2.92% 18.08% 22.85% 8.22% (10.88%)
Net Assets at End of Period (In millions)........................ $ 253.3 $ 260.7 $ 251.5 $ 221.4 $ 199.5 $ 220.5
Ratio of Expenses to Average Net Assets (Annualized)............. 1.31% 1.32% 1.20% 1.42% 1.41% 1.28%
Ratio of Net Investment Income to Average Net Assets
(Annualized).................................................... 9.13% 8.85% 11.13% 12.12% 14.00% 13.68%
Portfolio Turnover............................................... 151.51% 202.70% 198.06% 173.97% 157.84% 66.92%

JUNE 27, 1986
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
TO
1989 1988 1987 JUNE 30, 1986
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............................. $13.650 $14.570 $14.336 $14.265
------- ------- ------- -------------
Net Investment Income........................................... 1.650 1.586 1.426 .019
Net Realized and Unrealized Gain/Loss on Investments and Foreign
Currency...................................................... (.610) (.747) .326 .052
------- ------- ------- -------------
Total from Investment Operations................................. 1.040 .839 1.752 .071
------- ------- ------- -------------
Less:
Distributions from and in Excess of Net Investment Income....... 1.650 1.619 1.412 .000
Distributions from Net Realized Gain on Investments............. .000 .029 .106 .000
Return of Capital Distributions................................. .060 .111 .000 .000
------- ------- ------- -------------
Total Distributions.............................................. 1.710 1.759 1.518 .000
------- ------- ------- -------------
Net Asset Value, End of Period................................... $12.980 $13.650 $14.570 $14.336
======== ======== ======== ===============
Total Return (Non-annualized).................................... 7.96% 6.26% 12.83% .49%
Net Assets at End of Period (In millions)........................ $ 353.8 $ 248.6 $ 121.3 $ 10.5
Ratio of Expenses to Average Net Assets (Annualized)............. 1.27% 1.23% 1.25% .85%
Ratio of Net Investment Income to Average Net Assets
(Annualized).................................................... 12.47% 11.36% 10.28% 11.93%
Portfolio Turnover............................................... 119.73% 125.97% 135.10% 0%
</TABLE>

Note: Certain per share amounts and the ratio of net investment income to
average net assets have been restated to conform with Statement of
Position 93-4. "Foreign Currency Accounting and Financial Statement
Presentation for Investment Companies."

See Financial Statements and Notes Thereto

11
<PAGE> 18

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

<TABLE>
<CAPTION>
CLASS B SHARES
---------------------
YEAR ENDED
JUNE 30,
---------------------
1995 1994
------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period.................................................... $ 9.638 $ 10.382
------- --------
Net Investment Income.................................................................. .788 .889
Net Realized and Unrealized Gain/Loss on Investments and Foreign Currency.............. (.115) (.665)
------- --------
Total from Investment Operations........................................................ .673 .224
------- --------
Less:
Distributions from and in Excess of Net Investment Income.............................. .751 .877
Distributions from Net Realized Gain on Investments.................................... .000 .000
Return of Capital Distributions........................................................ .162 .091
------- --------
Total Distributions..................................................................... .913 .968
------- --------
Net Asset Value, End of Period.......................................................... $ 9.398 $ 9.638
======== =========
Total Return (Non-annualized)........................................................... 7.61% 2.11%
Net Assets at End of Period (In millions)............................................... $ 55.9 $ 33.2
Ratio of Expenses to Average Net Assets (Annualized).................................... 2.04% 2.13%
Ratio of Net Investment Income to Average Net Assets (Annualized)....................... 8.35% 7.94%
Portfolio Turnover...................................................................... 151.51% 202.70%

<CAPTION>
CLASS C
SHARES
--------
MAY 17, 1993 YEAR
(COMMENCEMENT OF ENDED
DISTRIBUTION) TO JUNE 30,
JUNE 30, 1993 1995
---------------- --------
<S> <<C>
Net Asset Value, Beginning of Period.................................................... $ 10.190 $ 9.643
------ --------
Net Investment Income.................................................................. .117 .745
Net Realized and Unrealized Gain/Loss on Investments and Foreign Currency.............. .217 (.079)
------ --------
Total from Investment Operations........................................................ .334 .666
------ --------
Less:
Distributions from and in Excess of Net Investment Income.............................. .128 .751
Distributions from Net Realized Gain on Investments.................................... .000 .000
Return of Capital Distributions........................................................ .014 .162
------ --------
Total Distributions..................................................................... .142 .913
------ --------
Net Asset Value, End of Period.......................................................... $ 10.382 $ 9.396
================= =========
Total Return (Non-annualized)........................................................... 3.27% 7.61%
Net Assets at End of Period (In millions)............................................... $ 2.7 $ 2.0
Ratio of Expenses to Average Net Assets (Annualized).................................... 2.06% 2.12%
Ratio of Net Investment Income to Average Net Assets (Annualized)....................... 7.17% 8.13%
Portfolio Turnover...................................................................... 198.06% 151.51%

AUGUST 13, 1993
(COMMENCEMENT OF
DISTRIBUTION) TO
JUNE 30, 1994
----------------
Net Asset Value, Beginning of Period.................................................... $ 10.340
-------
Net Investment Income.................................................................. .761
Net Realized and Unrealized Gain/Loss on Investments and Foreign Currency.............. (.605)
-------
Total from Investment Operations........................................................ .156
-------
Less:
Distributions from and in Excess of Net Investment Income.............................. .763
Distributions from Net Realized Gain on Investments.................................... .000
Return of Capital Distributions........................................................ .090
-------
Total Distributions..................................................................... .853
-------
Net Asset Value, End of Period.......................................................... $ 9.643
=================
Total Return (Non-annualized)........................................................... 1.37%
Net Assets at End of Period (In millions)............................................... $ 2.2
Ratio of Expenses to Average Net Assets (Annualized).................................... 2.14%
Ratio of Net Investment Income to Average Net Assets (Annualized)....................... 7.91%
Portfolio Turnover...................................................................... 202.70%
</TABLE>

See Financial Statements and Notes Thereto

12
<PAGE> 19

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

THE FUND

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

Van Kampen American Capital High Yield Fund (the "Fund") is a mutual fund
which pools shareholders' money to seek to achieve a specified investment
objective. The Fund is a separate diversified series of Van Kampen American
Capital Trust (the "Trust"), an open-end management investment company, commonly
known as a "mutual fund," which is organized as a Delaware 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

13
<PAGE> 20

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 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."
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." There can be no assurance that the
Fund will achieve its investment objective. An investment in the Fund may not be
appropriate for all investors. The Fund is not intended to be a complete
investment program, and investors should consider their

14
<PAGE> 21

long-term investment goals and financial needs when making an investment
decision with respect to the Fund. An investment in the Fund is intended to be a
long-term investment and should not be used as a trading vehicle. 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.

The table below sets forth the percentages of the Fund's assets invested as of
June 30, 1995 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 1995 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.............................. 0.24% 0.14%
AA/Aa................................ 0.17% 0.33%
A/A.................................. 0.34% 0.30%
BBB/Baa.............................. 0.56% 0.19%
BB/Ba................................ 20.01% 0.66%
B/B.................................. 71.44% 2.24%
CCC/Caa.............................. 3.35% 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.................... 96.11% 3.89%
======= ======
</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

15
<PAGE> 22

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.

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

16
<PAGE> 23

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 securities, although under
Rule 144A under the Securities Act of 1933, as amended 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 (the "Code"), 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 June 30, 1995, approximately 2.34%
of the Fund's total assets were invested in zero coupon securities.

17
<PAGE> 24

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 June 30, 1995, approximately 0.15%
of the Fund's total assets were invested in payment-in-kind securities.

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 may 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.

18
<PAGE> 25

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 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.

19
<PAGE> 26

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.

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.

20
<PAGE> 27

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 "1940 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 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

21
<PAGE> 28

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 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

22
<PAGE> 29

(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 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.

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 are generally 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.

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
and 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.

23
<PAGE> 30

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

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 over $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. 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 and its subsidiaries (some of whom are officers or trustees of
the Fund) own, in the aggregate, not more than 7% of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% 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 series.
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 indicated below. This fee is higher than
that paid by most mutual funds.

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENTAGE PER ANNUM
------------------------------------------------ ---------------------
<S> <C>
First $500 million.............................. 0.75 of 1.00%
Over $500 million............................... 0.65 of 1.00%
</TABLE>

24
<PAGE> 31

Under the investment advisory agreement, 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 1940 Act, of the Adviser, the Distributor or Van Kampen American
Capital); 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.

PERSONAL INVESTING POLICIES. 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 of Ethics 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. 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.

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

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.

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
million 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."

25
<PAGE> 32

The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
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 million 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.

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

26
<PAGE> 33

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 "Purchase of Shares -- 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 Code.

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

PURCHASE OF SHARES

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

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") acting as
securities dealers ("dealers") and through NASD members acting as brokers for
investors ("brokers") or eligible non-NASD members acting as agents for
investors ("financial intermediaries"). The Fund reserves the right to suspend
or terminate the continuous public offering at any time and without prior
notice.

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 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

27
<PAGE> 34

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.

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 to brokers, dealers and financial
intermediaries for sales contests, other sales programs and seminars 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.

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.

28
<PAGE> 35

SALES CHARGE TABLE

<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 $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
million 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: 1.00% 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 "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.

QUANTITY DISCOUNTS

Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.

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.

As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.

As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("Money Market Fund"), Van Kampen American Capital Tax Free
Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve Fund
("Reserve Fund") and The Govett Funds, Inc.

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A

29
<PAGE> 36

Shares of the Fund alone, or in combination with other shares of the Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.

CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.

LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.

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.

30
<PAGE> 37

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
broker, dealer or 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.

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.

NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:

(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.

(2) 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 fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.

(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group 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.

31
<PAGE> 38

Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.

(5) 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 1.00% for such purchases.

(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.

(7) 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.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.

The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.

Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.

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<PAGE> 39

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) with respect to Class A Shares, 1.00% 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; (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.

CDSC Shares redeemed within a specified period of time generally will be
subject to a CDSC at the rates set forth below. The amount of the CDSC 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 CDSC 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 CDSC 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 CDSC
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 CDSC 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 CDSC 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 CDSC is

33
<PAGE> 40

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).

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1 million or more, although for such
investments the Fund imposes a CDSC 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: 1.00% 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 six years of purchase generally
will be subject to a CDSC 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 CDSC generally is waived on redemption of Class B Shares made pursuant to
the Systematic Withdrawal Plan. See "Shareholder Services -- Systematic
Withdrawal Plan."

34
<PAGE> 41

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 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.

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. Class C Shares of the
Fund do not convert to Class A Shares.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder

35
<PAGE> 42

Services" and "Redemption of Shares" for further discussion of the waiver
provisions.

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.

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 series. 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.

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

SHAREHOLDER SERVICES

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

The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.

SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

36
<PAGE> 43

each share transaction in an account, the shareholder receives a statement
showing the activity in the account. Each shareholder will receive statements at
least quarterly from ACCESS showing any reinvestments of dividends and capital
gains distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.

SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.

REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."

AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.

RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.

37
<PAGE> 44

DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund so
long as a pre-existing account for such class of shares exists for such
shareholder.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.

EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or the
Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. 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.

In general, shares of the Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of the Fund registered in
a shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, the Fund will increase the number of days shares must be
registered in a shareholder's name prior to an exchange to 30 days.

Exchanges of Class A Shares of the Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to the Fund will have the sales
charge differential imposed upon exchange into the Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of the Fund upon exchange into the
Fund.

No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of the Fund,

38
<PAGE> 45

are determined by the date of purchase into the initial Van Kampen American
Capital fund purchased by the investor prior to any exchanges.

Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.

A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.

SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an

39
<PAGE> 46

investor purchasing shares for a retirement plan established on a form made
available by the Fund. See "Shareholder Services -- Retirement Plans."

Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."

Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.

When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."

Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or State Street

40
<PAGE> 47

Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege. A "stop payment" system is not available on
these checks.

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
ACCESS 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 ACCESS.

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REDEMPTION OF SHARES

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Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.

WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by

41
<PAGE> 48

check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.

DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.

TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption

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<PAGE> 49

privilege is not available for shares represented by certificates. If the shares
to be redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.

For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.

REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of 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 Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.

In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C 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 contingent deferred sales charge on Class B
Shares and Class C 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 REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred

43
<PAGE> 50

sales charge will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.

REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.

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THE DISTRIBUTION AND SERVICE PLANS

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CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% 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 brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or 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

44
<PAGE> 51

Service Plan in connection with the ongoing provision of services to holders of
such shares by the Distributor and by brokers, dealers or 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
brokers, dealers or 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
broker's, dealer's or financial intermediary's customers. The Fund pays the
Distributor the lesser of the balance of the 0.75% not paid to such brokers,
dealers or 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 brokers, dealers or 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 CDSC. 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
June 30, 1995, there were $1,259,214 of unreimbursed distribution expenses with
respect to Class B Shares, representing 0.40% of the Fund's total net assets. As
of June 30, 1995, there were no unreimbursed distribution expenses with respect
to Class C Shares. 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.

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<PAGE> 52

Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series 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 CDSC 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.

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DISTRIBUTIONS FROM THE FUND

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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.

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<PAGE> 53

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.

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 section of the account application accompanying in this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS 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 instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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TAX STATUS

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The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of 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.

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 the close of each calendar

47
<PAGE> 54

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

48
<PAGE> 55

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.

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.

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, as well as
the effects of state, local, and foreign tax laws and any proposed tax law
changes.

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FUND PERFORMANCE

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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

49
<PAGE> 56

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 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

50
<PAGE> 57

investment as of the end of the period by the amount of the initial investment
and expressing the result as a percentage.

Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).

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DESCRIPTION OF SHARES OF THE FUND

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The Fund is a series of the Van Kampen American Capital Trust, a Delaware
business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1986 under the name Van Kampen Merritt High Yield Fund
as a sub-trust of Van Kampen Merritt Trust, a Massachusetts business trust. The
Fund was reorganized as a series of the Trust as of July 31, 1995. Shares of the
Trust entitle their holders to one vote per share; however, separate votes are
taken by each series on matters affecting an individual series.

The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 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 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 holders of Class B Shares and Class C Shares 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 two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.

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<PAGE> 58

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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.

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 the Fund's
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 American Capital High
Yield Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence.

For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD), dial (800)
772-8889.

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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.
</TABLE>

A-1
<PAGE> 60

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

SPECULATIVE GRADE

<TABLE>
<S> <C>
BB Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as
B having predominantly speculative characteristics with
CCC respect to capacity to pay interest and repay principal.
CC 'BB' indicates the least degree of speculation and 'C' the
C highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BB' or
'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment
of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay
principal. The 'CCC' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated
to senior debt that is assigned an actual or implied 'CCC'
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.
</TABLE>

A-2
<PAGE> 61

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

A-3
<PAGE> 62

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

A-4
<PAGE> 63

<TABLE>
<S> <C>
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>

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

A-5
<PAGE> 64

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.

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.
</TABLE>

A-6
<PAGE> 65

<TABLE>
<S> <C>
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. 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.

A-7
<PAGE> 66

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, 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.

A-8
<PAGE> 67

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.

--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.

A-9
<PAGE> 68

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 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> 69

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL

YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL 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

ACCESS INVESTOR SERVICES, INC.

P.O. Box 418256

Kansas City, MO 64141-9256

Attn: Van Kampen American Capital Funds

Custodian

STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105

Attn: Van Kampen American Capital 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> 70

HIGH YIELD FUND

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

P R O S P E C T U S

SEPTEMBER 5, 1995

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------

VAN KAMPEN AMERICAN CAPITAL

------------------------------------------------------------------------
<PAGE> 71

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL HIGH YIELD FUND

Van Kampen American Capital High Yield Fund, formerly known as Van Kampen
Merritt High Yield Fund (the "Fund"), is organized as a separate diversified
series of Van Kampen American Capital Trust, a Delaware 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 September 5, 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 (800) 421-5666 ((800) 772-8889 for the hearing impaired). 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>
<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-18
Investment Advisory and Other Services................................................ B-18
Custodian and Independent Auditors.................................................... B-20
Portfolio Transactions and Brokerage Allocation....................................... B-20
Tax Status of the Fund................................................................ B-21
The Distributor....................................................................... B-21
Performance Information............................................................... B-22
Independent Auditors' Report.......................................................... B-25
Financial Statements.................................................................. B-26
Notes to Financial Statements......................................................... B-35
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 5, 1995.

B-1
<PAGE> 72

THE FUND AND THE TRUST

The Fund is a separate diversified series of Van Kampen American Capital 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 State of Delaware by an Agreement and Declaration of Trust (the
"Declaration of Trust") dated as of May 10, 1995. At present, the Fund, Van
Kampen American Capital Short-Term Global Income Fund, Van Kampen American
Capital Adjustable Rate U.S. Government Fund, Van Kampen American Capital
Strategic Income Fund and Van Kampen American Capital Emerging Markets Income
Fund are the only series of the Trust, although other series may be organized
and offered in the future. The Fund was originally organized in 1986 under the
name Van Kampen Merritt High Yield Fund as a sub-trust of Van Kampen Merritt
Trust, a Massachusetts business trust. The Fund was reorganized as a series of
the Trust as of July 31, 1995. The Trust and each of its series, including the
Fund, will be treated as separate corporations for Federal income tax purposes.

The Declaration of Trust permits the Trustees to create one or more separate
investment portfolios and issue a series of shares for each portfolio. The
trustees can further sub-divide each series of shares into one or more classes
of shares for each portfolio. The Trust can issue an unlimited number of full
and fractional shares, par value $0.01 (prior to July 31, 1995, the shares had
no par value). Each share represents an equal proportionate interest in the
assets of the series with each other share in such series and no interest in any
other series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
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 series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series 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 two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
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, Inc. ("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

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their prices may be more volatile as compared to higher rated securities, which
may cause the Fund's net asset 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

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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.

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, as amended, 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

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revenues, sales or profits (i.e., interest or 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 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.

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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.

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.

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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, 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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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.

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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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 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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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.

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.

B-10
<PAGE> 81

currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in 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 the 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

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 SEC require either that

B-11
<PAGE> 82

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 Trust.

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

B-12
<PAGE> 83

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 tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc. (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.

TRUSTEES

B-13
<PAGE> 84

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
</TABLE>

B-14
<PAGE> 85

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

B-15
<PAGE> 86

OFFICERS

<TABLE>
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.

Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.

Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.

Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.

Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
</TABLE>

B-16
<PAGE> 87

<TABLE>
<S> <C> <C>
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>

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

* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.

Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.

The Fund will pay trustees who are not affiliated persons of the VK Adviser,
the Distributor or Van Kampen American Capital an annual retainer of $2,500 per
year and $125 per regular quarterly meeting of the Fund, plus expenses. No
additional fees are proposed at the present time to be paid for special
meetings, committee meetings or to the chairman of the board. The trustees have
approved an aggregate annual compensation cap from the combined fund complex of
$84,000 per trustee (excluding any retirement benefits) until December 31, 1996,
based upon the current net assets and the current number of Van Kampen American
Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end
funds advised by the VK Adviser would receive additional compensation for
serving as a trustee of such funds). In addition, the VK Adviser has agreed to
reimburse the Fund through December 31, 1996, for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
------------------------------- -------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 8,580 $ 102 $2,500 $62,362
Philip G. Gaughan.............. 11,726 2,224 2,500 63,250
Donald C. Miller............... 8,268 3,606 2,500 62,178
Jack A. Nelson................. 8,580 1,061 2,500 62,362
Jerome L. Robinson............. 8,346 1,880 2,500 58,475
Wayne W. Whalen................ 11,502 719 2,500 49,875
</TABLE>

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

(1) Messrs. McDonnell and Powell, trustees of the Trust, are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its fiscal year ended June 30, 1995.

(2) The Registrant is Van Kampen American Capital Trust (the "Trust") which
currently is comprised of 5 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 5 series during such series' fiscal year ended June 30,
1995. 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.

B-17
<PAGE> 88

(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended June 30, 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 a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.

(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had 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 VK Adviser also serves
as investment adviser for other investment companies; however, with the
exception of Messrs. Powell, McDonnell and Whalen, such investment companies
do not have the same trustees as the Fund Complex. Combining the Fund
Complex with other investment companies advised by the VK Adviser, Mr.
Whalen received Total Compensation of $161,850.

As of August 18, 1995, the Trustees and officers as a group owned less than 1%
of the Shares of the Fund.

To the knowledge of the Fund, as of August 18, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of August 18, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class C Shares: ADVEST Inc., 436-04444-10, 280 Trumbull
Street, Hartford, CT 06103-3502, 6%; ADVEST Inc., 436-04557-13, Trumbull Street,
Hartford, CT 06103-3502, 6%; Rauscher Pierce Refsnes, FBO Leroy G. Denman, Jr.,
711 Navarro Ste. 636, San Antonio, TX 78206-1721, 6%; and PaineWebber FBO Larry
Owens, 80 Trotters Walk, Covington, GA 30209-8525, 16%.

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 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, 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 own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon exercise of options,
approximately an additional 11% 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.

B-18
<PAGE> 89

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 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, 1995, 1994 and 1993, the Fund recognized advisory
expenses of $2,202,317, $2,069,670 and $1,739,911, respectively.

OTHER AGREEMENTS.

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in Transfer Agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was 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 American Capital mutual funds distributed by the
Distributor, shared such costs proportionately among themselves based upon their
respective net asset values.

For the years ended June 30, 1995, 1994 and 1993, the Fund recognized expenses
of approximately $129,700, $114,700 and $94,600, 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 American Capital mutual funds
advised by the Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.

For the years ended June 30, 1995, 1994 and 1993, the Fund recognized expenses
of approximately $10,500, $9,000 and $5,100, respectively, representing the
Adviser's cost of providing certain accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to

B-19
<PAGE> 90

which Van Kampen American Capital provides legal services, including without
limitation: accurate maintenance of the funds' minute books and records,
preparation and oversight of the funds' regulatory reports, and other
information provided to shareholders, as well as responding to day-to-day legal
issues on behalf of the funds. It is expected that Van Kampen American Capital
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. Other funds distributed by the
Distributor also receive legal services from Van Kampen American Capital. Of the
total costs for legal services provided to funds distributed by the Distributor,
one half of such costs are allocated equally to each fund and the remaining one
half of such costs are allocated to specific funds based on monthly time
records.

For the years ended June 30, 1995, 1994 and 1993, the Fund recognized expenses
of approximately $10,100, $12,600 and $11,000, respectively, representing Van
Kampen American Capital'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 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 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.

B-20
<PAGE> 91

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 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 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 series, 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

The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.

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, 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 and its subsidiaries own, in the aggregate not more than
7% of the common stock of VK/AC Holding, Inc. and have the right to acquire,
upon the exercise of options, approximately an additional 11% 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
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 and sub-agreements between the
Distributor and members of the NASD acting as securities dealers and NASD
members or eligible non-members acting as brokers or agents (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,

B-21
<PAGE> 92

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 series, 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, 1993, the Fund has recognized expenses under the
Plans of $428,370 and $2,080 for the Class A Shares and Class B Shares,
respectively, of which $508,617 and $537 represent payments to financial
intermediaries under the Selling Agreements for Class A Shares and Class B
Shares, respectively. For the year ended June 30, 1993, the Fund has reimbursed
the Distributor $32,227 and $4 for advertising expenses, and $40,768 and $107
for compensation of the Distributor's sales personnel for the Class A Shares and
Class B Shares, respectively.

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.

For the year ended June 30, 1995, the Fund has recognized expenses under the
Plans of $645,210, $433,721 and $18,586 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $578,187, $106,435 and $4,170
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares, Class B Shares and Class C Shares, respectively. For the year
ended June 30, 1995, the Fund has reimbursed the Distributor $79,336, $3,915 and
$0 for advertising expenses, and $22,813, $19,846 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
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-22
<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, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 8.72%. 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, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 9.73%.

The Fund's average total returns for Class A Shares for (i) the one year
period ended June 30, 1995 was 3.35%, (ii) the five year period ended June 30,
1995 was 10.80% and (iii) the approximately 108 month period since the
commencement of investment operations through June 30, 1995 was 7.62%.

The Fund's cumulative non-standardized total return for Class A Shares from
inception through June 30, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 103.23%.

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 8.37%. In determining the Fund's

B-23
<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, 1995 (calculated in the manner
described in the Prospectus under the heading "Fund Performance") for Class B
Shares was 9.45%.

The Fund's average total return for Class B Shares for (i) the one year period
ended June 30, 1995 was 3.71% and (ii) the approximately 26 month period since
May 17, 1993, the commencement of distribution for Class B Shares of the Fund,
through June 30, 1995 was 4.60%.

The Fund's cumulative non-standardized total return for Class B Shares from
inception through June 30, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 13.47%.

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 8.33%. 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, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 9.45%.

The Fund's average total returns for Class C Shares for (i) the one year
period ended June 30, 1995 was 6.63%, and (ii) the approximately 23 month period
since August 13, 1993, the commencement of distribution, through June 30, 1995
was 4.64%.

The Fund's cumulative non-standardized total return for Class C Shares from
inception through June 30, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 9.08%.

B-24
<PAGE> 95

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, 1995, 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
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, 1995, 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, 1995, 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 15, 1995

B-25

<PAGE> 96

Portfolio of Investments
June 30, 1995

<TABLE>
<CAPTION>
Par Amount
In Local
Currency
(000) Description Coupon Maturity U.S. Market Value
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds 67.5%
Aerospace & Defense 1.1%

3,800 Sequa Corp. .............................. 9.375% 12/15/03 $ 3,534,000
------------
Automobile 1.0%
500 Chrysler Financial Corp. (Var Rate Cpn) ... 10.340 05/15/08 517,500
2,600 Exide Corp. ............................... 10.000 04/15/05 2,678,000
------------
3,195,500
------------
Beverage, Food & Tobacco 2.3%
2,550 Fleming Cos. Inc. ........................ 10.625 12/15/01 2,690,250
1,800 Fleming Cos. Inc. (Var Rate Cpn) .......... 8.313 12/15/01 1,755,000
3,000 Pilgrims Pride Corp. ..................... 10.875 08/01/03 2,835,000
------------
7,280,250
------------
Buildings & Real Estate 3.2%

3,700 American Standard Inc. .................... 11.375 05/15/04 4,051,500
2,000 Building Material Corp. <F2> ............. 0/11.750 07/01/04 1,190,000
4,700 Walter Industries Inc. <F3> .............. 12.190 03/15/00 4,747,000
------------
9,988,500
------------
Chemicals, Plastics & Rubber 1.6%
1,450 Foamex L.P. .............................. 11.250 10/01/02 1,435,500
4,500 G I Holdings Inc. ......................... * 10/01/98 3,060,000
500 NL Industries Inc. ....................... 11.750 10/15/03 522,500
------------
5,018,000
------------
Containers, Packaging & Glass 6.3%
2,250 Anchor Glass Container Corp. .............. 10.250 06/30/02 2,261,250
2,750 Anchor Glass Container Corp. .............. 9.875 12/15/08 2,530,000
4,000 Atlantis Group Inc. <F4> .................. 11.000 02/15/03 3,940,000
950 Owens Illinois Inc. ....................... 10.250 04/01/99 978,500
1,800 Owens Illinois Inc. ....................... 10.500 06/15/02 1,872,000
900 Owens Illinois Inc. ....................... 11.000 12/01/03 990,000
5,080 Silgan Holdings Inc. <F2> ................ 0/13.250 12/15/02 4,622,800
2,100 SD Warren Co. ............................ 12.000 12/15/04 2,268,000
------------
19,462,550
------------
Diversified/Conglomerate Manufacturing 4.8%
3,600 Cabot Safety Acquisition Corp. <F3> ....... 12.500 07/15/05 3,600,000
2,000 Chatwins Group Inc. ...................... 13.000 05/01/03 1,650,000
1,561 IMO Industries Inc. ...................... 12.250 08/15/97 1,568,805
4,250 Jordan Industries Inc. ................... 10.375 08/01/03 3,910,000
1,800 Talley Industries Inc. <F2> .............. 0/12.250 10/15/05 1,201,500
2,900 Talley Manufacturing & Technology Inc. .... 10.750 10/15/03 2,842,000
------------
14,772,305
------------
</TABLE>

See Notes to Financial Statements

B-26
<PAGE> 97

Portfolio of Investments (Continued)
June 30, 1995
<TABLE>
<CAPTION>
Par Amount
In Local
Currency
(000) Description Coupon Maturity U.S. $ Market Value
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds (Continued)
Diversified/Conglomerate Service 1.1%

3,100 Comdata Network Inc. ................ 13.250% 12/15/02 $ 3,503,000
-----------
Ecological 0.9%
3,300 Envirosource Inc. .................. 9.750 06/15/03 2,953,500
-----------

Farming and Agriculture 0.9%
3,150 Trans Resources Inc. ................ 11.875 07/01/02 2,850,750
-----------
Grocery 2.7%
2,400 Pantry Inc. ........................ 12.000 11/15/00 2,376,000
3,800 Pathmark Stores Inc. ................ 9.625 05/01/03 3,724,000
2,000 Purity Supreme Inc. ................. 11.750 08/01/99 2,150,000
-----------
8,250,000
-----------
Healthcare 4.2%
900 Columbia/HCA Healthcare Corp. ...... 7.690 06/15/25 900,000
300 Jackson County <F5> ................. 13.000 11/01/96 60,000
4,600 National Medical Enterprises Inc. ... 10.125 03/01/05 4,876,000
3,250 Ornda Healthcorp ................... 11.375 08/15/04 3,558,750
3,650 Paracelsus Healthcare Corp. ........ 9.875 10/15/03 3,704,750
-----------
13,099,500
-----------

Hotel, Motel, Inns & Gaming 5.0%

1,600 Aztar Corp. ........................ 11.000 10/01/02 1,600,000
1,900 Aztar Corp. ........................ 13.750 10/01/04 2,147,000
4,500 California Hotel Finance Corp. ...... 11.000 12/01/02 4,657,500
3,000 GB Property Funding Corp. ........... 10.875 01/15/04 2,580,000
900 HWCC Tunica Inc. .................... 13.500 09/30/98 1,032,750
750 Station Casinos Inc. ............... 9.625 06/01/03 705,000
2,550 Trump Plaza Funding Inc. ........... 10.875 06/15/01 2,358,750
600 Trump Taj Mahal Funding Inc. <F6> ... 11.350 11/15/99 476,684
-----------
15,557,684
-----------
Insurance & Finance 3.2%
3,650 American Annuity Group Inc. ........ 11.125 02/01/03 3,814,250
2,750 Americo Life Inc. <F4> ............. 9.250 06/01/05 2,543,750
2,800 Nacolah Holding Corp. ............... 9.500 12/01/03 2,646,000
300 Orion Capital Corp. ................ 9.125 09/01/02 321,000
500 Reliance Group Holdings Inc. ........ 9.000 11/15/00 495,000
-----------
9,820,000
-----------
Leisure 3.0%
4,000 AMC Entertainment Inc. <F4> ........ 12.625 08/01/02 4,400,000
1,200 Viacom International Inc. .......... 8.000 07/07/06 1,164,000
3,300 Viacom International Inc. .......... 10.250 09/15/01 3,696,000
-----------
9,260,000
-----------
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 98

Portfolio of Investments (Continued)
June 30, 1995

1,300 Armco Inc. ........................ 11.375% 10/15/99 $ 1,332,500
1,900 Carbide/Graphite Group Inc. ....... 11.500 09/01/03 2,004,500
3,700 Easco Corp. ....................... 10.000 03/15/01 3,700,000
------------
7,037,000
------------
Oil & Gas 4.7%
3,000 Clark R & M Holdings Inc. ......... * 02/15/00 1,875,000
3,000 Global Marine Inc. ............... 12.750 12/15/99 3,315,000
3,500 Petroleum Heat & Power Inc. ...... 12.250 02/01/05 3,762,500
2,900 Plains Resources Inc. ............. 12.000 10/01/99 3,016,000
2,600 TransTexas Gas Corp. .............. 11.500 06/15/02 2,665,000
------------
14,633,500
------------
Personal & Non-Durable 2.9%
1,850 Astrum International Corp. ....... 11.500 06/08/03 1,942,500
4,000 Playtex Family Products Corp. .... 9.000 12/15/03 3,760,000
3,350 Revlon Consumer Products Corp. .... 9.375 04/01/01 3,249,500
------------
8,952,000
------------
Printing, Publishing &
Broadcasting 8.3%
3,450 Century Communications Corp. ..... 9.750 02/15/02 3,501,750
2,600 Comcast Corp. ..................... 9.375 05/15/05 2,613,000
3,175 Insight Communications Co.L.P.<F2>. 8.250/11.250 03/01/00 3,222,625
1,600 K-III Communications Corp. ........ 10.625 05/01/02 1,696,000
1,800 K-III Communications Corp. ........ 10.250 06/01/04 1,890,000
489 SCI Television Inc. (Var Rate Cpn). 7.500 06/30/98 484,209
3,700 SCI Television Inc. ............... 11.000 06/30/05 3,866,500
1,350 Storer Communications Inc. ........ 10.000 05/15/03 1,350,000
3,800 Williamhouse Regency Delaware Inc.. 11.500 06/15/05 3,838,000
2,350 Young Broadcasting Inc. ........... 11.750 11/15/04 2,585,000
800 Young Broadcasting Inc. ........... 10.125 02/15/05 808,000
------------
25,855,084
------------
Retail 2.4%
1,332 Eckerd, Jack Corp. ................ 11.125 05/01/01 1,338,660
2,750 Hosiery Corp. America Inc. ........ 13.750 08/01/02 2,736,250
3,500 Waban Inc. ........................ 11.000 05/15/04 3,465,000
------------
7,539,910
------------
</TABLE>

See Notes to Financial Statements

B-28
<PAGE> 99

Portfolio of Investments (Continued)
June 30, 1995

<TABLE>
<CAPTION>
Par Amount
In Local
Currency
(000) Description Coupon Maturity U.S. $ Market Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds (Continued)
Telecommunications 4.4%
3,400 Centennial Cellular Corp. .............................. 10.125% 05/15/05 $ 3,349,000
3,150 Intermedia Communications .............................. 13.500 06/01/05 3,165,750
3,100 Mobile Telecommunication Technology .................... 13.500 12/15/02 3,317,000
1,800 Panamsat L.P. <F2> .................................... 0/11.375 08/01/03 1,287,000
3,200 Pricellular Wireless Corp. ............................. 14.000 11/15/01 2,576,000
------------
13,694,750
------------
Utilities 1.2%
3,200 Midland Funding Corp. II ............................... 11.750 07/23/05 3,344,000
500 Toledo Edison Co. ..................................... 8.700 09/01/02 457,500
------------
3,801,500
------------
Total Corporate Bonds ....................................................... 210,059,283
------------
Foreign Bonds and Debt Securities 15.3%
Argentina 2.3%
3,550 Federal Republic of Argentina
(Var Rate Cpn) (US$) .................................. 5.000 03/31/23 1,704,000
3,000 Sodigas Pampeana (US$) ................................ 10.500 07/06/99 2,670,000
3,000 Telefonica De Argentina (US$) ......................... 8.375 10/01/00 2,666,250
------------
7,040,250
------------
Australia 0.3%
1,900 New South Wales Trust (AU$) ........................... 6.500 05/01/06 1,074,911
------------
Brazil 0.9%
1,940 Republic of Brazil (US$) .............................. 6.688 01/01/01 1,559,275
2,600 Republic of Brazil (US$) .............................. 4.250 04/15/24 1,160,250
------------
2,719,525
------------
Canada 3.3%
4,100 Malette Inc. (US$) ..................................... 12.250 07/15/04 4,551,000
1,000 Repap New Brunswick Inc. (US$) ......................... 9.875 07/15/00 1,010,000
400 Rogers Cantel Mobile Inc. (US$) ....................... 10.750 11/01/01 414,000
4,200 Rogers Communications Inc. (US$) ....................... 10.875 04/15/04 4,326,000
------------
10,301,000
------------
Colombia 1.3%
4,050 Oleoducto Central South America (US$) .................. 9.350 09/01/05 4,060,125
------------
Denmark 0.3%
5,640 Kingdom of Denmark (Kroner) ............................ 9.000 11/15/98 1,079,856
------------
Ecuador 0.2%
2,000 Federal Republic of Ecuador (US$) ...................... 3.000 02/28/25 645,000
------------
Indonesia 1.8%
5,450 Indah Kiat International Finance Co. B.V. (US$) ........ 11.875 06/15/02 5,531,750
------------
</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 100

Portfolio of Investments (Continued)
June 30, 1995

<TABLE>
<CAPTION>
Par Amount
In Local
Currency
(000) Description Coupon Maturity U.S. $ Market Value
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
Italy 0.6%
1,700,000 Federal Republic of Italy (Lira) ................. 9.000% 10/01/98 $ 961,039
1,650,000 Federal Republic of Italy (Lira) ................. 10.500 04/01/00 952,840
-----------
1,913,879
-----------
Morocco 0.8%
4,000 Morocco Trust A Loan <F3> <F7> (US$) ............. * 01/01/09 2,345,000
-----------
Poland 1.4%
5,700 Government of Poland (Var Rate Cpn) (US$) ....... 7.125 10/27/24 4,367,625
-----------
Spain 0.6%
129,500 Government of Spain (Peseta) .................... 10.250 11/30/98 1,032,258
114,000 Government of Spain (Peseta) .................... 12.250 03/25/00 955,953
-----------
1,988,211
-----------
Sweden 0.7%
7,000 Kingdom of Sweden (Krona) ....................... 10.250 05/05/00 946,311
7,300 Kingdom of Sweden (Krona) ....................... 13.000 06/15/01 1,098,348
-----------
2,044,659
-----------
United Kingdom 0.8%
650 United Kingdom Treasury (Pound) ................. 8.500 12/07/05 1,036,785
2,700 International Cabletel Inc. <F2> (US$) ........... 0/12.750 04/15/05 1,606,500
-----------
2,643,285
-----------
Total Foreign Bonds and Debt Securities ................................... 47,755,076
-----------
Government and Agencies (U.S.) 1.0%
900 U.S. Treasury Note ............................... 5.625 06/30/97 896,625
2,000 U.S. Treasury Note ............................... 6.250 05/31/00 2,022,080
-----------
Total Government and Agencies (U.S.) ..................................... 2,918,705
-----------
Total Debt Securities ..................................................... 260,733,064
-----------
Equities 0.6%
Capital Gaming (5,000 common stock warrants) ........................................ 0
Casino America Inc. (5,873 common stock warrants) .................................... 17,620
Chatwins Group Inc. (1,000 common stock warrants) ................................... 4,000
Hosiery Corp. America Inc. (2,750 common stock warrants) ............................ 41,250
Panamsat L. P. (1,754 preferred shares) ............................................. 1,776,250
Purity Supreme Inc. (5,198 common stock warrants) .................................... 0
-----------
Total Equities ....................................................................... 1,839,120
-----------
Total Long-Term Investments 84.4%
(Cost $256,117,900) <F1> ............................................................. 262,572,184
-----------

</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 101

Portfolio of Investments (Continued)
June 30, 1995

<TABLE>
<CAPTION>
Description U.S. $ Market Value
-----------------------------------------------------------------------------------------------------------------
<S> <C>
Short-Term Investments 16.5%
Repurchase Agreement (UBS Securities, U.S. Treasury Note, $26,930,000 par, 14.000% coupon,
due 11/15/11, dated 06/30/95, to be sold on 07/03/95 at $42,661,675) .................... $ 42,640,000
J.P. Morgan Indonesian Rupiah Linked CD ($3,000,000 par,
yielding 15.250%, maturing 11/24/95) .................................................... 2,830,785
J.P. Morgan Polish Zloty Linked CD ($1,035,197 par, yielding 24.000%, maturing 08/09/95) . 1,035,714
J.P. Morgan Polish Zloty Linked CD ($2,001,641 par, yielding 25.200%, maturing 10/19/95) . 1,871,935
J.P. Morgan Thai Baht Linked CD ($1,000,000 par, yielding 13.035%, maturing 10/19/95) .... 967,835
J.P. Morgan Thai Baht Linked CD ($2,000,000 par, yielding 10.990%, maturing 11/16/95) .... 1,918,148
--------------
Total Short-Term Investments (Cost $51,220,439) <F1> ....................................... 51,264,417
--------------
Liabilities in Excess of Other Assets -0.9% ............................................... (2,709,483)
--------------
Net Assets 100.0% ....................................................................... $ 311,127,118
--------------
*Zero Coupon

<FN>
<F1> At June 30, 1995, cost for federal income tax purposes including
short-term investments is $307,338,339; the aggregate gross unrealized
appreciation is $8,657,124 and the aggregate gross unrealized
depreciation is $2,218,120, resulting in net unrealized appreciation
including foreign currency translation of other assets and liabilities
and forward currency contracts of $6,439,004.
<F2> Security is a "Step-up" bond where the coupon increases or steps up at a
predetermined date.
<F3> Securities purchased on a when issued or delayed delivery basis.
<F4> Assets segregated as collateral for when issued or delayed delivery
purchase commitments and open forward transactions.
<F5> Currently is a non-income producing security.
<F6> Payment-in-kind security.
<F7> Security is a bank loan participation currently being restructured. At
June 30, 1995, item is a non-income producing security.
</FN>
</TABLE>

The following table summarizes the portfolio composition at June 30, 1995, based
upon quality ratings issued by Standard & Poor's. For securities not rated by
Standard & Poor's, the Moody's rating is used.

Portfolio Composition by Credit Quality
<TABLE>
<CAPTION>
<S> <C> <C>
AAA .......... 1.5%
AA .......... 0.8
A ........... 0.6
BBB ......... 0.5
BB .......... 21.4
B ........... 61.5
CCC .......... 2.0
Non-Rated ... 11.7
-------
100.0%
-------
</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 102

Statement of Assets and Liabilities
June 30, 1995

<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $256,117,900) (Note 1) .......................... $ 262,572,184
Short-Term Investments (Cost $51,220,439) (Note 1) ................................ 51,264,417
Cash .............................................................................. 4,136,772
Receivables:
Interest ......................................................................... 5,751,121
Investments Sold ................................................................ 5,662,267
Fund Shares Sold ................................................................. 1,585,667
Other ............................................................................. 51,046
---------------
Total Assets ....................................................................... 331,023,474
---------------
Liabilities:
Payables:
Investments Purchased ............................................................ 17,220,433
Income Distributions ............................................................ 1,685,787
Fund Shares Repurchased ......................................................... 219,501
Investment Advisory Fee (Note 2) ................................................ 192,494
Forward Currency Contracts (Note 5) ............................................. 63,734
Accrued Expenses ................................................................... 514,407
---------------
Total Liabilities .................................................................. 19,896,356
---------------
Net Assets ......................................................................... $ 311,127,118
---------------
Net Assets Consist of:
Paid in Surplus (Note 3) ........................................................... $ 417,969,853
Net Unrealized Appreciation on Investments and Foreign Currency .................... 6,439,004
Accumulated Distributions in Excess of Net Investment Income (Note 1) ............. (1,895,466)
Accumulated Net Realized Loss on Investments ....................................... (111,386,273)
---------------
Net Assets ......................................................................... $ 311,127,118
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $253,278,355
and 26,951,319 shares of beneficial interest issued and outstanding) (Note 3) ...... $ 9.40
Maximum sales charge (4.75%* of offering price) .................................... .47
---------------
Maximum offering price to public ................................................... $ 9.87
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $55,857,410
and 5,943,391 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 $1,991,353
and 211,927 shares of beneficial interest issued and outstanding) (Note 3) ........ $ 9.40
---------------
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 103

Statement of Operations
For the Year Ended June 30, 1995

<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest .............................................................................. $ 30,403,100
Dividend ............................................................................. 51,250
Other ................................................................................ 229,048
---------------
Total Income ......................................................................... 30,683,398
---------------
Expenses:
Investment Advisory Fee (Note 2) ..................................................... 2,202,317
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $645,210,
$433,721, $18,586 and $3, respectively) (Note 6) .................................... 1,097,520
Shareholder Services (Note 2) ......................................................... 508,098
Legal (Note 2) ....................................................................... 52,828
Trustees Fees and Expenses (Note 2) ................................................... 26,329
Other ................................................................................ 298,746
---------------
Total Expenses ........................................................................ 4,185,838
---------------
Net Investment Income ................................................................. $ 26,497,560
---------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments and Foreign Currency (Including realized loss
on foreign currency transactions and expired option transactions of $15,692
and $28,463, respectively) ........................................................... $ (18,692,466)
---------------
Unrealized Appreciation/Depreciation on Investments and Foreign Currency:
Beginning of the Period .............................................................. (9,599,697)
End of the Period (Including unrealized appreciation on foreign currency translation
of other assets and liabilities of $4,476 and unrealized depreciation on forward
currency contracts of $63,734) ........................................................ 6,439,004
---------------
Net Unrealized Appreciation on Investments and Foreign Currency During the Period ..... 16,038,701
---------------
Net Realized and Unrealized Loss on Investments and Foreign Currency ................. $ (2,653,765)
---------------
Net Increase in Net Assets from Operations ........................................... $ 23,843,795
---------------
</TABLE>

See Notes to Financial Statements

B-33
<PAGE> 104

Statement of Changes in Net Assets
For the Years Ended June 30, 1995 and 1994

<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1995 June 30, 1994
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 26,497,560 $ 24,154,826
Net Realized Gain/Loss on Investments and Foreign Currency ........ (18,692,466) 722,946
Net Unrealized Appreciation/Depreciation on Investments
and Foreign Currency During the Period ............................ 16,038,701 (18,485,429)
-------------- --------------
Change in Net Assets from Operations ............................. 23,843,795 6,392,343
-------------- --------------
Distributions from Net Investment Income* ......................... (25,471,594) (24,154,826)
Distributions in Excess of Net Investment Income* (Note 1) ........ -0- (1,176,275)
-------------- --------------
Distributions from and in Excess of Net Investment Income* ........ (25,471,594) (25,331,101)
Return of Capital Distribution* (Note 1) ......................... (5,584,355) (2,807,769)
-------------- --------------
Total Distributions .............................................. (31,055,949) (28,138,870)
-------------- --------------
Net Change in Net Assets from Investment Activities .............. (7,212,154) (21,746,527)
-------------- --------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold ........................................ 73,674,367 114,607,347
Net Asset Value of Shares Issued Through Dividend Reinvestment .... 11,308,840 9,509,394
Cost of Shares Repurchased ........................................ (62,721,749) (60,437,772)
-------------- --------------
Net Change in Net Assets from Capital Transactions ............... 22,261,458 63,678,969
-------------- --------------
Total Increase in Net Assets ..................................... 15,049,304 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
$(1,895,466) and $(1,435,104), respectively) .................... $ 311,127,118 $ 296,077,814
-------------- --------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1995 June 30, 1994
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares .................... $ (21,911,417) $(23,837,532)
Class B Shares .................... (3,405,059) (1,416,951)
Class C Shares .................... (155,035) (76,590)
Class D Shares .................... (83) (28)
---------------- -------------
$ (25,471,594) $(25,331,101)
---------------- -------------
Return of Capital Distribution:
Class A Shares .................... $ (4,709,317) $ (2,558,430)
Class B Shares .................... (846,910) (238,038)
Class C Shares .................... (28,115) (11,294)
Class D Shares .................... (13) (7)
---------------- -------------
$ (5,584,355) $ (2,807,769)
---------------- -------------
</TABLE>

See Notes to Financial Statements

B-34
<PAGE> 105

Notes to Financial Statements
June 30, 1995

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 and C shares on May 17, 1993 and August 13, 1993,
respectively. On May 2, 1995, all Class D shareholders redeemed their shares and
the class was eliminated. The Fund will no longer offer Class D 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
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" or "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.

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, 1995, the Fund had an accumulated capital

B-35

<PAGE> 106

Notes to Financial Statements (Continued)

June 30, 1995

loss carryforward for tax purposes of $102,028,402. Of this amount, $4,105,907,
$55,057,263, $30,093,392, $45,384 and $12,726,456 will expire on June 30, 1998,
1999, 2000, 2002 and 2003, 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 investment income for federal income
tax purposes includes gains and losses realized on foreign currency
transactions. These gains and losses are included as net realized gains and
losses for financial reporting purposes. Permanent book and tax basis
differences resulting from these items totaling $15,692 were reclassified from
accumulated undistributed net investment income to accumulated net realized
gain/loss on investments. Permanent book and tax basis differences relating to
shareholder distributions totaling $1,470,636 have been reclassified from
accumulated undistributed net investment income to Class A share paid in
surplus.
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.

F. Currency Translation-During the current period, the Fund adopted Statement of
Position 93-4 "Foreign Currency Accounting and Financial Statement Presentation
for Investment Companies." Accordingly, prior period financial highlights were
restated to reflect reclassification of net realized gain/loss on foreign
currency and forward currency contracts from net investment income to net
realized gain/loss on investments and foreign currency.
Assets and liabilities denominated in foreign currencies and commitments under
forward 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 prevailing when accrued.

B-36

<PAGE> 107

Notes to Financial Statements (Continued)
June 30, 1995

G. 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 positioned 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, 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 year ended June 30, 1995, the Fund recognized expenses of
approximately $150,300 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "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. The Fund's liability under the
deferred compensation and retirement plans at June 30, 1995, was $24,650.
At June 30, 1995, VKAC owned 100 shares each of Classes B and C, respectively.

B-37

<PAGE> 108

Notes to Financial Statements (Continued)

June 30, 1995

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 June 30, 1995, paid in surplus aggregated $358,452,226,
$57,414,003 and $2,103,624 for Class A, B and C shares, respectively. For the
year ended June 30, 1995, transactions were as follows:

<TABLE>

<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 4,486,285 $ 41,415,162
Class B ...................... 3,320,361 30,775,474
Class C ....................... 160,125 1,483,731
Class D ....................... -0- -0-
---------- ---------------
Total Sales ................... 7,966,771 $ 73,674,367
---------- ---------------

Dividend Reinvestment:
Class A ...................... 1,055,695 $ 9,744,229
Class B ...................... 159,582 1,472,222
Class C ....................... 10,007 92,378
Class D ....................... 1 11
---------- ---------------
Total Dividend Reinvestment ... 1,225,285 $ 11,308,840
---------- ---------------
Repurchases:
Class A ...................... (5,626,205) $ (51,959,218)
Class B ...................... (978,937) (9,050,461)
Class C ....................... (186,357) (1,710,842)
Class D ....................... (121) (1,228)
---------- ---------------
Total Repurchases ............ (6,791,620) $ (62,721,749)
---------- ---------------
</TABLE>

B-38

<PAGE> 109

Notes to Financial Statements (Continued)

June 30, 1995

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 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.

B-39

<PAGE> 110

Notes to Financial Statements (Continued)

June 30, 1995

<TABLE>
<CAPTION>
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 year ended June 30, 1995, VKAC, as Distributor for the Fund, received
net commissions on sales of the Fund's Class A shares of approximately $95,400
and CDSC on the redeemed shares of Classes B, C and D of approximately $180,500.
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, 1995, were $368,454,901 and
$385,700,477, 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 dis-
position, a realized gain or loss is recognized accordingly.
Summarized below are the specific types of derivative financial instruments
used by the Fund.

B-40

<PAGE> 111

Notes to Financial Statements (Continued)

June 30, 1995

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.
Transactions in options for the year ended June 30, 1995, were as follows:

<TABLE>
<CAPTION>
Contracts Premium
---------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994 ... -0- $ -0-
Options Written (Net) .......... 1,035 (28,463)
Options Expired (Net) .......... (1,035) 28,463
--------- ----------
Outstanding at June 30, 1995 ... -0- $ -0-
--------- ----------
</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 as a component of realized
gain/loss on investments and foreign currency.
At June 30, 1995, the Fund has outstanding forward currency contracts as
follows:

<TABLE>
<CAPTION>
Forward Original Current Unrealized
Currency Contracts Value Value Depreciation
----------------------------------------------------------------
<S> <C> <C> <C>
Sells to Open
German Mark,
expiring 12/08/95 ... $ 3,002,112 $ 3,065,846 $ 63,734
------------
</TABLE>

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
year ended June 30, 1995, are payments to VKAC of approximately $443,900.

B-41

<PAGE> 112

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

VAN KAMPEN AMERICAN CAPITAL

STRATEGIC INCOME FUND
------------------------------------------------------------------------------

Van Kampen American Capital Strategic Income Fund, formerly known as Van
Kampen Merritt Strategic Income Fund (the "Fund"), is a non-diversified mutual
fund organized as a series of Van Kampen American Capital 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
(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 September 5, 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 (800) 421-5666, extension 6504 or for
Telecommunication Device For the Deaf at (800) 772-8889.

------------------
VAN KAMPEN AMERICAN CAPITAL (SM)

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

THIS PROSPECTUS IS DATED SEPTEMBER 5, 1995.

<PAGE> 113

(Continued from previous page.)

securities rated in the lowest rating category. Investment in lower grade income
securities involves significant risks. Lower grade securities commonly are
referred to as "junk bonds." The Fund borrows 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
(800) 421-5666.

Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% 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 "Alternative
Sales Arrangements" and "Purchase of Shares."

2
<PAGE> 114

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 10
Investment Objectives and Policies............................. 10
Investment Practices........................................... 21
Investment Advisory Services................................... 26
Alternative Sales Arrangements................................. 28
Purchase of Shares............................................. 29
Shareholder Services........................................... 39
Redemption of Shares........................................... 43
The Distribution and Service Plans............................. 46
Distributions from the Fund.................................... 48
Tax Status..................................................... 49
Fund Performance............................................... 51
Description of Shares of the Fund.............................. 52
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 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> 115

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

PROSPECTUS SUMMARY

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

THE FUND. Van Kampen American Capital Strategic Income Fund (the "Fund") is a
non-diversified mutual fund organized as a series of Van Kampen American Capital
Trust (the "Trust").

MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").

INVESTMENT OBJECTIVES. 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.

INVESTMENT POLICIES. 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."

INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."

PURCHASE OF SHARES. 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 "Purchase of Shares."

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for the Fund. See "Investment Advisory Services."

DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.

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

4
<PAGE> 116

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."

THE ABOVE IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED

INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.

5
<PAGE> 117

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

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 the lesser of
the original purchase price
or redemption proceeds)...... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--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 $100,000 or more. See "Purchase of Shares -- Class
A Shares."

(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
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."

6
<PAGE> 118

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

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)(1)................. 1.03% 1.03% 1.03%
12b-1 fees (as a percentage of
average daily net assets)(2)................. 0.25% 1.00% 1.00%
Other expenses:
Miscellaneous other expenses
(as a percentage of
average daily net assets)(1)(3)............ 0.65% 0.65% 0.66%
Interest expenses (as a percentage of
average daily net assets)(1)(3)............ 2.38% 2.38% 2.38%
Total other expenses (as a percentage of
average daily net assets)(1)(3).............. 3.03% 3.03% 3.04%
Total expenses (as a percentage of
average daily net assets)(1)(3).............. 4.31% 5.06% 5.07%
</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. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."

(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 1.93%, 2.68% and 2.69% 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."

7
<PAGE> 119

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 4.31% for Class
A Shares, 5.06% for Class B Shares and
5.07% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $89 $ 172 $ 256 $ 472
Class B Shares............................ $91 $ 187 $ 268 $ 484*
Class C Shares............................ $61 $ 152 $ 253 $ 505
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $89 $ 172 $ 256 $ 472
Class B Shares............................ $51 $ 152 $ 253 $ 484*
Class C Shares............................ $51 $ 152 $ 253 $ 505
</TABLE>

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

* Based on conversion to Class A Shares after seven years.

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."

8
<PAGE> 120

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

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 throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods 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 B
CLASS A SHARES SHARES
--------------------------------- -------------
FROM
DECEMBER 31, 1993
(COMMENCEMENT OF
INVESTMENT
YEAR ENDED OPERATIONS) TO YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1995
------------- ----------------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....................................... $11.975 $14.300 $11.968
------- ------- -------
Net Investment Income..................................................... .657 .566 .585
Net Realized and Unrealized Gain/Loss on Investments and
Foreign Currency........................................................ .272 (2.391) .245
------- ------- -------
Total from Investment Operations........................................... .929 (1.825) .830
------- ------- -------
Less:
Distributions from Net Investment Income.................................. .793 .500 .722
Return of Capital Distributions........................................... .407 -0- .370
Total Distributions........................................................ 1.200 .500 1.092
------- ------- -------
Net Asset Value, End of Period............................................. $11.704 $11.975 $11.706
======= ======= =======
Total Return (Non-annualized).............................................. 8.46% (12.83%) 7.62%
Net Assets at End of Period (In millions).................................. $29.6 $24.5 $52.6
Ratio of Operating Expenses to Average Net Assets (Annualized)............. 1.98% 1.88% 2.68%
Ratio of Interest Expense to Average Net Assets (Annualized)............... 2.38% .96% 2.38%
Ratio of Net Investment Income to Average Net Assets (Annualized).......... 5.88% 9.27% 5.30%
Portfolio Turnover......................................................... 252.74% 114.04% 252.74%

CLASS C SHARES
---------------------------------
FROM FROM
DECEMBER 31, 1993 DECEMBER 31, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
INVESTMENT INVESTMENT
OPERATIONS) TO YEAR ENDED OPERATIONS) TO
JUNE 30, 1994 JUNE 30, 1995 JUNE 30, 1994
----------------- ------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period....................................... $14.300 $11.966 $14.300
------- ------- -------
Net Investment Income..................................................... .515 .598 .509
Net Realized and Unrealized Gain/Loss on Investments and
Foreign Currency........................................................ (2.392) .227 (2.388)
------- ------- -------
Total from Investment Operations........................................... (1.877) .825 (1.879)
------- ------- -------
Less:
Distributions from Net Investment Income.................................. .455 .722 .455
Return of Capital Distributions........................................... -0- .370 -0-
Total Distributions........................................................ .455 1.092 .455
------- ------- -------
Net Asset Value, End of Period............................................. $11.968 $11.699 $11.966
======= ======= =======
Total Return (Non-annualized).............................................. (13.21%) 7.53% (13.21%)
Net Assets at End of Period (In millions).................................. $46.4 $1.7 $2.1
Ratio of Operating Expenses to Average Net Assets (Annualized)............. 2.63% 2.69% 2.65%
Ratio of Interest Expense to Average Net Assets (Annualized)............... .96% 2.38% .95%
Ratio of Net Investment Income to Average Net Assets (Annualized).......... 8.48% 5.92% 8.36%
Portfolio Turnover......................................................... 114.04% 252.74% 114.04%

</TABLE>

<TABLE>
<CAPTION>
Bank Borrowing: AMOUNT OF DEBT AVERAGE DAILY BALANCE OF
OUTSTANDING AT DEBT OUTSTANDING DURING
PERIOD END OF YEAR PERIOD
------------------------------------------------------------------------------------------------- -------------------------
<S> <C> <C>
Six Months Ended June 30, 1994..................................................... $ 19,574,968 $ 4,421,010
Year Ended June 30, 1995........................................................... $ 28,496,055 $29,790,000

<CAPTION>
AVERAGE MONTHLY
Bank Borrowing: BALANCE OF SHARES AVERAGE AMOUNT OF
OUTSTANDING DURING DEBT PER SHARE
PERIOD PERIOD DURING PERIOD
----------------------------------------------------------------------------------- ---------------------- -----------------
<S> <C> <C>
Six Months Ended June 30, 1994..................................................... 5,080,190 $ 0.870
Year Ended June 30, 1995........................................................... 6,729,831 $ 4.427
</TABLE>

See Financial Statements and Notes Thereto

9
<PAGE> 121

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

THE FUND

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

Van Kampen American Capital Strategic Income Fund (the "Fund") is a mutual
fund, which pools shareholders' money to seek to achieve specified investment
objectives. The Fund is a separate, non-diversified series of Van Kampen
American Capital Trust (the "Trust"), which is an open-end management investment
company, commonly known as a "mutual fund," organized as a Delaware 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 "1940 Act"). There can be no
assurance that the Fund will achieve its investment objectives.

An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.

10
<PAGE> 122

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 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 ("NRSRO") or, if not rated by any NRSRO,
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 NRSRO or, if not rated by any
NRSRO, 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.

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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 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

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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 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."

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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 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.

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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.

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 in additional
securities. Accordingly, zero coupon and payment-in-kind 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.

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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.

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

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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.

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

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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 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.

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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 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.

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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, as amended 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.

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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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

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the market price of 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.

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

23
<PAGE> 135

Fund did not borrow. Conversely, if the income from the assets obtained through
borrowing is not sufficient to cover the cost of 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
1940 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.

24
<PAGE> 136

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 anticipates that the
annual portfolio turnover rate will generally be less than 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.

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 1940
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.

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 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.

25
<PAGE> 137

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.

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

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. 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 and its subsidiaries (some of whom are officers or
trustees of the Fund) own, in the aggregate, not more than 7% of the common
stock of VK/AC Holding, Inc. and the right to acquire, upon the exercise of
options, approximately an additional 11% 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 series. 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 overall management of the Fund's business
affairs. The Fund will pay the

26
<PAGE> 138

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 1.00%
Over $500 million but less than $1 billion.............. 0.70 of 1.00%
Over $1 billion......................................... 0.65 of 1.00%
</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 1940 Act, of the Adviser, the Distributor or Van Kampen American
Capital), 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 an Executive 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.

27
<PAGE> 139

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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 minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
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 million 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 (discussed below). Investors who intend to hold
their

28
<PAGE> 140

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 "Purchase of Shares -- 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 (the "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 "Code").

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

PURCHASE OF SHARES

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

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

29
<PAGE> 141

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") acting as securities dealers
("dealers") and through NASD members acting as brokers for investors ("brokers")
or eligible non-NASD members acting as agents for investors ("financial
intermediaries"). The Fund reserves the right to suspend or terminate the
continuous public offering at any time and without prior notice.

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 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.

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

30
<PAGE> 142

increases in assets under management. Such payments to brokers, dealers and
financial intermediaries for sales contests, other sales programs and seminars
are made by the Distributor out of its own assets and not out of the assets of
the Fund. These programs will not change the price an investor will pay for
shares or the amount that the Fund will receive from such sale.

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.

SALES CHARGE TABLE

<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>

31
<PAGE> 143

QUANTITY DISCOUNTS

VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund alone, or in combination with other shares of the Fund and
shares of other Participating Funds, although other Participating Funds may have
different sales charges.

32
<PAGE> 144

the investment goal. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provision, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. If the goal is not achieved within the
13-month period, the investor must pay the difference between the charges
applicable to the purchases made and the charges previously paid. When an
investor signs a Letter of Intent, shares equal to at least 5% of the total
purchase amount of the level selected will be restricted from sale or redemption
by the investor until the Letter of Intent is satisfied or any additional sales
charges have been paid; if the Letter of Intent is not satisfied by the investor
and any additional sales charges are not paid, sufficient restricted shares will
be redeemed by the Fund to pay such charges. Additional information is contained
in the application accompanying this Prospectus.

OTHER PURCHASE PROGRAMS

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 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 1.00% 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 broker, dealer or financial intermediary or the Distributor.

33
<PAGE> 145

account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.

(4) 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 Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.

(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs

34
<PAGE> 146

made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.

The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.

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) with respect to Class A Shares, 1.00%
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; (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.

CDSC Shares redeemed within a specified period of time generally will be
subject to a CDSC at the rates set forth below. The amount of the CDSC will vary

35
<PAGE> 147

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 CDSC 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 CDSC 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 CDSC and the distribution fee facilitates the ability of
the Fund to sell CDSC Shares without a sales charge being deducted at the time
of purchase. Investors should understand that the purpose of the CDSC 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.

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).

CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1 million or more, although for such

36
<PAGE> 148

investments the Fund imposes a CDSC 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: 1.00% 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 six years of purchase generally
will be subject to a CDSC 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 CDSC generally is waived on redemptions of Class B Shares made pursuant to
the Systematic Withdrawal Plan. See "Shareholder Services -- Systematic
Withdrawal Plan."

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
after 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 CDSC, 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

37
<PAGE> 149

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.

CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a CDSC of 1.00% of the dollar amount
subject thereto. Class C Shares redeemed thereafter will not be subject to a
CDSC. Class C Shares of the Fund do not convert to Class A Shares.

WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC is waived on redemptions
of Class B Shares and Class C Shares (i) following the death or disability (as
defined in the Code) of a shareholder, (ii) in connection with certain
distributions from an IRA or other retirement plan, (iii) pursuant to the Fund's
systematic withdrawal plan but limited to 12% annually of the initial value of
the account, and (iv) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
is also waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See "Shareholder Services" and "Redemption of
Shares" for further discussion of the waiver provisions.

NET ASSET VALUE

38
<PAGE> 150

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 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 series. 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 of the Trust.

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SHAREHOLDER SERVICES

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SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES

INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.

39
<PAGE> 151

In addition, if such certificates are lost the shareholder must write to Van
Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City, MO
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.

If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund

40
<PAGE> 152

into which distributions would be invested. Distributions are invested into the
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected fund have been registered for sale in the
investor's state.

41
<PAGE> 153

automatically has telephone exchange privileges unless otherwise designated in
the application form accompanied by this Prospectus. The exchange will take
place at the relative net asset values of the shares next determined after
receipt of such request with adjustment for any additional sales charge. Any
shares exchanged begin earning dividends on the next business day after the
exchange is affected. Van Kampen American Capital and its subsidiaries,
including ACCESS (collectively, "VKAC"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed, a
shareholder agrees that neither VKAC nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. VKAC and the
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. If the exchanging shareholder does
not have an account in the fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gains
options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire its
shares through exchange. In addition, the Fund may restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.

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<PAGE> 154

SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY

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 ACH. 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 ACCESS 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 ACCESS.

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REDEMPTION OF SHARES

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43
<PAGE> 155

certificates are held for the shares being redeemed, such certificates must be
endorsed for transfer or accompanied by an endorsed stock power and sent with
the redemption request. In the event the redemption is requested by a
corporation, partnership, trust, fiduciary, executor or administrator, and the
name and title of the individual(s) authorizing such redemption is not shown in
the account registration, a copy of the corporate resolution or other legal
documentation appointing the authorized signer and certified within the prior 60
days must accompany the redemption request. The redemption price is the net
asset value per share next determined after the request is received by ACCESS in
proper form. Payment for shares redeemed (less any sales charge, if applicable)
will ordinarily be made by check mailed within three business days after
acceptance by ACCESS of the request and any other necessary documents in proper
order. Such payments may be postponed or the right of redemption suspended as
provided by the rules of the SEC. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check until
it confirms that the purchase check has cleared, usually a period of up to 15
days. Any gain or loss realized on the redemption of shares is a taxable event.

44
<PAGE> 156

shareholder agrees that neither VKAC nor the Fund will be liable for following
instructions which it reasonably believes to be genuine. VKAC and the Fund may
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's other redemption procedures previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.

In cases of disability, the CDSC on Class B Shares and Class C 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

45
<PAGE> 157

the initial determination of disability. This waiver of the CDSC on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.

REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any CDSC paid upon such redemption. Such reinstatement is made at the net asset
value next determined after the order is received, which must be within 120 days
after the date of the redemption. See "Purchase of Shares -- Waiver of
Contingent Deferred Sales Charge." Reinstatement at net asset value is also
offered to participants in those eligible retirement plans held or administered
by Van Kampen American Capital Trust Company for repayment of principal (and
interest) on their borrowings on such plans.

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THE DISTRIBUTION AND SERVICE PLANS

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<PAGE> 158

the ongoing provision of services to holders of such shares by the Distributor
and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.25% not paid to such brokers, dealers or
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 brokers, dealers or 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 brokers, dealers or 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 brokers, dealers or 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 brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.

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 CDSC. 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

47
<PAGE> 159

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
June 30, 1995, there were $2,027,406 of unreimbursed distribution expenses with
respect to Class B Shares representing 2.42% of the Fund's total net assets. As
of June 30, 1995, there were no unreimbursed distribution expenses with respect
to Class C Shares. 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 series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series 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 CDSC 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.

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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

48
<PAGE> 160

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.

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.

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 section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS 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 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 instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.

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TAX STATUS

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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.

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 Code. 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

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<PAGE> 161

any income distributed to shareholders. The Fund will not be subject to federal
income tax on any net capital gains distributed 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.

GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the

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<PAGE> 162

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.

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FUND PERFORMANCE

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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.

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.

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<PAGE> 163

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DESCRIPTION OF SHARES OF THE FUND

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The Fund is a series of the Van Kampen American Capital Trust, a Delaware
business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1993 under the name of Van Kampen Merritt Strategic
Income Fund as a sub-trust of Van Kampen Merritt Trust, a Massachusetts business
trust. The Fund was reorganized as a series of the Trust as of July 31, 1995.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.

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 holders of Class B Shares and Class C Shares are likely
to be lower than to holders of Class A Shares.

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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.

52
<PAGE> 164

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 American Capital
Strategic Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181
Attn: Correspondence.

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<PAGE> 165

EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE

NUMBER--(800) 421-5666.

PROSPECTIVE INVESTORS--CALL

YOUR BROKER OR (800) 421-5666.

DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE

NUMBER--(800) 421-5666.

FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)

DIAL (800) 772-8889.

FOR AUTOMATED TELEPHONE

SERVICES DIAL (800) 421-5666.

VAN KAMPEN AMERICAN CAPITAL

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

ACCESS INVESTOR SERVICES, INC.

P.O. Box 418256

Kansas City, MO 64141-9256

Attn: Van Kampen American Capital Funds

Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713

Attn: Van Kampen American Capital 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> 166

STRATEGIC INCOME

FUND

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P R O S P E C T U S

SEPTEMBER 5, 1995

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------

VAN KAMPEN AMERICAN CAPITAL

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<PAGE> 167

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL STRATEGIC INCOME FUND

Van Kampen American Capital Strategic Income Fund, formerly known as 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
series of Van Kampen American Capital Trust, a Delaware 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 September 5, 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 (800) 421-5666. 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-38
Custodian and Independent Auditors................................................... B-40
Portfolio Transactions and Brokerage Allocation...................................... B-40
Tax Status of the Fund............................................................... B-41
The Distributor...................................................................... B-44
Legal Counsel........................................................................ B-45
Performance Information.............................................................. B-45
Independent Auditors' Report......................................................... B-47
Financial Statements................................................................. B-48
Notes to Financial Statements........................................................ B-55
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 5, 1995.

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THE FUND AND THE TRUST

The Fund is a separate non-diversified series of the Trust, an open-end
management investment company. At present, the Fund, Van Kampen American Capital
High Yield Fund, Van Kampen American Capital Short-Term Global Income Fund, Van
Kampen American Capital Adjustable Rate U.S. Government Fund and Van Kampen
American Capital Emerging Markets Income Fund are the only series of the Trust,
although other series 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 State of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995, (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares. The Trustees can further sub-divide each series of shares into one or
more classes of shares. The Trust can issue an unlimited number of full and
fractional shares, par value $0.01 (prior to July 31, 1995, the shares had no
par value). Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability. The Fund was originally
organized on October 14, 1993 under the name Van Kampen Merritt Strategic Income
Fund as a sub-trust of Van Kampen Merritt Trust, a Massachusetts business trust.
The Fund was reorganized as a series of the Trust as of July 31, 1995.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series 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 two-thirds of the shares then outstanding cast in person or by proxy at
such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
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);

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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.

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

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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.

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

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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.

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.

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 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

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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.

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.

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.

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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 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.

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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 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.

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.

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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.

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.

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.

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.

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.

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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 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.

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

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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 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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may also acquire warrants and other equity securities in connection with the
purchase of income securities. Warrants are securities permitting, but not
obligating, their holder to subscribe for other securities or 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

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sovereign bank loans, restructured external debt that has not undergone a
Brady-style debt exchange, and 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.

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.

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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.

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 the 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. 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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<PAGE> 187

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.

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 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,
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.

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

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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<PAGE> 191

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.

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
shareholders as dividends will be reduced.

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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<PAGE> 192

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> 193

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> 194

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> 195

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

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:

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.

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<PAGE> 196

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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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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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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OFFICERS AND TRUSTEES

The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.

TRUSTEES

<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
</TABLE>

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<PAGE> 200

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
</TABLE>

B-34
<PAGE> 201

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

OFFICERS

B-35
<PAGE> 202

<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.

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

B-36
<PAGE> 203

COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
------------------------------- -------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 8,580 $ 100 $2,500 $62,362
Philip G. Gaughan.............. 11,726 1,259 2,500 63,250
Donald C. Miller............... 8,268 0 2,500 62,178
Jack A. Nelson................. 8,580 917 2,500 62,362
Jerome L. Robinson............. 8,346 0 2,500 58,475
Wayne W. Whalen................ 11,502 518 2,500 49,875
</TABLE>

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

(2) The Registrant is Van Kampen American Capital Trust (the "Trust") which
currently is comprised of five operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these five series during such series' fiscal year ended June 30,
1995. 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 Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended June 30, 1995.

As of August 18, 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 August 18, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.

As of August 18, 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%; 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, 5%.

B-37
<PAGE> 204

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
(the "Van Kampen American Capital"), 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 own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 11% 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.

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 series, 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 series (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.

B-38
<PAGE> 205

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.

For the years ended June 30, 1995 and June 30, 1994, the Fund recognized
advisory expenses of $798,331 and $306,119, respectively.

OTHER AGREEMENTS

SUPPORT SERVICES AGREEMENT. Under a support services agreement with Van
Kampen American Capital Distributors, Inc. (the "Distributor") which terminated
as of July 10, 1995 concurrent with the Fund's change in Transfer Agent, the
Fund received support services for shareholders, including the handling of all
written and telephonic communications, except initial order entry and other
distribution related communications. Payment by the Fund for such services was
made on cost basis for the employment of the personnel and the equipment
necessary to render the support services. At such time, the Fund, and the other
Van Kampen American Capital mutual funds distributed by the Distributor, shared
such costs proportionately among themselves based upon their respective net
asset values.

For the years ended June 30, 1995 and June 30, 1994, the Fund recognized
expenses of approximately $44,900 and $2,800, 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 equally, together with the other Van Kampen American Capital
mutual funds advised by the Adviser and 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.

For the years ended June 30, 1995 and June 30, 1994, the Fund recognized
expenses of approximately $4,500 and $2,800, respectively, representing the
Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital 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 funds. 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. Other Funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.

For the years ended June 30, 1995 and June 30, 1994, the Fund recognized
expenses of approximately $12,000 and $6,000, respectively, representing Van
Kampen American Capital, Inc.'s cost of providing legal services.

B-39
<PAGE> 206

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 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.

B-40
<PAGE> 207

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.

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.

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. 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.

B-41
<PAGE> 208

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.

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

B-42
<PAGE> 209

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 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.

B-43
<PAGE> 210

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, and its subsidiaries own, in the aggregate not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 11% 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 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 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."

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, 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.

B-44
<PAGE> 211

For the period 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 period 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.

For the year ended June 30, 1995, the Fund has recognized expenses under the
Plans of $74,777, $487,064 and $20,370 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $64,495, $119,407 and $2,755
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares, Class B Shares and Class C Shares, respectively. For the year
ended June 30, 1995, the Fund has reimbursed the Distributor $5,464, $15,985 and
$0 for advertising expenses, and $7,717, $10,727 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
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-45
<PAGE> 212

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, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 8.35%. 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, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 9.77%.

The Fund's average total return for (i) the one year ended June 30, 1995 was
3.31% and (ii) the one year, six month period from December 31, 1993, the
commencement of investment operations for Class A Shares of the Fund, through
June 30, 1995 was (6.73%).

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 8.07%. 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, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 9.33%.

The Fund's average total return for (i) the one year ended June 30, 1995 was
3.71% and (ii) the one year, six month period from December 31, 1993, the
commencement of investment operations for Class B Shares of the Fund, through
June 30, 1995 was (6.55%).

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 8.07%. 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, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 9.33%.

The Fund's average total return for (i) the one year ended June 30, 1995 was
6.55% and (ii) the one year, six month period from December 31, 1993, the
commencement of investment operations for Class C Shares of the Fund, through
June 30, 1995 was (4.50%).

B-46
<PAGE> 213

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, 1995, and the related statement of operations for
the year then ended, and the statement of changes in net assets and the
financial highlights for the year then ended and for the period from December
31, 1993 (commencement 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 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, 1995, 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 Strategic Income Fund as of June 30, 1995, the results of its
operations for the year then ended, and the changes in its net assets and
financial highlights for the year then ended and for the period from December
31, 1993 (commencement of investment operations) through June 30, 1994, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP
Chicago, Illinois
August 15, 1995

B-47

<PAGE> 214
Portfolio of Investments
June 30,1995
<TABLE>
<CAPTION>
Par
Amount
In Local
Currency
(000) Description Coupon Maturity U.S.$ Market Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds (U.S.) 26.9%
Banking 2.4%
2,000 Western Financial Savings .............. 8.500% 07/01/03 $2,010,000
----------
Beverage, Food & Tobacco 1.2%
500 Fleming Cos Inc (Var Rate Cpn) <F4> ... 8.313 12/15/01 487,500
500 Fleming Cos Inc (Var Rate Cpn) <F4> ... 10.625 12/15/01 527,500
----------
1,015,000
----------
Chemicals, Plastics and Rubber 3.2%
2,500 W. R. Grace & Co <F4> .................. 8.000 08/15/04 2,653,638
----------
Containers, Packaging & Glass 1.8%
500 Anchor Glass Container Corp <F4> ...... 10.250 06/30/02 502,500
1,000 Atlantis Group Inc <F4> ................ 11.000 02/15/03 985,000
----------
1,487,500
----------
Electronics 1.2%
1,000 Panamsat L.P. ......................... 9.750 08/01/00 1,025,000
----------
Healthcare 1.2%
1,000 Tenet Healthcare Corp ................. 10.125 03/01/05 1,060,000
----------
Leisure & Amusement 3.6%
1,000 Time Warner Inc (Convertible Bond) ..... 8.750 01/10/15 1,042,500
2,000 Time Warner Entertainment .............. 8.375 03/15/23 1,960,000
----------
3,002,500
----------
Mining .5%
400 Carbide/Graphite Group Inc <F4> ....... 11.500 09/01/03 422,000
----------
Oil & Gas .9%
300 Global Marine <F4> ..................... 12.750 12/15/99 331,500
420 Plains Resources Inc .................. 12.000 10/01/99 436,800
----------
768,300
----------
Personal-Food 1.2%
1,000 Nabisco Inc <F4> ...................... 7.550 06/15/15 992,260
----------
Personal & Non Durable 4.3%
3,500 Colgate Palmolive Co <F4> .............. 7.600 05/19/25 3,639,489
----------
Printing, Publishing & Broadcasting 1.2%
1,000 Century Communications <F4> ............ 9.750 02/15/02 1,015,000
----------
Transportation 2.3%
1,928 Jet Equipment Trust <F4> .............. 8.080 06/15/96 1,955,063
----------
Utilities 1.9%
1,500 Midland Funding Corp II ................ 11.750 07/23/05 1,567,500
----------
Total Corporate Bonds (U.S.) .............................. 22,613,250
----------

Foreign Bonds and Debt Securities 71.0%
Argentina 24.1%
3,000 Argentina Discount Bond - US$ <F5> ..... 6.875 03/31/23 1,717,500
1,000 Argentina Floating Rate Bond - US$ <F5> . 7.313 03/31/05 615,000
</TABLE>

See Notes to Financial Statements

B-48
<PAGE> 215

Portfolio of Investments (Continued)
June 30,1995

Par
Amount
In Local
Currency U.S.$ Market
(000) Description Coupon Maturity Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)
3,000 Republic of Argentina Global Bond - US$ <F4> ... 8.375% 12/20/03 $2,220,000
5,000 Argentina Par Bond - US$ <F5> ................. 5.000 03/31/23 2,400,000
3,000 Banco De Galicia Yankee - US$ .................. 9.000 11/01/03 2,115,000
1,000 Banco Rio De La Plata Yankee - US$ ............. 8.500 07/15/98 915,000
2,000 Banco Rio De La Plata Yankee - US$ ............. 8.750 12/15/03 1,475,000
1,000 Bridas Corp - US$ <F4> ......................... 12.500 11/15/99 900,000
1,000 Central Termica Guemes - US$ .................. 12.000 11/29/96 880,000
1,000 Empresa Distribuidor Del Sur - US$ ............. 10.075 05/17/96 970,000
2,000 Goldman Sachs Argentine Bocones Trust - US$ .... 13.375 08/15/01 1,665,000
1,000 Sodigas Pampeana - US$ ........................ 10.500 07/06/99 890,000
2,000 Telecom Argentina - US$ ........................ 8.375 10/18/00 1,777,500
1,950 Transportadora De Gas Del Sur - US$ ........... 7.750 12/23/98 1,696,500
----------
20,236,500
----------
Australia 1.6%
1,750 New South Wales Treasury - AU$ ................. 11.500 07/01/99 1,364,428
----------
Brazil 3.7%
3,880 Brazil IDU -US$ <F5> ........................... 7.813 01/01/01 3,118,550
---------
Canada 3.1%
1,400 Canadian Government - CA$ ...................... 5.750 03/01/99 965,271
1,500 Canadian Government - CA$ ...................... 6.500 06/01/04 991,627
1,000 Rogers Cable Systems - CA$ ..................... 9.650 01/15/14 626,138
----------
2,583,036
----------
Chile 3.7%
3,000 Banco Del Estado - US$ <F4> .................... 8.390 08/01/01 3,097,500
----------
China 4.9%
1,000 Guangdong Enterprise - US$ <F4> ............... 8.750 12/15/03 880,150
3,000 China International Trust - US$ <F4> ........... 9.000 10/15/06 3,207,966
----------
4,088,116
----------
Columbia 1.8%
1,500 Ocensa - US$ ................................... 9.350 09/01/05 1,503,750
----------
Costa Rica .6%
1,000 Banco Central Costa Rica - US$ <F5> ........... 6.250 05/21/10 490,000
----------
Ecuador 1.7%
2,550 Ecuador Discount Bond - US$ <F5> .............. 7.250 02/28/25 1,268,625
560 Ecuador PDI Bond - US$ <F3> <F5> ............... 7.250 02/28/15 180,600
----------
1,449,225
----------
Finland 1.7%
6,000 Finnish Government - FIM ....................... 9.500 03/15/04 1,454,975
----------
Germany 2.3%
1,200 Bundes-Obligation - DEM <F4> .................. 8.375 01/20/97 908,960
1,500 Deutschland Republic - DEM ..................... 6.000 09/15/03 1,015,800
----------
1,924,760
----------
</TABLE>
See Notes to Financial Statements

B-49
<PAGE> 216
Portfolio of Investments (Continued)
June 30,1995
<TABLE>
<CAPTION>
Par
Amount
In Local
Currency
(000) Description Coupon Maturity U.S.$ Market Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign Bonds and Debt Securities (Continued)

Hungary .9%
1,000 National Bank of Hungary - US$ .................. 8.875% 11/01/13 $ 748,120
----------
Italy .6%
1,000,000 Republic of Italy - ITL ......................... 8.500 04/01/99 546,983
----------
Mexico 2.2%
6,000 Mexico Par Bond with Rights - US$ <F5> .......... 6.250 12/31/19 1,830,000
----------
New Zealand 1.6%
2,000 New Zealand Government - NZ$ ..................... 9.000 11/15/96 1,346,437
----------
Nigeria 1.0%
2,002 Nigeria Par Bond with Warrants - US$ <F5> ....... 6.250 11/15/20 882,000
----------
Philippines 1.9%
1,000 Philippines Government (FLIRB) - US$ <F5> ........ 5.000 06/01/08 753,700
931 Subic Power Corp - US$ ........................... 9.500 12/28/08 854,224
----------
1,607,924
----------
Poland 3.1%
3,500 Poland PDI Bond - US$ <F5> ...................... 3.250 10/27/14 2,091,250
1,039 Poland RSTA Par Bond - US$ <F5> .................. 2.750 10/27/24 487,031
----------
2,578,281
----------
Russia .6%
2,000 Vneshekonombank Loans - DEM ..................... <F2> <F2> 488,105
----------
Spain 2.6%
265,000 Spanish Government - ESP ......................... 11.000 06/15/97 2,187,385
----------
Sweden 1.8%
3,500 Swedish Government - SEK ......................... 11.000 01/21/99 485,882
7,500 Swedish Government - SEK ......................... 10.250 05/05/03 997,029
----------
1,482,911
----------
Thailand 1.2%
25,000 ABN/AMRO Bank - THB .............................. 9.100 08/05/97 979,238
----------
United Kingdom 3.1%
350 UK Treasury Bonds - GBP ......................... 6.000 08/10/99 515,820
1,425 UK Treasury Bonds - GBP <F4> .................... 7.000 11/06/01 2,116,421
----------
2,632,241
----------
Venezuela 1.2%
2,010 Venezuelan Par Bond with Oil Obligation
Certificates - US$ <F5> .......................... 6.750 03/31/20 1,005,000
----------
Total Foreign Bonds and Debt Securities .......... 59,625,465
----------
Government and Agencies (U.S.) 2.5%
2,000 U.S. Treasury Notes .............................. 7.125 09/30/99 2,083,080
----------
Mortgage Backed Securities (U.S.) 29.6%
3,000 FNMA Note ........................................ 8.000 04/13/05 3,104,400
5,000 FNMA REMIC #95-11 A PAC (Principal Only) <F4> .... * 01/25/24 3,437,500

</TABLE>
See Notes to Financial Statements

B-50
<PAGE> 217

Portfolio of Investments (Continued)
June 30,1995
<TABLE>
<CAPTION>
Par
Amount
In Local
Currency
(000) Description Coupon Maturity U.S.$ Market Value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

Mortgage Backed Securities (U.S.) (Continued)
4,319 FNMA REMIC #93-180 SB (Inverse Fltg) .............. 2.330% 09/25/00 $3,908,330
2,000 FNMA REMIC #92-33 S (Inverse Fltg) <F4> ............ 12.720 03/25/22 1,949,375
75 FNMA REMIC #93-55 M PAC (Interest Only) <F4> ....... 727.220 09/25/06 1,987,500
5,000 FNMA REMIC #93-206 SE (Inverse Fltg) <F4> .......... 2.909 11/25/23 2,125,000
1,930 FNMA REMIC #94-3 SA (Inverse Fltg) ................ 3.102 01/25/24 1,044,861
2,926 FNMA REMIC #94-15 SD (Inverse Fltg) ............... 2.930 02/25/24 1,613,137
5,000 Residential Funding Mtg 92-S39 A8 PAC .............. 7.500 11/25/07 5,139,062
13,185 Salomon Brothers Mtg Securities VII 1994-2 P2
(Interest Only) ................................... 2.285 03/25/24 539,772
-------------
Total Mortgage Backed Securities (U.S.) .............................. 24,848,937
-------------
Total Long-Term Investments 130.0%
(Cost $111,218,711) <F1> .............................................. 109,170,732
Short-Term Investments 2.4%
(Cost $2,000,000) <F1> ................................................ 1,988,800
Liabilities in Excess of Other Assets (32.4%) ....................... (27,194,563)
-------------
Net Assets 100.0% .................................................... $ 83,964,969
-------------
</TABLE>

*Zero coupon bond

[FN]
<F1> At June 30, 1995, cost for federal income tax purposes including
short-term investments is $113,218,711; the aggregate gross unrealized
appreciation is $3,618,690 and the aggregate gross unrealized depreciation is
$5,598,586, resulting in net unrealized depreciation on investments, foreign
currency translation of other assets and liabilities, forward currency
contracts, option and futures transactions of $1,979,896.

<F2> Items represents an assignment of a bank loan which currently is in
default with the potential to be restructured at a future date. As of June 30,
1995, item is a non-income producing security.

<F3> Item represents a when issued security resulting from the restructuring of
a previously defaulted bank loan.

<F4> Assets segregated as collateral for when issued or delayed delivery
purchase commitments, forward currency contracts, open option or futures
transactions or borrowings of the Fund.

<F5> Item represents a "Brady Bond" which is a product of the "Brady
Plan" under which various Latin American, African and southeast Asian nations
have converted their outstanding external defaulted commercial bank loans into
bonds. Certain Brady Bonds have been collateralized, as to principal due at
maturity, by U.S. Treasury zero coupon bonds with a maturity date equal to the
final maturity date of such Brady Bonds.

The following table summarizes the portfolio composition at June 30,1995,
based upon quality ratings issued by Standard & Poor's. For securities not
rated by Standard & Poor's, the Moody's rating is used.

<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
AAA .......... 29.2%
AA ........... 7.6
A ............ 3.3
BBB .......... 10.9
BB ........... 19.7
B ............ 11.2
Non-Rated ... 18.1
-----
100.0%
=====
</TABLE>

See Notes to Financial Statements

B-51
<PAGE> 218
Statement of Assets and Liabilities
June 30,1995
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at Market Value (Cost $111,218,711) (Note 1) ............................ $ 109,170,732
Short-Term Investments (Cost $2,000,000) (Note 1) ................................... 1,988,800
Receivables:
Interest ........................................................................ 2,169,215
Investments Sold ................................................................ 1,005,700
Fund Shares Sold ................................................................ 705,755
Forward Currency Contracts (Note 5) .............................................. 24,617
Unamortized Organizational Expenses and Initial Registration Costs (Note 1) .......... 119,074
Options at Market Value (Net premiums paid of $268,450) (Note 5) ..................... 50,415
--------------
Total Assets ......................................................................... 115,234,308

Liabilities:
Payables:
Bank Borrowing (Note 8) .......................................................... 23,234,065
Reverse Repurchase Agreement (Note 8) ........................................... 5,261,990
Investments Purchased ........................................................... 1,380,211
Income Distributions ............................................................ 389,745
Investment Advisory Fee (Note 2) .................................................. 275,426
Fund Shares Repurchased ........................................................... 151,464
Margin on Futures (Note 5) ........................................................ 124,656
Accrued Expenses ..................................................................... 451,782
--------------
Total Liabilities .................................................................... 31,269,339
--------------
Net Assets ........................................................................... $ 83,964,969
--------------
Net Assets Consist of:
Paid in Surplus (Note 3) ............................................................. $ 95,176,206
Accumulated Distributions in Excess of Net Investment Income (Note 1) ................ (407,598)
Net Unrealized Depreciation on Investments and Foreign Currency ...................... (1,979,896)
Accumulated Net Realized Loss on Investments ......................................... (8,823,743)
--------------
Net Assets ........................................................................... $ 83,964,969
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$29,633,169 and 2,531,907 shares of beneficial interest issued and
outstanding) (Note 3) ................................................................ $ 11.70
--------------
Maximum sales charge (4.75%* of offering price) ...................................... .58
--------------
Maximum offering price to public ..................................................... $ 12.28
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$52,607,669 and 4,494,004 shares of beneficial interest issued
and outstanding) (Note 3) ............................................................ $ 11.71
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,724,131
and 147,376 shares of beneficial interest issued and outstanding) (Note 3) ........... $ 11.70
--------------
</TABLE>

*On sales of $100,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-52
<PAGE> 219
Statement of Operations
For the Year Ended June 30,1995
<TABLE>
<S> <C>
Investment Income:
Interest (Net of foreign withholding taxes of $16,904) .............................. $ 7,830,242
Fee Income .......................................................................... 125,781
--------------
Total Income ....................................................................... 7,956,023
--------------
Expenses:
Investment Advisory Fee (Note 2) ................................................... 798,331
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$74,777, $487,064 and $20,370, respectively) (Note 7) .............................. 582,211
Custody............................................................................. 132,324
Shareholder Services (Note 2)....................................................... 129,526
Amortization of Organizational Expenses and Initial Registration Costs (Note 1) .... 38,965
Trustees Fees and Expenses (Note 2)................................................. 22,994
Legal (Note 2) ..................................................................... 21,900
Other............................................................................... 153,064
-------------
Total Operating Expenses............................................................ 1,879,315
Interest Expense (Note 8)........................................................... 1,830,949
-------------
Net Investment Income............................................................... $ 4,245,759
--------------
Realized and Unrealized Gain/Loss on Investments and Foreign Currency:
Net Realized Loss on Investments and Foreign Currency (Including realized gain
on foreign currency transactions of $248,308 and realized loss on closed and
expired option and futures transactions of $740,429 and $1,569,872, respectively)... $ (5,113,942)
-------------
Net Unrealized Appreciation/Depreciation on Investments and Foreign Currency:
Beginning of the Period ............................................................ (8,751,995)
End of the Period (Including unrealized appreciation on foreign currency
translation of other assets and liabilities, forward currency contracts and futures
contracts of $6,084, $13,360 and $277,874, respectively and unrealized depreciation
on option transactions of $218,035) ................................................ (1,979,896)
--------------
Net Unrealized Appreciation on Investments and Foreign Currency During the Period .. 6,772,099
-------------
Net Realized and Unrealized Gain on Investments and Foreign Currency ............... $ 1,658,157
-------------
Net Increase in Net Assets from Operations.......................................... $ 5,903,916
-------------
</TABLE>

See Notes to Financial Statements

B-53
<PAGE> 220

Statement of Changes in Net Assets

For the Year Ended June 30,1995 and the Period December 31,1993
(Commencement of Investment Operations) to June 30,1994
<TABLE>
<CAPTION>
Year Ended Period Ended
June 30,1995 June 30,1994
------------- --------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................ $ 4,245,759 $ 2,906,189
Net Realized Loss on Investments and Foreign Currency ............ (5,113,942) (3,791,891)
Net Unrealized Appreciation/Depreciation on Investments and
Foreign Currency During the Period ............................... 6,772,099 (8,751,995)
------------- --------------
Change in Net Assets from Operations ............................ 5,903,916 (9,637,697)
------------- --------------
Distributions from Net Investment Income* ........................ (4,415,661) (2,528,789)
Distributions in Excess of Net Investment Income* (Note 1) ....... (533,006) -0-
------------- --------------
Distributions from and in Excess of Net Investment Income* ....... (4,948,667) (2,528,789)
Return of Capital Distribution* ................................. (2,635,924) -0-
------------- --------------
Total Distributions ............................................. (7,584,591) (2,528,789)
------------- --------------
Net Change in Net Assets from Investment Activities .............. (1,680,675) (12,166,486)
------------- --------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold ....................................... 25,816,917 89,237,622
Net Asset Value of Shares Issued Through Dividend Reinvestment ... 3,244,998 1,072,183
Cost of Shares Repurchased ....................................... (16,415,322) (5,148,558)
------------- --------------
Net Change in Net Assets from Capital Transactions .............. 12,646,593 85,161,247
------------- --------------
Total Increase in Net Assets .................................... 10,965,918 72,994,761
Net Assets:
Beginning of the Period ......................................... 72,999,051 4,290
------------- --------------
End of the Period (Including undistributed net investment income
of $(407,598) and $169,902, respectively) ....................... $ 83,964,969 $ 72,999,051
------------- --------------
</TABLE>

Year Ended Period Ended
*Distributions by Class June 30, 1995 June 30,1994
----------------------- --------------- --------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares .................... $ (1,773,941) $ (927,849)
Class B Shares .................... (3,039,599) (1,532,147)
Class C Shares .................... (135,127) (68,793)
-------------- --------------
$ (4,948,667) $ (2,528,789)
-------------- --------------
Return of Capital Distribution:
Class A Shares .................... $ (957,995) $ -0-
Class B Shares .................... (1,618,412) -0-
Class C Shares .................... (59,517) -0-
-------------- --------------
$ (2,635,924) $ -0-
-------------- --------------
</TABLE>

See Notes to Financial Statements

B-54
<PAGE> 221

Notes to Financial Statements
June 30,1995
------------------------------

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" or "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.

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-During the current period, the Fund adopted
Statement of Position 93-4, "Foreign Currency Accounting and Financial Statement
Presentation for Investment Companies." Accordingly, the 1994 statement of
changes in net assets and financial highlights were restated to reflect
reclassification of net realized gain/loss on foreign currency and forward
currency contracts from net investment income to net realized gain/loss on
investments and foreign currency.

Assets and liabilities denominated in foreign currencies and commitments under
forward currency contracts are translated into U.S. dollars at the mean of the
quoted bid and ask prices

B-55
<PAGE> 222

Notes to Financial Statements (Continued)
June 30,1995
-------------------------------------------

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
prevailing when accrued.

E. Organizational Expenses and Initial Registration Costs-The Fund will
reimburse Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with the Fund's
organization and initial registration in the amount of $170,000. 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.

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, 1995, the Fund had an accumulated capital
loss carryforward for tax purposes of $4,216,449, which will expire on June 30,
2003. 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 foreign
currencies and options on foreign currencies. These realized gains and losses
are included as net realized gains or losses for financial reporting purposes.
Permanent book and tax basis differences relating to these items totaling
$125,408 were reclassified from accumulated net realized gain/loss on
investments to accumulated undistributed net investment income.

Net realized gains on securities, if any, are distributed annually.

B-56
<PAGE> 223

Notes to Financial Statements (Continued)
June 30,1995
-------------------------------------------

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 year ended June 30, 1995, the Fund recognized expenses of
approximately $61,400 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.

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. The Fund's liability under
the deferred compensation and retirement plans at June 30, 1995, was
approximately $17,900.

At June 30, 1995, 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.

B-57
<PAGE> 224

Notes to Financial Statements (Continued)
June 30,1995
------------------------------------------

At June 30, 1995, paid in surplus aggregated $33,387,911, $59,671,778 and
$2,116,517 for Classes A, B and C, respectively. For the year ended June 30,
1995, transactions were as follows:

<TABLE>
<CAPTION>
Shares Value
------ -----
<S> <C> <C>
Sales:
Class A ....................... 970,765 $ 11,135,557
Class B ....................... 1,206,027 13,927,571
Class C ....................... 65,188 753,789
---------- -------------
Total Sales ................... 2,241,980 $ 25,816,917
---------- -------------
Dividend Reinvestment:
Class A ....................... 90,046 $ 1,025,064
Class B ....................... 185,189 2,109,222
Class C ....................... 9,720 110,712
--------- -------------
Total Dividend Reinvestment ... 284,955 $ 3,244,998
--------- -------------
Repurchases:
Class A ....................... (576,467) $ (6,551,783)
Class B ....................... (772,126) (8,730,596)
Class C ....................... (103,217) (1,132,943)
---------- -------------
Total Repurchases ............ (1,451,810) $ (16,415,322)
---------- -------------
</TABLE>

B-58

<PAGE> 225

Notes to Financial Statements (Continued)
June 30,1995
-------------------------------------------

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>

<TABLE>
<CAPTION>
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>

B-59
<PAGE> 226

Notes to Financial Statements (Continued)
June 30,1995
------------------------------------------

For the year ended June 30, 1995, VKAC, as Distributor for the Fund, received
net commissions on sales of the Fund's Class A shares of approximately $39,200
and CDSC on the redeemed shares of Classes B and C of approximately $203,000.
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 year ended June
30, 1995 were $321,417,051 and $322,572,748, 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.

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-60

<PAGE> 227

Notes to Financial Statements (Continued)
June 30,1995
------------------------------------------

Transactions in options for the year ended June 30, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts Premium
---------- ------------
<S> <C> <C>
Outstanding at June 30, 1994 .......... 254 $ (412,000)
Options Written and Purchased (Net) ... 3,241 (1,792,579)
Options Terminated in Closing
Transactions (Net) .................... (1,549) 1,253,269
Options Exercised ..................... (151) 80,081
Options Expired (Net) ................. (1,790) 602,779
------ -------------
Outstanding at June 30, 1995 ......... 5 $ (268,450)
------ -------------
</TABLE>

The descriptions and market values of the option contracts outstanding as of
June 30, 1995, are as follows:

<TABLE>
<CAPTION>
Strike
Opening Expiration Price/ Market
Description Transaction Date Yield Value
----------- ----------- --------- ------ ------
<S> <C> <C> <C> <C>
Argentina Par Bond Call ... Sell 07/05/95 45.00% $ (132,330)
Argentina Par Bond Put .... Sell 07/05/95 36.00% -0-
Argentina Par Bond Put .... Buy 07/24/95 45.00% 25,585
Japanese Yen Call ......... Buy 04/22/96 82.65% 39,290
Japanese Yen Call ......... Buy 04/22/96 83.25% 117,870
------------
$ 50,415
------------
</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 year ended June 30, 1995, were as
follows:

<TABLE>
<CAPTION>
Contracts
---------
<S> <C>
Outstanding at June 30, 1994 .... 1,594
Futures Opened .................. 4,973
Futures Closed ................. (6,268)
---------
Outstanding at June 30, 1995 ... 299
---------
</TABLE>

B-61
<PAGE> 228

Notes to Financial Statements (Continued)
June 30,1995
-----------------------------------------

The futures contracts outstanding as of June 30, 1995, and the descriptions
and unrealized appreciation/depreciation are as follows:

<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
--------- ------------
<S> <C> <C>
U.S. Treasury Bond Futures
Sept 1995 - Sells to Open ....... 175 $ 306,030
5-Year U.S. Treasury Bond Futures
Sept 1995 - Sells to Open ...... 124 (28,156)
--- ------------
299 $ 277,874
--- ------------
</TABLE>

C. 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 as a component of realized
gain/loss on investments and foreign currency.

At June 30, 1995, the Fund has outstanding forward currency contracts as
follows:

<TABLE>
<CAPTION>
Forward Original Current Unrealized
Currency Contracts Value Value Appreciation
------------------ --------- -------- ------------
<S> <C> <C> <C>
Sells to Open
German Mark,
expiring 07/06/95 -
08/30/95 .......... $ 2,384,883 $ 2,371,523 $ 13,360
</TABLE>

At June 30, 1995, the Fund had realized gains on closed but unsettled forward
currency contracts of $11,257 scheduled to settle between July 6 and August 30,
1995.

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.

B-62
<PAGE> 229

Notes to Financial Statements (Continued)
June 30,1995
-----------------------------------------

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 such as Federal National Mortgage Association (FNMA).

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.

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

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, 1995, are payments to VKAC of approximately
$398,000.

B-63
<PAGE> 230

Notes to Financial Statements (Continued)
June 30,1995
------------------------------------------

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 April 30, 1996. 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,
1995 was 7.3125%. 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 June 30, 1995, the average interest rate in effect for reverse
repurchase agreements was 6.41%.

The average daily balance of bank borrowings and reverse repurchase agreements
for the year ended June 30, 1995, was approximately $29,790,000 with an average
interest rate of 6.15%.

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 June 30,
1995, there were no open dollar roll transactions.

At June 30, 1995, these agreements represented 24.7% of the Fund's total
assets.

B-64
<PAGE> 231

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 American Capital Short-Term Global Income Fund:
included in Post-Effective Amendment No. 35 to the Registration Statement
of the Registrant.

For Van Kampen American Capital Adjustable Rate U.S. Government Fund:
included in Post-Effective Amendment No. 32 to the Registration Statement
of the Registrant.

For each of Van Kampen American Capital High Yield Fund and Van Kampen
American Capital Strategic Income Fund:

Included in the Prospectus:

Financial Highlights

Included in the Statement of Additional Information:

Independent Auditors' Report

Financial Statements

Notes to Financial Statements.

For Van Kampen American Capital Emerging Markets Income Fund: not
included herein because such fund is a new registrant.

(B) EXHIBITS:
(1)(a) Form of Agreement and Declaration of Trust(32)
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(32)
(iv) Van Kampen American Capital Strategic Income Fund+
(v) Van Kampen American Capital Emerging Markets Income
Fund++
(2) Form of By-Laws(32)
(4) Form of Specimen of Share Certificates
(i) Van Kampen American Capital High Yield Fund
(a) Class A Shares+
(b) Class B Shares+
(c) Class C Shares+
(ii) Van Kampen American Capital Short-Term Global Income
Fund

(a) Class A Shares(35)

(b) Class B Shares(35)

C-1
<PAGE> 232

(v) Van Kampen American Capital Emerging Markets Income
Fund
(a) Class A Shares(27)
(b) Class B Shares(27)
(c) Class C Shares(27)
(5)(a) Form of Investment Advisory Agreement
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(32)
(iv) Van Kampen American Capital Strategic Income Fund+
(v) Van Kampen American Capital Emerging Markets Income
Fund, as amended and restated(27)
(b) Form of Investment Sub-Advisory Agreement
(i) Van Kampen American Capital Emerging Markets Income
Fund(27)
(6)(a) Form of Distribution and Service Agreement(32)
(b) Form of Dealer Agreement(32)
(c) Form of Broker Agreement(32)
(d) Form of Bank Agreement(32)
(e) Form of Underwriting Agreement(1)
(f) Form of Selected Dealer Agreement(1)
(g) Form of Agreement Between Underwriters(1)
(8)(a) Form of Custodian Agreement
(i) Van Kampen American Capital High Yield Fund*
(ii) Van Kampen American Capital Short-Term Global Income
Fund(6)
(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(12)
(iv) Van Kampen American Capital Strategic Income
Fund(20)
(v) Van Kampen American Capital Emerging Markets Income
Fund, as amended and restated(24)
(b) Form of Transfer Agency Agreement(32)
(9)(a) Form of Accounting Service Agreement(32)
(b) Form of Legal Services Agreement(32)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen American Capital High Yield Fund+

(b) Van Kampen American Capital Short-Term Global Income
Fund(35)

(c) Van Kampen American Capital Adjustable Rate U.S. Government
Fund(32)
(d) Van Kampen American Capital Strategic Income Fund+
(e) Van Kampen American Capital Emerging Markets Income Fund++
(11) Consent of KPMG Peat Marwick LLP
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(32)
(iv) Van Kampen American Capital Strategic Income Fund+
(v) Van Kampen American Capital Emerging Markets Income
Fund(21)
(13) Letter of Understanding relating to initial capital(1)
(15) (a) Form of Distribution Plan Pursuant to Rule 12b-1(32)
(b) Form of Shareholder Assistance Agreement(32)
(c) Form of Administrative Services Agreement(32)
(d) Form of Service Plan(32)
(16) (a) Computation of Performance Quotations
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(28)
(iv) Van Kampen American Capital Strategic Income Fund+

(17) (a) List of certain investment companies in response to Item
29(a)(35)

C-2
<PAGE> 233

(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(35)

(24) Power of attorney(35)

(27) Financial Data Schedules+
---------------
* Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.

(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(9) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(12) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(16) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(17) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(21) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(24) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(25) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(28) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(30) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(32) Incorporated herein by reference to Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.

---------------
+ Filed herewith.
++ To be filed by amendment.

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.

C-3
<PAGE> 234

ITEM 26. NUMBER OF HOLDERS OF SECURITIES.

As of August 18, 1995:

<TABLE>
<CAPTION>
(2)
NUMBER
(1) OF
RECORD
TITLE OF CLASS HOLDERS
---------------------------------------------------------- ------
<S> <C>
Shares of Beneficial Interest, $0.01 par value
(i) Van Kampen American Capital High Yield Fund*:
Class A Shares.................................... 14,987
Class B Shares.................................... 2,928
Class C Shares.................................... 147
(ii) Van Kampen American Capital Short-Term Global
Income Fund*:
Class A Shares.................................... 4,070
Class B Shares.................................... 8,650
Class C Shares.................................... 14
(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund:
Class A Shares.................................... 277
Class B Shares.................................... 716
Class C Shares.................................... 41
(iv) Van Kampen American Capital Strategic Income Fund:
Class A Shares.................................... 1,918
Class B Shares.................................... 3,175
Class C Shares.................................... 63
(v) Van Kampen American Capital Emerging Markets Income
Fund*:
Class A Shares.................................... 5
Class B Shares.................................... 3
Class C Shares.................................... 2
</TABLE>

---------------
* Prior to May 1, 1995, the Fund offered Class D Shares.

ITEM 27. INDEMNIFICATION.

Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.

Article 8; Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.

The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.

Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides a security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the

C-4
<PAGE> 235

Registrant's disinterested, non-party trustees, or an independent legal counsel
in a written opinion, shall determine, based upon a review of readily available
facts, that a recipient of the advance ultimately will be found entitled to
indemnification.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefor 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 the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
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 "Investment
Advisory and Other Services" 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(a) 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 17(b). 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, Access Investors Services,
Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri, 64153, or at the
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts. 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.

C-5
<PAGE> 236

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 American Capital Emerging Markets Income
Fund, a series 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> 237

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN AMERICAN CAPITAL
TRUST, CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND 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 20TH DAY OF AUGUST, 1995.

VAN KAMPEN AMERICAN CAPITAL TRUST

By: /s/ RONALD A. NYBERG
-----------------------------
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 AUGUST 20, 1995 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:

<TABLE>
<CAPTION>
SIGNATURES TITLE
--------------------------------------------- ----------------------------------------------
<C> <S>
/s/ DONALD C. MILLER * Chairman of the Board and Trustee
---------------------------------------------
Donald C. Miller

Chief Executive Officer:

/s/ DENNIS J. McDONNELL* President and Trustee
---------------------------------------------
Dennis J. McDonnell

Chief Financial and Accounting Officer:

/s/ EDWARD C. WOOD, III * Vice President and Treasurer
---------------------------------------------
Edward C. Wood, III

Trustees:

/s/ J. MILES BRANAGAN * Trustee
---------------------------------------------
J. Miles Branagan

/s/ RICHARD E. CARUSO* Trustee
---------------------------------------------
Richard E. Caruso

/s/ PHILIP P. GAUGHAN * Trustee
---------------------------------------------
Philip P. Gaughan

/s/ ROGER HILSMAN * Trustee
---------------------------------------------
Roger Hilsman

/s/ R. CRAIG KENNEDY * Trustee
---------------------------------------------
R. Craig Kennedy

/s/ JACK E. NELSON * Trustee
---------------------------------------------
Jack E. Nelson

/s/ DON G. POWELL * Trustee
---------------------------------------------
Don G. Powell
</TABLE>

C-7
<PAGE> 238

<TABLE>
<CAPTION>
SIGNATURES TITLE
--------------------------------------------- ----------------------------------------------
<S> <C>
/s/ DAVID REES* Trustee
---------------------------------------------
David Rees

/s/ JEROME L. ROBINSON * Trustee
---------------------------------------------
Jerome L. Robinson

/s/ LAWRENCE J. SHEEHAN * Trustee
---------------------------------------------
Lawrence J. Sheehan

/s/ FERNANDO SISTO * Trustee
---------------------------------------------
Fernando Sisto

/s/ WAYNE W. WHALEN * Trustee
---------------------------------------------
Wayne W. Whalen

/s/ WILLIAM S. WOODSIDE* Trustee
---------------------------------------------
William S. Woodside
</TABLE>

---------------
*Signed by Ronald A. Nyberg pursuant to a power of attorney previously filed.

/s/ RONALD A. NYBERG
---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact

August 20, 1995

C-8
<PAGE> 239

SCHEDULE OF EXHIBITS TO

POST-EFFECTIVE AMENDMENT 36 TO FORM N-1A

SUBMITTED TO THE SECURITIES AND EXCHANGE

COMMISSION ON SEPTEMBER 1, 1995

(B) EXHIBITS:
(1)(a) Form of Agreement and Declaration of Trust(32)
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(32)
(iv) Van Kampen American Capital Strategic Income Fund+
(v) Van Kampen American Capital Emerging Markets Income
Fund++
(2) Form of By-Laws(32)
(4) Form of Specimen of Share Certificates
(i) Van Kampen American Capital High Yield Fund
(a) Class A Shares+
(b) Class B Shares+
(c) Class C Shares+
(ii) Van Kampen American Capital Short-Term Global Income
Fund

(a) Class A Shares(35)

(b) Class B Shares(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund
(a) Class A Shares(32)
(b) Class B Shares(32)
(c) Class C Shares(32)
(iv) Van Kampen American Capital Strategic Income Fund
(a) Class A Shares+
(b) Class B Shares+
(c) Class C Shares+
(v) Van Kampen American Capital Emerging Markets Income
Fund
(a) Class A Shares(27)
(b) Class B Shares(27)
(c) Class C Shares(27)
(5)(a) Form of Investment Advisory Agreement
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)

<TABLE>
<S> <C>
(iv) Van Kampen American Capital Strategic Income Fund(20)
(v) Van Kampen American Capital Emerging Markets Income
Fund, as amended and restated(24)
(b) Form of Transfer Agency Agreement(32)
(9)(a) Form of Accounting Service Agreement(32)
(b) Form of Legal Services Agreement(32)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen American Capital High Yield Fund+

(b) Van Kampen American Capital Short-Term Global Income
Fund(35)

(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(32)
(iv) Van Kampen American Capital Strategic Income Fund+
(v) Van Kampen American Capital Emerging Markets Income
Fund(21)
(13) Letter of Understanding relating to initial capital(1)
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1(32)
(b) Form of Shareholder Assistance Agreement(32)
(c) Form of Administrative Services Agreement(32)
(d) Form of Service Plan(32)
(16)(a) Computation of Performance Quotations
(i) Van Kampen American Capital High Yield Fund+

(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)

(iii) Van Kampen American Capital Adjustable Rate U.S.
Government Fund(28)
(iv) Van Kampen American Capital Strategic Income Fund+

(17)(a) List of certain investment companies in response to Item 29(a)(35)

(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(35)

(24) Power of attorney(35)

(27) Financial Data Schedules+
</TABLE>

---------------
* Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.