VAN KAMPEN AMERICAN CAPITAL TRUST, 497, 1996-11-01

VAN KAMPEN AMERICAN CAPITAL TRUST
497, 1996-11-01

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STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL HIGH YIELD FUND

Van Kampen American Capital High Yield Fund (the "Fund") seeks as its primary
investment objective 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.

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current Prospectus for the Fund dated the date
hereof (the "Prospectus"). This Statement of Additional Information does not
include all the 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

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PAGE
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<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Trustees and Officers................................................................. B-13
Legal Counsel......................................................................... B-21
Investment Advisory and Other Services................................................ B-21
Custodian and Independent Accountants................................................. B-23
Portfolio Transactions and Brokerage Allocation....................................... B-23
Tax Status of the Fund................................................................ B-24
The Distributor....................................................................... B-24
Performance Information............................................................... B-25
Independent Accountants' Report....................................................... B-28
Financial Statement................................................................... B-29
Notes to the Financial Statements..................................................... B-39
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
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THE FUND AND THE TRUST

The Fund is a diversified series of Van Kampen American Capital Trust (the
"Trust"), an open-end management investment company. The Fund was established
pursuant to a designation of series dated May 10, 1995. At present, the Fund,
Van Kampen American Capital Short-Term Global Income Fund and Van Kampen
American Capital Strategic Income Fund are the only series of the Trust,
although other series may be organized and offered in the future. Each series of
the Trust will be treated as a separate corporation for Federal income tax
purposes.

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. The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares, par value $0.01 per share for each portfolio. The trustees can
further sub-divide each series of shares into one or more classes of shares for
each portfolio. 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. Except as described in the
Prospectus, 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 Trust
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act of 1940, as amended (the "1940
Act").

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 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.

The Trust originally was organized as the Van Kampen Merritt Trust, a
Massachusetts business trust, by a Declaration of Trust dated March 14, 1986
(the "Massachusetts Trust"). The Massachusetts Trust was reorganized into the
Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization and
Liquidation. The Trust was formed pursuant to an Agreement and Declaration of
Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.

The Fund originally was organized, under the name Van Kampen Merritt High
Yield Fund, as a sub-trust of the Massachusetts Trust. In connection with the
Massachusetts Trust's reorganization into a Delaware business trust, the Fund
was reorganized into a series of the Trust and renamed Van Kampen American
Capital High Yield Fund.

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 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

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securities. There is no assurance that such objectives will be achieved. The
Fund may invest in debt securities rated between BB and D (inclusive) by
Standard & Poor's Ratings Group ("S&P"), Ba 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 foreign corporate debt securities of similar quality. The
securities in which the Fund invests generally will have a higher degree of
individual credit and market risk and as a result their prices may be more
volatile as compared to higher rated securities, which may cause the Fund's net
asset 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.

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

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

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interests in mortgage loans. Participation certificates are issued by obligors
to finance the acquisition of equipment and facilities and may represent
participations in a lease, an installment purchase contract or a conditional
sales contract. Most debt securities in which the Fund will invest will bear
interest at fixed rates. However, the Fund reserves the right to invest without
limitation in corporate debt securities that have variable rates of interest or
involve equity features, such as contingent interest or participation based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are 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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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.

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.

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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.

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.

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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.

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.

B-8
<PAGE> 9

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.

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.

B-9
<PAGE> 10

portion of its portfolio, to protect against currency fluctuations, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

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 cash or liquid
securities 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 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 cash or liquid 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 cash or liquid securities equal to the
excess

B-10
<PAGE> 11

of the index value over the exercise price on a current basis. A put option
written by the Fund requires the Fund to segregate cash or liquid securities
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
cash or liquid securities denominated in that currency equal to the Fund's
obligations or to segregate cash or liquid securities 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

B-11
<PAGE> 12

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 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 liquid securities
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 liquid securities, 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.

B-12
<PAGE> 13

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 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 or other
liquid 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.

TRUSTEES AND OFFICERS

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"), Van Kampen American Capital Asset
Management, Inc. (the "AC Adviser"), Van Kampen American Capital Distributors,
Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital"), VK/AC Holding, Inc. or ACCESS Investor Services, Inc.
("ACCESS"). For purposes hereof, the terms "Van Kampen American Capital Funds"
or "Fund Complex" includes each of the open-end investment companies advised by
the VK Adviser (excluding The Explorer Institutional Trust) and each of the
open-end investment companies advised by the AC Adviser (excluding the Van
Kampen American Capital Exchange Fund and the Common Sense Trust).

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.
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.
Date of Birth: 11/23/19
</TABLE>

B-13
<PAGE> 14

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 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, Van Kampen American Capital
Oakbrook Terrace, IL 60181 Advisors, Inc. and Van Kampen American Capital
Date of Birth: 05/20/42 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc. and Van Kampen American Capital.
President and Director of Van Kampen Merritt Equity
Advisors Corp. Director of Van Kampen Merritt Equity
Holdings Corp. Director of McCarthy, Crisanti & Maffei,
Inc. Prior to September 1996, Chief Executive Officer
McCarthy, Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company, Limited. Prior to
July 1996, President, Chief Operating Officer and Trustee
of VSM Inc. and VCJ Inc. President, Chief Executive
Officer and Trustee of each of the Van Kampen American
Capital Funds. President, Chairman of the Board and
Trustee of other investment companies advised by the VK
Adviser. Executive Vice President of other investment
companies advised by the AC Adviser.

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
Date of Birth: 03/31/20 Trust Company of Chicago and Continental Illinois
Corporation. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.

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
Date of Birth: 02/13/36 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.

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
Date of Birth: 10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.

Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
155 Hickory Lane of Graduate School and Chairman, Department of Mechanical
Closter, NJ 07624-2322 Engineering, Stevens Institute of Technology. Director of
Date of Birth: 08/02/24 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.
</TABLE>

B-14
<PAGE> 15

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the Van Kampen
Chicago, IL 60606 American Capital Funds, The Explorer Institutional Trust
Date of Birth: 08/22/39 and the closed-end investment companies advised by the VK
Adviser. Trustee of each of the Van Kampen American
Capital Funds, The Explorer Institutional Trust and the
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
Date of Birth: 01/31/22 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>

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

* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the VK Adviser, the
AC Adviser and the Fund by reason of his positions with the VK Adviser and the
AC Adviser. Mr. Whalen is an interested person of the Fund by reason of his
firm acting as legal counsel to the Fund.

OFFICERS

The address for William N. Brown, Curtis W. Morell, Robert C. Peck, Jr., Alan
T. Sachtleben, Paul R. Wolkenberg, Tanya M. Loden, Huey P. Falgout, Jr. and
Robert Sullivan is 2800 Post Oak Blvd., Houston, TX 77056. The address for Peter
W. Hegel, Ronald A. Nyberg, Edward C. Wood III, John L. Sullivan, Nicholas
Dalmaso, Scott E. Martin, Weston B. Wetherell and Steven M. Hill is One Parkview
Plaza, Oakbrook Terrace, IL 60181.

B-15
<PAGE> 16

Curtis W. Morell........ Vice President and Senior Vice President of the VK Adviser and
Date of Birth: Chief Accounting the AC Adviser. Vice President and Chief
08/04/46 Officer Accounting Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.

Ronald A. Nyberg........ Vice President and Executive Vice President, General Counsel
Date of Birth: Secretary and Secretary of Van Kampen American
07/29/53 Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen Merritt Equity Advisors Corp., and
Van Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc. and ACCESS. Executive Vice
President, General Counsel, Assistant
Secretary and Director of Van Kampen
American Capital Trust Company. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to September 1996,
General Counsel of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Executive
Vice President and General Counsel of VSM
Inc. and VCJ Inc. Vice President and
Secretary of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.

Robert C. Peck, Jr...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
10/01/46 Inc. Executive Vice President and Director
of the AC Adviser and Van Kampen American
Capital Advisors, Inc. Vice President of
each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.

Alan T. Sachtleben...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
04/20/42 Inc. Executive Vice President and a
Director of the AC Adviser and Van Kampen
American Capital Advisors, Inc. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
</TABLE>

B-16
<PAGE> 17

Edward C. Wood III...... Vice President and Senior Vice President of the VK Adviser,
Date of Birth: Chief Financial Officer the AC Adviser and Van Kampen American
01/11/56 Capital Management, Inc. Vice President and
Chief Financial Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.

John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: the AC Adviser. Treasurer of each of the
08/20/55 Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.

Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: Adviser. Controller of each of the Van
11/19/59 Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.

Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.

Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
</TABLE>

B-17
<PAGE> 18

Weston B. Wetherell..... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: and Assistant Secretary of Van Kampen
06/15/56 American Capital, the VK Adviser, the AC
Adviser, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.

Steven M. Hill.......... Assistant Treasurer Assistant Vice President of the VK Adviser
Date of Birth: and AC Adviser. Assistant Treasurer of each
10/16/64 of the Van Kampen American Capital Funds
and other investment companies advised by
the VK Adviser and the AC Adviser.

Robert Sullivan......... Assistant Controller Assistant Vice President of the VK Adviser
Date of Birth: and the AC Adviser. Assistant Controller of
03/30/33 each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser.
</TABLE>

Each of the foregoing trustees and officers holds the same position with each
of the funds in the Fund Complex. As of December 31, 1995, there were 50 funds
in the Fund Complex. Each trustee who is not an affiliated person of the VK
Adviser, the AC Adviser, the Distributor or Van Kampen American Capital (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to the funds in the Fund Complex. Each fund in the Fund Complex
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees to defer receipt of his or her compensation and earn a return on such
deferred amounts based upon the return of the common shares of the funds in the
Fund Complex as more fully described below. Each fund in the Fund Complex also
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.

B-18
<PAGE> 19

attended by the Non-Affiliated Trustee, due on the date of such meeting, plus
reasonable expenses incurred by the Non-Affiliated Trustee in connection with
his or her services as a trustee, provided that no compensation will be paid in
connection with certain telephonic special meetings.

The trustees have approved an aggregate compensation cap with respect to funds
in the Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding
any retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of funds in the Fund Complex as of July
21, 1995 and certain other exceptions. In addition, each of the VK Adviser or
the AC Adviser, as the case may be, has agreed to reimburse each fund in the
Fund Complex through December 31, 1996 for any increase in the aggregate
trustee's compensation over the aggregate compensation paid by such fund in its
1994 fiscal year, provided that if a fund did not exist for the entire 1994
fiscal year appropriate adjustments will be made.

Each Non-Affiliated Trustee can elect to defer receipt of all or a portion of
the compensation earned by such Non-Affiliated Trustee until retirement. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to the return on the common shares of the Fund or other funds in the
Fund Complex as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, the Fund may invest in securities of those funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.

The Fund adopted a retirement plan on July 21, 1994. Under the Fund's
retirement plan, a Non-Affiliated Trustee who is receiving trustee's fees from
the Fund prior to such Non-Affiliated Trustee's retirement, has at least ten
years of service and retires at or after attaining the age of 60, is eligible to
receive a retirement benefit equal to $2,500 per year for each of the ten years
following such trustee's retirement. Trustees retiring prior to the age of 60 or
with fewer than 10 years but more than 5 years of service may receive reduced
retirement benefits from a series. The retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year.

Additional information regarding compensation and benefits for trustees is set
forth below. The "Registrant" is the Trust, which currently consists of three
operating series (four operating series as of June 30, 1996). As indicated in
the notes accompanying the table, the amounts relate to either the Registrant's
last fiscal year ended June 30, 1996 or the Fund Complex' last calendar year
ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
ESTIMATED TOTAL
PENSION OR ANNUAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS BEFORE DEFERRAL
COMPENSATION BENEFITS ACCRUED FROM FROM REGISTRANT
BEFORE DEFERRAL AS PART OF REGISTRANT AND FUND
FROM REGISTRANT UPON COMPLEX PAID TO
NAME(1) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- --------------------------------------- ---------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan...................... $ 10,250 $1,754 6,750 $84,250
Dr. Richard E. Caruso.................. 6,875 -0- -0- 57,250
Philip P. Gaughan...................... 6,875 3,570 3,250 76,500
Linda Hutton Heagy..................... 10,250 199 7,500 38,417
Dr. Roger Hilsman...................... 10,250 -0- -0- 91,250
R. Craig Kennedy....................... 11,500 152 7,500 92,625
Donald C. Miller....................... 11,500 6,433 4,000 94,625
Jack E. Nelson......................... 11,500 1,049 7,500 93,625
David Rees............................. 7,875 -0- -0- 83,250
Jerome L. Robinson..................... 11,500 7,907 2,500 89,375
Lawrence J. Sheehan.................... 10,250 -0- -0- 91,250
Dr. Fernando Sisto..................... 10,250 2,990 3,750 98,750
Wayne W. Whalen........................ 11,500 778 7,500 93,375
William S. Woodside.................... 10,250 -0- -0- 79,125
</TABLE>

B-19
<PAGE> 20

Powell, Rees, Sheehan, Sisto and Woodside were elected by shareholders to
the Board of Trustees on July 21, 1995. Ms. Heagy was appointed to the Board
of Trustees on September 7, 1995. Mr. Don G. Powell resigned from the Board
of Trustees on August 15, 1996, and did not receive any compensation or
benefits from the Fund while a trustee because he was an affiliated person
of the VK Adviser and AC Adviser. Messrs. Gaughan and Rees retired from the
Board of Trustees on January 26, 1996 and January 29, 1996, respectively.
Messrs. Caruso and Sheehan were removed from the Board of Trustees effective
September 7, 1995 and January 29, 1996, respectively.

(2) The amounts shown in this column are aggregated from the compensation paid
by each series in operation during the Registrant's fiscal year ended June
30, 1996 before deferral by the trustees under the deferred compensation
plan. The following trustees deferred all or a portion of their compensation
from the Registrant during the fiscal year ended June 30, 1996: Dr. Caruso,
$0; Mr. Gaughan, $6,875; Ms. Heagy, $3,750; Mr. Kennedy, $11,500; Mr.
Miller, $11,500; Mr. Nelson, $11,500; Mr. Rees, $4,750; Mr. Robinson,
$11,500; Dr. Sisto, $0; and Mr. Whalen, $11,500. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Registrant as of June 30, 1996 is as follows: Dr. Caruso, $0; Mr.
Gaughan, $15,367; Ms. Heagy, $3,838; Mr. Kennedy, $27,805; Mr. Miller,
$26,353; Mr. Nelson, $27,805; Mr. Rees, $7,796; Mr. Robinson, $26,724; Dr.
Sisto, $0; and Mr. Whalen, $21,331. The deferred compensation plan is
described above the Compensation Table. Amounts deferred are retained by the
Fund and earn a rate of return determined by reference to either the return
on the common shares of the Fund or other funds in the Fund Complex as
selected by the respective Non-Affiliated Trustee. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation.

(3) The amounts shown in this column are aggregated from the Retirement Benefits
accrued by each series in operation during the Registrant's fiscal year
ended June 30, 1996. The Retirement Plan is described above the Compensation
Table.

(4) The amounts shown in this column are the estimated annual benefits payable
by the Registrant in each year of the 10-year period commencing in the year
of such trustee's retirement from the Registrant (based on $2,500 per series
for each series of the Registrant in operation) assuming: the trustee has 10
or more years of service on the Board of the respective series and retires
at or after attaining the age of 60. The actual annual benefit may be less
if the trustee is subject to the Fund Complex retirement benefit cap or if
the trustee is not fully vested at the time of retirement.

(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 1995, before
deferral by the trustees under the deferred compensation plan. The following
trustees deferred compensation paid by the Registrant and the Fund Complex
during the calendar year ended December 31, 1995; Dr. Caruso, $41,750; Mr.
Gaughan, $57,750; Ms. Heagy, $8,750; Mr. Kennedy, $65,875; Mr. Miller,
$65,875; Mr. Nelson, $65,875; Mr. Rees, $8,375; Mr. Robinson, $62,375; Dr.
Sisto, $30,260; and Mr. Whalen, $65,625. The deferred compensation earns a
rate of return determined by reference to the return on the common shares of
the Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, the Fund
may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap commenced on July 22, 1995 and
covered the period between July 22, 1995 and December 31, 1995. Compensation
received prior to July 22, 1995 was not subject to the cap. For the calendar
year ended December 31, 1995, while certain trustees received compensation
over $84,000 in the aggregate, no trustee received compensation in excess of
the pro rata amount of the Fund Complex cap for the period July 22, 1995
through December 31, 1995. In addition to the amounts set forth above,
certain trustees received lump sum retirement benefit distributions not
subject to the cap in 1995 related to three mutual funds that ceased
investment operations during 1995 as follows: Mr. Gaughan, $22,136; Mr.
Miller, $33,205; Mr. Nelson, $30,851; Mr. Robinson, $11,068; and Mr. Whalen,
$27,332. The VK Adviser, AC Adviser and their affiliates also serve as
investment adviser for other investment companies; however, with the
exception of Messrs. McDonnell and Whalen, the trustees were not trustees of
such investment companies. Combining the Fund Complex with other investment
companies advised by the VK Adviser, AC Adviser and their affiliates, Mr.
Whalen received Total Compensation of $268,857 during the calendar year
ended December 31, 1995.

As of October 17, 1996, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund. As of October 17, 1996, no trustee or
officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc. Mr. McDonnell owns, or has the opportunity to
purchase, an equity interest in VK/AC Holding, Inc., the parent company of Van
Kampen American Capital, and has entered into an employment contract (for a term
until February 17, 1998) with Van Kampen American Capital.

B-20
<PAGE> 21

As of October 17, 1996, no person was known by the Fund to own beneficially or
to hold of record as much as 5% of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company............................. 2,109,861 A 7.24%
2800 Post Oak Blvd. ................................................ 555,807 B 4.79%
Houston, TX 77056 11,264 C 1.45%
PaineWebber for the Benefit of
Richard Larry Owens Sr. ............................................ 52,390 C 6.73%
Revocable Trust DTD 09/12/98
Richard Larry Owens Sr. TTEE
80 Trotters Walk
Covington, GA 30209
</TABLE>

Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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, Inc. ("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 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon exercise of options,
approximately an additional 12% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of stock options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.

The investment advisory agreement 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.

B-21
<PAGE> 22

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, 1996, 1995 and 1994, the Fund recognized advisory
expenses of $2,614,970, $2,202,317 and $2,069,670, 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, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $10,600, $129,700 and $114,700, respectively, representing the
Distributor's cost of providing certain support services.

ACCOUNTING SERVICES 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, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $11,300, $10,500 and $9,000, 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 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. 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 insurance and
other regular wages for the employment of personnel as well as the overhead and
expenses related to office space 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.

B-22
<PAGE> 23

For the years ended June 30, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $14,300, $10,100 and $12,600, respectively, representing Van
Kampen American Capital's cost of providing legal services.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants 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.

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

B-23
<PAGE> 24

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, among other things, 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 $57 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
more than 80 analysts devoted to various specializations.

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 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, 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 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

B-24
<PAGE> 25

of such class, and all material amendments to either of the Plans must be
approved by the Trustees and also by the disinterested Trustees. Each of the
Plans may be terminated with respect to either class of shares at any time by a
vote of a majority of the disinterested Trustees or by a vote of a majority of
the outstanding voting shares of such class.

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

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.

For the year ended June 30, 1996, the Fund recognized expenses under the Plans
of $647,486, $779,712 and $51,552 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $520,742, $154,566 and $7,520 represent
payments to financial intermediaries under the Selling Agreements for 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 front-end 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 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 CDSC on 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.

B-25
<PAGE> 26

asset class diversification, top five sector holdings and ten largest holdings.
Materials may also mention how Van Kampen American Capital believes the Fund
compares relative to other Van Kampen American Capital funds. Materials may also
discuss the Dalbar Financial Services study from 1984 to 1994 which examined
investor cash flow into and out of all types of mutual funds. The ten year study
found that investors who bought mutual fund shares and held such shares
outperformed investors who bought and sold. The Dalbar study conclusions were
consistent regardless if shareholders purchased their funds in direct or sales
force distribution channels. The study showed that investors working with a
professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the Internet.

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 CDSC, and if any such contingent deferred
sales charge with respect to the CDSC Shares imposed at the time of redemption
were reflected, it would reduce the performance quoted.

CLASS A SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 8.19%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 9.04%.

The Fund's average total returns, including payment of the maximum sales
charge, for Class A Shares for (i) the one year period ended June 30, 1996 was
5.96%, (ii) the five year period ended June 30, 1996 was 11.41%, (iii) the ten
year period ended June 30, 1996 was 7.92% and (iv) the approximately ten year
period since June 27, 1986, the commencement of investment operations, through
June 30, 1996 was 7.97%.

The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, for Class A Shares from inception through June 30, 1996
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 115.43%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum front-end sales charge, with respect to the Class A Shares from the
commencement of operations through June 30, 1996 (as calculated in the manner
described in the Prospectus under the heading "Fund Performance") was 8.49%.

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 7.82%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 8.72%.

The Fund's average total return, including payment of the CDSC, for Class B
Shares for (i) the one year period ended June 30, 1996 was 6.55% and (ii) the
approximately three year period since May 17, 1993, the commencement of
distribution for Class B Shares of the Fund, through June 30, 1996 was 6.89%.

B-26
<PAGE> 27

The Fund's cumulative non-standardized total return, including payment of the
CDSC, for Class B Shares from inception through June 30, 1996 (as calculated in
the manner described in the Prospectus under the heading "Fund Performance") was
23.11%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum front-end sales charge, with respect to the Class B Shares from June
30, 1993 (the commencement of the sale of Class B Shares) through June 30, 1996
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 25.44%.

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 7.82%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 8.72%.

The Fund's average total returns, including payment of the CDSC, for Class C
Shares for (i) the one year period ended June 30, 1996 was 9.55%, and (ii) the
approximately three year period since August 13, 1993, the commencement of
distribution, through June 30, 1996 was 6.72%.

The Fund's cumulative non-standardized total return, including payment of the
CDSC, for Class C Shares from inception through June 30, 1996 (as calculated in
the manner described in the Prospectus under the heading "Fund Performance") was
20.59%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum front-end sales charge, with respect to the Class C Shares from June
30, 1994 (the commencement of the sale of Class C Shares) through June 30, 1996
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 20.59%.

B-27
<PAGE> 28

INDEPENDENT ACCOUNTANTS' REPORT

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

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital High Yield Fund (the "Fund"), including the portfolio of
investments, as of June 30, 1996, 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, 1996, 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 American Capital High Yield Fund as of June 30, 1996, 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 2, 1996

B-28
<PAGE> 29

PORTFOLIO OF INVESTMENTS

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DOMESTIC CORPORATE BONDS 70.6%
AEROSPACE & DEFENSE 1.0%
1,650 Sequa Corp................................ 9.625% 10/15/99 $ 1,662,375
2,150 Sequa Corp................................ 9.375 12/15/03 2,074,750
-------------
3,737,125
-------------
AUTOMOBILE 0.7%
2,600 Exide Corp................................ 10.750 12/15/02 2,658,500
-------------
BEVERAGE, FOOD & TOBACCO 0.5%
2,100 Pilgrims Pride Corp....................... 10.875 08/01/03 2,037,000
-------------
BUILDINGS & REAL ESTATE 3.1%
2,900 American Standard Inc..................... 10.875 05/15/99 3,074,000
1,000 American Standard Inc..................... 11.375 05/15/04 1,082,500
3,300 Schuller International Group Inc.......... 10.875 12/15/04 3,564,000
3,500 Southdown Inc............................. 14.000 10/15/01 3,745,000
-------------
11,465,500
-------------
CHEMICALS, PLASTICS & RUBBER 1.1%
4,258 G I Holdings Inc.......................... 10.000 02/15/06 4,151,550
-------------
CONTAINERS, PACKAGING & GLASS 5.1%
460 Anchor Glass Container Corp............... 10.250 06/30/02 322,000
950 Owens Illinois Inc........................ 10.250 04/01/99 966,625
2,950 Owens Illinois Inc........................ 11.000 12/01/03 3,171,250
2,100 S.D. Warren Co............................ 12.000 12/15/04 2,226,000
6,598 Silgan Holdings Inc....................... 13.250 12/15/02 6,630,990
2,000 Stone Consolidated Corp................... 10.250 12/15/00 2,060,000
3,500 U.S. Can Co............................... 13.500 01/15/02 3,727,500
-------------
19,104,365
-------------
DIVERSIFIED/CONGLOMERATE
MANUFACTURING 2.8%
3,400 Communications & Power Industries Inc..... 12.000 08/01/05 3,595,500
3,500 Jordan Industries Inc..................... 10.375 08/01/03 3,333,750
773 Talley Industries Inc. (b)................ 0/12.250 10/15/05 616,467
2,900 Talley Manufacturing & Technology Inc..... 10.750 10/15/03 3,016,000
-------------
10,561,717
-------------
ECOLOGICAL 0.7%
1,800 Envirosource Inc.......................... 9.750 06/15/03 1,629,000
1,100 Norcal Waste Systems Inc. (b)............. 12.50/13.50 11/15/05 1,163,250
-------------
2,792,250
-------------
</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 30

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ELECTRONICS 2.5%
4,250 Bell & Howell Co. (b)..................... 0/11.500% 03/01/05 $ 2,911,250
3,400 Computervision............................ 11.375 08/15/99 3,519,000
2,950 Exide Electronics Group Inc.
(Including 2,950 common stock warrants)... 11.500 03/15/06 3,009,000
-------------
9,439,250
-------------
FARMING & AGRICULTURE 0.9%
1,100 Agco Corp................................. 8.500 03/15/06 1,078,000
2,350 Trans Resources Inc....................... 11.875 07/01/02 2,256,000
-------------
3,334,000
-------------
FINANCE 1.9%
3,650 American Annuity Group Inc................ 11.125 02/01/03 3,923,750
3,300 Americo Life Inc. (d)..................... 9.250 06/01/05 3,118,500
-------------
7,042,250
-------------
GROCERY 3.4%
3,650 Pantry Inc................................ 12.000 11/15/00 3,212,000
3,700 Pathmark Stores Inc....................... 9.625 05/01/03 3,478,000
3,550 Purity Supreme Inc........................ 11.750 08/01/99 3,851,750
2,200 Vons Cos. Inc............................. 9.625 04/01/02 2,310,000
-------------
12,851,750
-------------
HEALTHCARE 3.8%
3,100 Merit Behavioral Care Corp................ 11.500 11/15/05 3,255,000
500 Ornda Healthcorp.......................... 12.250 05/15/02 541,250
3,250 Ornda Healthcorp.......................... 11.375 08/15/04 3,583,125
1,850 Paracelsus Healthcare Corp................ 9.875 10/15/03 1,822,250
4,600 Tenet Healthcare Corp. (d)................ 10.125 03/01/05 4,876,000
-------------
14,077,625
-------------
</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 31

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HOTEL, MOTEL, INNS & GAMING 6.1%
1,100 Argosy Gaming Co.......................... 13.250% 06/01/04 $ 1,116,500
1,000 Bally's Grand Inc......................... 10.375 12/15/03 1,097,500
1,800 Bally's Park Place Funding Inc............ 9.250 03/15/04 1,917,000
3,200 California Hotel Finance Corp............. 11.000 12/01/02 3,376,000
3,350 Coast Hotels & Casino..................... 13.000 12/15/02 3,643,125
3,300 Grand Casino Inc.......................... 10.125 12/01/03 3,390,750
2,700 Harvey's Casino Resorts................... 10.625 06/01/06 2,733,750
2,300 Hollywood Casino Inc...................... 12.750 11/01/03 2,288,500
3,325 Trump Atlantic City Associates............ 11.250 05/01/06 3,341,625
-------------
22,904,750
-------------
LEISURE/ENTERTAINMENT 1.3%
1,750 Cobblestone Holdings Inc.................. * 06/01/04 647,500
3,850 Viacom International Inc.................. 10.250 09/15/01 4,206,125
-------------
4,853,625
-------------
MINING, STEEL, IRON & NON-PRECIOUS
METAL 3.1%
3,200 Armco Inc................................. 11.375 10/15/99 3,304,000
3,000 Carbide/Graphite Group Inc................ 11.500 09/01/03 3,247,500
3,000 Easco Corp................................ 10.000 03/15/01 3,045,000
500 Magma Copper Co........................... 12.000 12/15/01 542,500
1,700 Republic Engineered Steels Inc............ 9.875 12/15/01 1,589,500
-------------
11,728,500
-------------
OIL & GAS 7.6%
1,800 Clark R & M Holdings Inc.................. * 02/15/00 1,233,000
3,600 Coda Energy Inc........................... 10.500 04/01/06 3,582,000
3,200 Giant Industries Inc...................... 9.750 11/15/03 3,136,000
4,500 Global Marine Inc. (d).................... 12.750 12/15/99 4,882,500
3,000 KCS Energy Inc............................ 11.000 01/15/03 3,172,500
4,500 Mesa Capital Corp......................... 12.750 06/30/98 4,511,250
3,650 Petroleum Heat & Power Inc................ 12.250 02/01/05 4,015,000
800 Triton Energy Corp........................ * 11/01/97 722,000
3,250 Triton Energy Corp. (b)................... 0/9.750 12/15/00 3,152,500
-------------
28,406,750
-------------
PERSONAL/FOOD 0.6%
2,600 Flagstar Corp............................. 10.750 09/15/01 2,288,000
-------------
</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 32

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PERSONAL & NON-DURABLE 1.6%
2,000 Playtex Family Products Corp.............. 9.000% 12/15/03 $ 1,880,000
3,350 Revlon Consumer Products Corp............. 9.375 04/01/01 3,291,375
900 Revlon Consumer Products Corp............. 10.875 07/15/10 922,500
------------
6,093,875
------------
PRINTING, PUBLISHING & BROADCASTING 8.3%
1,200 Cablevision Systems Corp.................. 10.750 04/01/04 1,236,000
1,350 Cablevision Systems Corp.................. 10.500 05/15/16 1,312,875
750 Century Communications Corp............... 9.750 02/15/02 746,250
900 Century Communications Corp............... * 03/15/03 443,250
1,800 Century Communications Corp............... 11.875 10/15/03 1,921,500
3,100 Comcast Corp.............................. 9.375 05/15/05 3,007,000
3,000 Continental Cablevision Inc............... 8.300 05/15/06 3,105,000
3,675 Insight Communications Co. L.P............ 11.250 03/01/00 3,693,375
2,700 International Cabletel Inc. (b)........... 0/12.750 04/15/05 1,734,750
900 International Cabletel Inc. (b)........... 0/11.500 02/01/06 504,000
1,900 K-III Communications Corp................. 10.625 05/01/02 1,976,000
1,600 K-III Communications Corp................. 10.250 06/01/04 1,640,000
4,200 SCI Television Inc........................ 11.000 06/30/05 4,378,500
1,600 Storer Communications Inc................. 10.000 05/15/03 1,604,000
1,350 Young Broadcasting Inc.................... 10.125 02/15/05 1,302,750
2,700 Young Broadcasting Inc.................... 9.000 01/15/06 2,409,750
------------
31,015,000
------------
RETAIL 3.8%
2,950 Hosiery Corp. America Inc. (Including
2,950 common stock warrants).............. 13.750 08/01/02 3,230,250
2,800 Loehmann's Inc............................ 11.875 05/15/03 2,912,000
4,115 Thrifty Payless........................... 12.250 04/15/04 4,547,075
3,400 Waban Inc................................. 11.000 05/15/04 3,536,000
------------
14,225,325
------------
TELECOMMUNICATIONS 6.3%
3,500 Centennial Cellular Corp.................. 10.125 05/15/05 3,377,500
1,800 Echostar Communications Corp.............. * 06/01/04 1,318,500
550 Intercel Inc.............................. * 05/01/06 299,750
1,350 Intermedia Communications of Florida, Inc.
(Including 3,150 common stock warrants)... 13.500 06/01/05 1,638,000
2,700 Intermedia Communications of Florida, Inc.
(b)....................................... 0/12.500 05/15/06 1,512,000
4,000 IXC Communications Inc.................... 12.500 10/01/05 4,200,000
</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 33

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
600 Metrocall Inc............................. 10.375% 10/01/07 $ 558,000
4,500 Mobilemedia Communications Inc. (b)....... 0/10.500 12/01/03 3,195,000
900 Panamsat L.P.............................. 9.750 08/01/00 931,500
1,800 Panamsat L.P. (b)......................... 0/11.375 08/01/03 1,566,000
3,200 Pricellular Wireless Corp. (b)............ 0/14.000 11/15/01 2,912,000
800 Pricellular Wireless Corp. (b)............ 0/12.250 10/01/03 632,000
3,000 Teleport Communications Group (b)(c)...... 0/11.125 07/01/07 1,747,500
------------
23,887,750
------------
TEXTILES 0.9%
3,300 Dan River Inc............................. 10.125 12/15/03 3,176,250
------------
TRANSPORTATION 0.7%
2,500 U.S. Air Inc.............................. 8.625 09/01/98 2,450,000
------------
UTILITIES 2.8%
2,000 AES Corp. (c)............................. 10.250 07/15/06 2,000,000
3,150 California Energy Inc..................... 9.875 06/30/03 3,205,125
2,100 El Paso Electric Co....................... 8.900 02/01/06 2,073,750
3,200 Midland Funding Corp. II.................. 11.750 07/23/05 3,360,000
------------
10,638,875
------------
TOTAL DOMESTIC CORPORATE BONDS 264,921,582
------------
FOREIGN BONDS AND DEBT SECURITIES 15.6%
ARGENTINA 2.4%
3,550 Federal Republic of Argentina
(Var. Rate Cpn.) (US$).................... 5.250 03/31/23 1,952,500
2,000 Sodigas Pampeana (US$).................... 10.500 07/06/99 2,030,000
2,000 Telefonica De Argentina (US$)............. 8.375 10/01/00 1,927,500
3,000 Transportadora De Gas Del Sur SA (US$).... 10.250 04/25/01 2,985,000
------------
8,895,000
------------
AUSTRALIA 0.6%
1,300 Commonwealth of Australia (AU$)........... 9.000 09/15/04 1,032,338
1,900 New South Wales Trust (AU$)............... 6.500 05/01/06 1,240,786
------------
2,273,124
------------
BRAZIL 0.8%
2,600 Federal Republic of Brazil (Var. Rate
Cpn.) (US$)............................... 5.000 04/15/24 1,443,000
1,862 Federal Republic of Brazil (Var. Rate
Cpn.) (US$)............................... 6.375 01/01/01 1,743,297
------------
3,186,297
------------
CANADA 3.3%
2,100 Doman Industries Ltd. (US$)............... 8.750 03/15/04 1,900,500
</TABLE>

See Notes to Financial Statements

B-33
<PAGE> 34

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CANADA (CONTINUED)
3,400 Fonorola Inc. (US$)....................... 12.500% 08/15/02 $ 3,672,000
3,000 Fundy Cable Ltd. (US$).................... 11.000 11/15/05 3,030,000
3,600 Rogers Communications Inc. (US$).......... 10.875 04/15/04 3,654,000
------------
12,256,500
------------
COLOMBIA 0.9%
3,500 Republic of Colombia (US$)................ 7.250 02/23/04 3,222,310
------------
ECUADOR 0.3%
2,000 Republic of Ecuador Par Bonds (Var. Rate
Cpn.) (US$)............................... 3.250 02/28/25 725,000
1,000 Republic of Ecuador (Var. Rate Cpn.)
(US$)..................................... 6.063 02/28/25 571,250
------------
1,296,250
------------
INDONESIA 1.2%
1,930 Indah Kiat International Finance Co. B.V.
(US$)..................................... 11.875 06/15/02 2,045,800
2,200 Tjiwi Kimia International Finance (US$)... 13.250 08/01/01 2,464,000
------------
4,509,800
------------
ITALY 0.6%
1,700,000 Federal Republic of Italy (Lira).......... 9.000 10/01/98 1,127,412
1,650,000 Federal Republic of Italy (Lira).......... 10.500 04/01/00 1,141,450
------------
2,268,862
------------
LUXEMBOURG 0.5%
3,200 Millicom International Cellular SA (US$)
(b)....................................... 0/13.500 06/01/06 1,696,000
------------
MEXICO 0.4%
2,000 Petroleos Mexicanos (US$)................. 8.625 12/01/23 1,490,000
------------
MOROCCO 0.6%
3,000 Morocco Trust A Loan (US$) (e)............ 6.4375 01/01/09 2,167,500
------------
NETHERLANDS 0.9%
3,700 Fresh Del Monte Produce N V (US$)......... 10.000 05/01/03 3,422,500
------------
POLAND 1.4%
5,700 Government of Poland (Var. Rate Cpn.)
(US$)..................................... 7.125 10/27/24 5,343,750
------------
SPAIN 0.8%
129,500 Government of Spain (Peseta).............. 10.250 11/30/98 1,069,750
114,000 Government of Spain (Peseta).............. 12.250 03/25/00 1,011,978
125,000 Government of Spain (Peseta).............. 10.150 01/31/06 1,056,599
------------
3,138,327
------------
SWEDEN 0.4%
7,300 Kingdom of Sweden (Krona)................. 13.000 06/15/01 1,351,362
------------
</TABLE>

See Notes to Financial Statements

B-34

<PAGE> 35

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par
Amount
in Local
Currency U.S.($)
(000) Description Coupon Maturity Market Value
------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UNITED KINGDOM 0.5%
1,250 Telewest PLC (US$) (b).................... 0/11.000% 10/01/07 $ 740,625
650 United Kingdom Treasury (Pound)........... 8.500 12/07/05 1,053,012
------------
1,793,637
------------
TOTAL FOREIGN BONDS AND DEBT SECURITIES......................................... 58,311,219
------------
U.S GOVERNMENT OBLIGATIONS 0.8%
3,000 U.S. T-Notes.............................. 9.000 05/15/98 3,152,040
------------
EQUITIES 1.4%
American Telecasting Inc. (8,370 common stock warrants) (g)................... 37,665
Cablevision Systems Corp. (14,608 preferred shares) (f)....................... 1,416,976
Capital Gaming International Inc. (5,000 common stock warrants) (g)........... 0
Casino America Inc. (5,873 common stock warrants) (g)......................... 5,874
El Paso Electric Co. (9,000 preferred shares)................................. 949,500
Panamsat L.P. (1,923 preferred shares) (f).................................... 2,230,680
Supermarkets General Holdings Corp. (28,600 preferred shares)................. 736,450
------------
TOTAL EQUITIES.................................................................. 5,377,145
------------
TOTAL LONG-TERM INVESTMENTS 88.4%
(Cost $326,056,234) (a)......................................................... 331,761,986
------------
SHORT-TERM INVESTMENTS 11.1%
Repurchase Agreement (J.P. Morgan, U.S. T-Note, $29,599,000 par, 9.875%
coupon, due 11/15/15, dated 06/28/96, to be sold on 07/01/96 at
$37,740,976).................................................................. 37,724,000
J.P. Morgan Polish Zloty Linked CD, ($2,954,990 par, yielding 20.913%,
maturing 10/23/96)............................................................ 2,678,950
New Zealand T-Bills, (2,000,000 New Zealand Dollar par, yielding 9.755%,
maturing 01/08/97)............................................................ 1,308,215
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $41,812,853) (a)............................. 41,711,165
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%..................................... 1,706,744
------------
NET ASSETS 100%................................................................ $375,179,895
------------
</TABLE>

*Zero coupon bond

(a) At June 30, 1996, cost for federal income tax purposes including short-term
investments is $367,869,087; the aggregate gross unrealized appreciation is
$10,127,208 and the aggregate gross unrealized depreciation is $4,572,871,
resulting in net unrealized appreciation including foreign currency
translation of other assets and liabilities and forward currency contracts
of $5,554,337.

(b) Security is a "Step-up" bond where the coupon increases or steps up at a
predetermined date.

(d) Assets segregated as collateral for when issued or delayed delivery purchase
commitments and open forward transactions.

(e) Security is a bank loan participation.

(f) Payment-in-kind security.

(g) Non-income producing security.

See Notes to Financial Statements

B-35
<PAGE> 36

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $326,056,234) (Note 1).............. $ 331,761,986
Short-Term Investments (Cost $41,812,853) (Note 1)..................... 41,711,165
Cash................................................................... 313
Receivables:
Interest............................................................. 7,449,171
Securities Sold...................................................... 2,946,411
Fund Shares Sold..................................................... 681,864
Other.................................................................. 45,015
-------------
Total Assets..................................................... 384,595,925
-------------
LIABILITIES:
Payables:
Securities Purchased................................................. 6,444,746
Income Distributions................................................. 1,784,659
Distributor and Affiliates (Notes 2 and 6)........................... 358,828
Fund Shares Repurchased.............................................. 334,121
Investment Advisory Fee (Note 2)..................................... 229,419
Forward Currency Contracts (Note 5).................................. 45,158
Accrued Expenses....................................................... 155,719
Deferred Compensation and Retirement Plans (Note 2).................... 63,380
-------------
Total Liabilities................................................ 9,416,030
-------------
NET ASSETS............................................................. $ 375,179,895
----------
NET ASSETS CONSIST OF:
Capital (Note 3)....................................................... $ 477,157,576
Net Unrealized Appreciation on Securities.............................. 5,542,049
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................... (1,835,750)
Accumulated Net Realized Loss on Securities............................ (105,683,980)
-------------
NET ASSETS............................................................. $ 375,179,895
----------
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $271,105,413 and 28,557,300 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 9.49
Maximum sales charge (4.75%* of offering price).................... .47
-------------
Maximum offering price to public................................... $ 9.96
----------
Class B Shares:
Net asset value and offering price per share (Based on net assets
of $97,098,815 and 10,224,423 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 9.50
----------
Class C Shares:
Net asset value and offering price per share (Based on net assets
of $6,975,667 and 734,629 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 9.50
----------
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>

See Notes to Financial Statements

B-36

<PAGE> 37

STATEMENT OF OPERATIONS

For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $32,955).................. $35,516,846
Dividends............................................................... 458,386
Other................................................................... 510,503
-----------
Total Income........................................................ 36,485,735
-----------
EXPENSES:
Investment Advisory Fee (Note 2)........................................ 2,614,970
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, and C
of $647,486, $779,712, and $51,552, respectively) (Note 6)............ 1,478,750
Shareholder Services (Note 2)........................................... 566,209
Trustees Fees and Expenses (Note 2)..................................... 37,859
Legal (Note 2).......................................................... 24,650
Other................................................................... 485,150
-----------
Total Expenses...................................................... 5,207,588
Less Expenses Reimbursed............................................ 18,112
-----------
Net Expenses........................................................ 5,189,476
-----------
NET INVESTMENT INCOME................................................... $31,296,259
---------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments......................................................... $ 5,747,673
Forwards............................................................ 675,027
Foreign Currency Transactions....................................... (428,329)
-----------
Net Realized Gain on Securities......................................... 5,994,371
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................... 6,439,004
-----------
End of the Period:
Investments......................................................... 5,604,064
Forward Currency Contracts.......................................... (60,696)
Foreign Currency Translation........................................ (1,319)
-----------
5,542,049
-----------
Net Unrealized Depreciation on Securities During the Period............. (896,955)
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.......................... $ 5,097,416
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS.............................. $36,393,675
---------
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 38

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended June 30, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................... $ 31,296,259 $ 26,497,560
Net Realized Gain/Loss on Securities..................... 5,994,371 (18,692,466)
Net Unrealized Appreciation/Depreciation on Securities
During the Period...................................... (896,955) 16,038,701
---------- ----------
Change in Net Assets from Operations..................... 36,393,675 23,843,795
---------- ----------
Distributions from Net Investment Income................. (31,296,259) (25,471,594)
Distributions in Excess of Net Investment Income (Note
1)..................................................... (186,982) -0-
---------- ----------
Distributions from and in Excess of Net Investment
Income*.............................................. (31,483,241) (25,471,594)
Return of Capital Distribution* (Note 1)................. (1,853,192) (5,584,355)
---------- ----------
Total Distributions.................................... (33,336,433) (31,055,949)
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES...... 3,057,242 (7,212,154)
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................................ 130,645,161 73,674,367
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................... 12,295,000 11,308,840
Cost of Shares Repurchased............................... (81,944,626) (62,721,749)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS....... 60,995,535 22,261,458
---------- ----------
TOTAL INCREASE IN NET ASSETS............................. 64,052,777 15,049,304
NET ASSETS:
Beginning of the Period.................................. 311,127,118 296,077,814
---------- ----------
End of the Period (Including undistributed net investment
income of $(1,835,750) and $(1,895,466),
respectively).......................................... $375,179,895 $311,127,118
---------- ----------
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1996 June 30, 1995
<S> <C> <C>
------------------------------------------------------------------
Distributions from and in Excess of
Net Investment Income:
Class A Shares....................... $(24,518,181) $(21,911,417)
Class B Shares....................... (6,539,545) (3,405,059)
Class C Shares....................... (425,515) (155,035)
Class D Shares....................... -- (83)
---------- ----------
$(31,483,241) $(25,471,594)
---------- ----------
Return of Capital Distribution:
Class A Shares....................... $ (1,394,959) $ (4,709,317)
Class B Shares....................... (427,086) (846,910)
Class C Shares....................... (31,147) (28,115)
Class D Shares....................... -- (13)
---------- ----------
$ (1,853,192) $ (5,584,355)
---------- ----------
</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 39

NOTES TO FINANCIAL STATEMENTS

June 30, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital High Yield Fund (the "Fund") is organized as a
series of Van Kampen American Capital Trust, a Delaware business trust (the
"Trust"), and is registered as a diversified open-end management investment
company under the Investment Company Act of 1940, as amended. The Fund's primary
investment objective is to provide a high level of current income through
investment in medium and lower grade domestic corporate debt securities. The
Fund also may invest up to 35% of its assets in foreign government and corporate
debt securities of comparable quality. The Fund commenced investment operations
on June 27, 1986. 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. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

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.

A repurchase agreement is a short-term investment in which the Fund acquires
ownership of a debt security and the seller agrees to repurchase the security at
a future time and specified price. Repurchase agreements are collateralized by
the underlying debt

B-39
<PAGE> 40

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

security. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian
bank. The seller is required to maintain the value of the underlying security at
not less than the repurchase proceeds due the Fund.

C. INVESTMENT INCOME--Interest income is recorded on an accrual basis and
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, 1996, the Fund had an accumulated capital loss carryforward
for tax purposes of $105,683,980. Of this amount, $4,105,907, $55,112,310,
$30,038,345, $45,384, $12,726,456 and $3,655,578 will expire on June 30, 1998,
1999, 2000, 2002, 2003 and 2004, 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 $246,698 were reclassified from
accumulated undistributed net investment income to accumulated net realized
gain/loss on securities. Additional permanent book and tax basis differences
related to the recognition of realized gains and losses totaling $45,380 was
reclassified from accumulated realized gain/loss on securities to Class A share
capital.

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.

B-40
<PAGE> 41

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

F. CURRENCY TRANSLATION--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.

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 year ended June 30, 1996, the Fund recognized expenses of approximately
$38,900 representing Van Kampen American Capital Distributors, Inc.'s or its
affiliates' (collectively "VKAC") cost of providing accounting, cash management
and legal services to the Fund.

In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent of
the Fund. For the year ended June 30, 1996, the Fund recognized expenses of
approximately $406,100, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit.

Additionally, for the year ended June 30, 1996, the Fund reimbursed VKAC
approximately $26,400 related to the direct cost of consolidating the VKAC
open-end fund complex. The reimbursement represents the reduction in expense
realized by the Fund during the period as a result of the consolidation.

B-41
<PAGE> 42

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.

The Fund has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC.

At June 30, 1996, VKAC owned 100 shares each of Classes B and C,
respectively.

3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of common shares, Classes A, B and C,
each with a par value of $.01 per share. There are an unlimited number of shares
of each class authorized. At June 30, 1996, capital aggregated $372,301,052,
$97,806,116 and $7,050,408 for Class A, B and C shares, respectively. For the
year ended June 30, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
- -------------------------------------------------------------------------
Sales:
Class A................................... 7,294,414 $ 69,532,238
Class B................................... 5,691,156 54,286,076
Class C................................... 717,313 6,826,847
---------- ------------
Total Sales................................. 13,702,883 $130,645,161
---------- ------------
Dividend Reinvestment:
Class A................................... 1,003,726 $ 9,564,922
Class B................................... 265,511 2,531,980
Class C................................... 20,771 198,098
---------- ------------
Total Dividend Reinvestment................. 1,290,008 $ 12,295,000
---------- ------------
Repurchases:
Class A................................... (6,692,159) $(63,898,755)
Class B................................... (1,675,635) (15,998,857)
Class C................................... (215,382) (2,047,014)
---------- ------------
Total Repurchases........................... (8,583,176) $(81,944,626)
---------- ------------
</TABLE>

B-42
<PAGE> 43

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1995, capital 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>

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-43
<PAGE> 44

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<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, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$118,900 and CDSC on redeemed shares of approximately $237,600. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $373,040,141 and $312,876,157,
respectively.

5. DERIVATIVE FINANCIAL INSTRUMENTS

A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.

The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity and duration. All of the Fund's portfolio holdings, including
derivative instruments, are marked to market each day with the change in value
reflected in the unrealized appreciation/depreciation on investments. Upon
disposition, a realized gain or loss is recognized accordingly.

During the year ended June 30, 1996, the Fund entered into forward currency
contracts, a type of derivative. 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.

B-44
<PAGE> 45

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1996, the Fund has outstanding forward currency contracts as
follows:

<TABLE>
<CAPTION>
ORIGINAL CURRENT UNREALIZED
FORWARD CURRENCY CONTRACTS VALUE VALUE DEPRECIATION
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
Sells to Open
German Deutsche Mark, expiring
07/29/96 to 08/05/96.............. $4,011,349 $4,023,637 $12,288
Italian Lira, expiring 08/02/96..... 1,000,000 1,000,000 -0-
Spanish Peseta, expiring 07/11/96 to
09/11/96.......................... 1,998,383 2,025,045 26,662
Swedish Krona, expiring 06/11/97.... 1,000,000 1,021,746 21,746
--------
$60,696
--------
</TABLE>

At June 30, 1996, the Fund had realized gains on closed but unsettled
forward currency contracts of $15,538 scheduled to settle August 2, 1996.

6. DISTRIBUTION AND SERVICE PLANS

The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 .25% 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, 1996, are payments to VKAC of approximately $583,000.

B-45
<PAGE> 46

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL SHORT-TERM GLOBAL INCOME FUND

Van Kampen American Capital Short-Term Global Income Fund (the "Fund") is a
non-diversified separate series of an open-end management investment company.
The Fund's investment objective is to seek a high level of current income,
consistent with prudent investment risk.

The Fund seeks to achieve its investment objective by investing in a global
portfolio of investment grade debt securities denominated in various currencies
and multi-national currency units and maintaining a dollar-weighted average
portfolio maturity of not more than three years. The portfolio will consist of
debt securities issued by foreign governments or supranational organizations or
their agencies, instrumentalities or subdivisions, investment grade debt
securities issued by corporations, certificates of deposit or bankers
acceptances issued or guaranteed by large U.S. or foreign banks, investment
grade commercial paper and debt securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities. Investments in securities
denominated in currencies other than the U.S. dollar involve foreign currency
exchange risks. The Fund may engage in hedging and risk management transactions
to seek to reduce or eliminate such risks.

The Fund is designed for the investor who seeks a higher yield than a money
market fund and less fluctuation in net asset value than a longer-term global
bond fund. There is no assurance that the Fund will achieve its investment
objective.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated the date hereof (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
Description of Securities Ratings...................................................... B-11
Trustees and Officers.................................................................. B-16
Legal Counsel.......................................................................... B-24
Investment Advisory and Other Services................................................. B-24
Custodian and Independent Accountants.................................................. B-26
Portfolio Transactions and Brokerage Allocation........................................ B-26
Tax Status of the Fund................................................................. B-27
The Distributor........................................................................ B-27
Performance Information................................................................ B-28
Independent Accountants' Report........................................................ B-31
Financial Statements................................................................... B-32
Notes to Financial Statements.......................................................... B-36
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
<PAGE> 47

THE FUND AND THE TRUST

The Fund is a separate non-diversified series of the Van Kampen American
Capital Trust (the "Trust"), an open-end management investment company. The Fund
was established pursuant to a Designation of Series dated May 10, 1995. At
present, the Fund, Van Kampen American Capital High Yield Fund and Van Kampen
American Capital Strategic Income Fund, each a separate series of the Trust, are
the only series of the Trust, although other series may be organized and offered
in the future. Each series of the Trust will be treated as a separate
corporation for federal income tax purposes.

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust dated 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 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.

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.

The Trust originally was organized as the Van Kampen Merritt Trust, a
Massachusetts business trust created by a Declaration of Trust dated March 14,
1986 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on June 28, 1995.

The Fund originally was organized, under the name Van Kampen Merritt
Short-Term Global Income Fund, as a sub-trust of the Massachusetts Trust. In
connection with the Massachusetts Trust's reorganization into a Delaware
business trust, the Fund was reorganized into a series of the Trust and renamed
Van Kampen American Capital Short-Term Global Income Fund.

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

INVESTMENT POLICIES AND RESTRICTIONS

The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its investment objective.

B-2
<PAGE> 48

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

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets would then be invested
in securities of a single issuer or if as a result the Fund would hold
more than 10% of the outstanding voting securities of any single issuer;
provided that, with respect to 50% of the Fund's assets, the Fund may
invest up to 25% of its assets in the securities of any one issuer.

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

3. Make loans, except to the extent the obligations the Fund may invest in
are considered to be loans, through loans of portfolio securities or the
acquisition of securities subject to repurchase agreements.

4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with transactions described under the
caption "Investment Practices" in the Prospectus nor short term credits in
connection with the clearance of transactions are considered the purchase
of a security on margin.

5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures contracts or
related options, except to the extent that the hedging transactions
described under the heading "Investment Practices" in the Prospectus would
be deemed to be any of the foregoing transactions.

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

7. Make investments for the purpose of exercising control or participation in
management.

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

9. Invest in oil, gas or mineral leases or in equity interests in oil, gas or
other mineral exploration or development programs.

10. Purchase or sell real estate, commodities or commodities contracts except
to the extent that hedging instruments the Fund may invest in are
considered to be commodities or commodities contracts.

The Fund may not change any of these investment restrictions or any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (a) 67% or more of the voting securities present at such meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present or represented by proxy; or (b) more than 50% of the outstanding voting
securities of the Fund. As long as the percentage restrictions described above
are satisfied at the time of the investment or borrowing, the Fund will be
considered to have abided by those restrictions even if, at a later time, a
change in values or net assets causes an increase or decrease in percentage
beyond that allowed.

B-3
<PAGE> 49

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.

In connection with certain state securities law requirements, the Fund has a
policy of limiting its investment in warrants, valued at the lower of cost or
market, to not more than 5.0% of the value of the Fund's net assets and, within
such amount, to not more than 2.0% of the value of its net assets in warrants
not listed on the New York Stock Exchange or on the American Stock Exchange;
provided however, that warrants acquired by the Fund in units or attached to
securities may be deemed to be without value.

ADDITIONAL INVESTMENT CONSIDERATIONS

REVERSE REPURCHASE AGREEMENTS

The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon date. The value of underlying securities
will be at least equal at all times to the total amount of the resale
obligation, including the interest factor. The Fund receives payment for such
securities only upon physical delivery or evidence of book entry transfer by its
custodian. Regulations of the SEC require either that securities sold by the
Fund under a reverse repurchase agreement be segregated pending repurchase or
that the proceeds be segregated on the Fund's books and records pending
repurchase. Reverse repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them. Reverse repurchase agreements will be considered
borrowings by the Fund and as such would be subject to the restrictions on
borrowing described under "Investment Policies and Restrictions" in the
Statement of Additional Information. The Fund will not hold more than 5% of the
value of its total assets in reverse repurchase agreements.

OTHER INVESTMENT STRATEGIES

B-4
<PAGE> 50

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.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than current market values, limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.

B-5
<PAGE> 51

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.

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

B-6
<PAGE> 52

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" or must
meet the asset segregation requirements described below as long as the call is
outstanding (i.e., the Fund must own the securities or futures contract subject
to the call). Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security and may require the Fund to hold a
security which it might otherwise have sold. The Fund may 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.

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.

B-7
<PAGE> 53

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.

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.

B-8
<PAGE> 54

SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.

B-9
<PAGE> 55

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 investment 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 investment 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 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, investment 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 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 liquid
securities 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.

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 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.

B-10
<PAGE> 56

The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended,
for qualification as a regulated investment company. See "Tax Status" in the
Prospectus.

DESCRIPTION OF SECURITIES RATINGS

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

1. DEBT

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

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

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

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

1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation 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.

INVESTMENT GRADE

<TABLE>
<S> <C>
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
</TABLE>

B-11
<PAGE> 57

SPECULATIVE GRADE

<TABLE>
<S> <C>
BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as
having significantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB Debt rated "BB" is less vulnerable 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" is more vulnerable 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" is currently vulnerable 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 Debt rated "CC" is currently highly vulnerable to nonpayment. The rating "CC" is
also used for debt subordinated to senior debt that is assigned an actual or
implied "CCC" rating.
C The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued. The rating "C" typically is
applied to debt subordinated to senior debt which is assigned an actual or
implied "CCC-" debt rating.
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.
NR Not rated
R This symbol is attached to the ratings of instruments with significant noncredit
risks. It highlights risks to principal or volatility of expected returns which
are not addressed in the credit rating. Examples include: obligations linked or
indexed to equities, currencies, or commodities; obligations exposed to severe
payment risk -- such as interest-only or principal-only mortgage securities; and
obligations with unusually risky interest terms, such as inverse floaters.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA," "AA," "A," and "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
</TABLE>

B-12
<PAGE> 58

2. COMMERCIAL PAPER

A 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 safe characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having significant speculative characteristics.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
</TABLE>

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

3. VARIABLE RATE DEMAND BONDS

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

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

4. NOTES

A S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three 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).

B-13
<PAGE> 59

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.

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

1. LONG-TERM BONDS

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

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

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA: Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA: Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

CAA: Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA: Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from AA to B. 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.

B-14
<PAGE> 60

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

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

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

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

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

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

2. SHORT-TERM DEBT

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted.

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

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.

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

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

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

3. COMMERCIAL PAPER

Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:

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

- Leading market positions in well-established industries.

- High rates of return on funds employed.

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

B-15
<PAGE> 61

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

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

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

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

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

TRUSTEES AND OFFICERS

TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.
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.
Date of Birth: 11/23/19
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 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.
</TABLE>

B-16
<PAGE> 62

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser, Van Kampen American Capital
Oakbrook Terrace, IL 60181 Advisors, Inc. and Van Kampen American Capital
Date of Birth: 05/20/42 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc. and Van Kampen American Capital.
President and Director of Van Kampen Merritt Equity
Advisors Corp. Director of Van Kampen Merritt Equity
Holdings Corp. Director of McCarthy, Crisanti & Maffei,
Inc. Prior to September 1996, Chief Executive Officer
McCarthy, Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company, Limited. Prior to
July 1996, President, Chief Operating Officer and Trustee
of VSM Inc. and VCJ Inc. President, Chief Executive
Officer and Trustee of each of the Van Kampen American
Capital Funds. President, Chairman of the Board and
Trustee of other investment companies advised by the VK
Adviser. Executive Vice President of other investment
companies advised by the AC Adviser.

Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the Van Kampen
Chicago, IL 60606 American Capital Funds, The Explorer Institutional Trust
Date of Birth: 08/22/39 and the closed-end investment companies advised by the VK
Adviser. Trustee of each of the Van Kampen American
Capital Funds, The Explorer Institutional Trust and the
closed-end investment companies advised by the VK
Adviser.
</TABLE>

B-17
<PAGE> 63

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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
Date of Birth: 01/31/22 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-18
<PAGE> 64

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President and Executive Vice President, General Counsel
Date of Birth: 07/29/53 Secretary and Secretary of Van Kampen American
Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen Merritt Equity Advisors Corp., and
Van Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc. and ACCESS. Executive Vice
President, General Counsel, Assistant
Secretary and Director of Van Kampen
American Capital Trust Company. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to September 1996,
General Counsel of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Executive
Vice President and General Counsel of VSM
Inc. and VCJ Inc. Vice President and
Secretary of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Robert C. Peck, Jr....... Vice President Executive Vice President of the VK Adviser
Date of Birth: 10/01/46 and Van Kampen American Capital Management,
Inc. Executive Vice President and Director
of the AC Adviser and Van Kampen American
Capital Advisors, Inc. Vice President of
each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Alan T. Sachtleben....... Vice President Executive Vice President of the VK Adviser
Date of Birth: 04/20/42 and Van Kampen American Capital Management,
Inc. Executive Vice President and a
Director of the AC Adviser and Van Kampen
American Capital Advisors, Inc. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Paul R. Wolkenberg....... Vice President Executive Vice President of VK/AC Holding,
Date of Birth: 11/10/44 Inc., Van Kampen American Capital, the
Distributor and the AC Adviser. President,
Chief Executive Officer and a Director of
Van Kampen American Capital Trust Company
and ACCESS. Director of American Capital
Contractual Services, Inc. Vice President
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Edward C. Wood III....... Vice President and Senior Vice President of the VK Adviser,
Date of Birth: 01/11/56 Chief Financial Officer the AC Adviser and Van Kampen American
Capital Management, Inc. Vice President and
Chief Financial Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-19
<PAGE> 65
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: 08/20/55 the AC Adviser. Treasurer of each of the
Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: 11/19/59 Adviser. Controller of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: 03/01/65 Attorney of Van Kampen American Capital.
Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: 11/15/63 Attorney of Van Kampen American Capital.
Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of Van
Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-20
<PAGE> 66

The compensation of each Non-Affiliated Trustee includes a retainer from the
Fund in an amount equal to $2,500 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per regular quarterly meeting attended by the Non-Affiliated Trustee, due
on the date of such meeting, plus reasonable expenses incurred by the
Non-Affiliated Trustee in connection with his or her services as a trustee. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.

B-21
<PAGE> 67

COMPENSATION TABLE

- ---------------
(1) Mr. McDonnell, a trustee of the Trust, is an affiliated person of the VK
Adviser and AC Adviser and is not eligible for compensation or retirement
benefits from the Registrant. Messrs. Branagan, Caruso, Hilsman, Powell,
Rees, Sheehan, Sisto and Woodside were elected by shareholders to the Board
of Trustees on July 21, 1995. Ms. Heagy was appointed to the Board of
Trustees on September 7, 1995. Mr. Don G. Powell resigned from the Board of
Trustees on August 15, 1996, and did not receive any compensation or
benefits from the Fund while a trustee because he was an affiliated person
of the VK Adviser and AC Adviser. Messrs. Gaughan and Rees retired from the
Board of Trustees on January 26, 1996 and January 29, 1996, respectively.
Messrs. Caruso and Sheehan were removed from the Board of Trustees effective
September 7, 1995 and January 29, 1996, respectively.

B-22
<PAGE> 68

B-23
<PAGE> 69

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ------------------------------------------------------- ---------------- -------- ---------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company.............. 664,187 B 7.13%
2800 Post Oak Blvd. 2,228 C 5.82%
Houston, TX 77056
Xerox Financial Services............................... 1,293,108 A 21.18%
Life Insurance Company
1 Tower Ln. #3000
Villa Park, IL 60181-4644
Raymond James & Assoc. Inc. CSDN....................... 2,408 C 6.29%
Hugh D. McPherson IRA
1217 Denton Rd.
Winter Park, FL 32792-2774
Principal Financial.................................... 4,015 C 10.50%
IRA Cust. FBO
Mary Alice Murphy
P.O. Box 215132
Dallas, TX 75221-5132
Principal Financial Cust. FBO.......................... 11,489 C 30.01%
Mary A. Murphy
P.O. Box 508
Dallas, TX 75221-0508
</TABLE>

Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.

LEGAL COUNSEL

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

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT.

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 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon exercise of options, approximately an additional 12%
of the common stock of VK/AC

B-24
<PAGE> 70

Holding, Inc. Presently, and after giving effect to the exercise of stock
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.

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

The Adviser's activities are subject to the review and supervision of the
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 investment advisory agreement will remain in effect from year to year if
specifically approved by the trustees of the Trust, of which the Fund is a
separate 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.

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, 1996, 1995 and 1994, the Fund recognized advisory
expenses of $882,054, $1,616,498 and $3,008,248, 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. 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, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $0, $126,400 and $278,000, respectively, representing the
Distributor's cost of providing certain support services.

ACCOUNTING SERVICES 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, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $9,900, $9,900 and $21,000, respectively, representing the
Adviser's cost of providing accounting services.

B-25
<PAGE> 71

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 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, 1996, 1995 and 1994, the Fund recognized expenses
of approximately $14,300, $15,800 and $17,000, respectively, representing Van
Kampen American Capital's cost of providing legal services.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

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

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

B-26
<PAGE> 72

possible that the ability to participate in volume transactions and to negotiate
lower brokerage commissions will be beneficial to the Fund.

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

State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.

TAX STATUS OF THE FUND

The 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, among other things, 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 $57 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 terms (outside of the rating agencies) in the
country, with more than 80 analysts devoted to various specializations.

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 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, 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."

B-27
<PAGE> 73

(an "Implementation Date") are not eligible to receive compensation pursuant to
such Distribution and Service Agreement 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.

For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $540,613, $3,563,969 and $1,364 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $471,049 and $872,003 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $48,070 and $90,367 for advertising
expenses, and $21,958 and $26,247 for compensation of the Distributor's sales
personnel for the Class A Shares and Class B Shares, respectively.

For the year ended June 30, 1995, the Fund recognized expenses under the Plans
of $263,818, $1,899,931 and $1,918 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $256,375, $469,537 and $672 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 $39,387, $63,700 and $0 for
advertising expenses, and $3,453, $5,441 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
Shares, respectively.

For the year ended June 30, 1996, the Fund recognized expenses under the Plans
of $131,097, $1,019,724 and $1,665 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $123,267, $216,622 and $1,221 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares, Class B Shares and Class C Shares, respectively.

PERFORMANCE INFORMATION

From time to time marketing materials may provide a portfolio manager update,
an adviser update and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how Van Kampen American
Capital believes the Fund compares relative to other Van Kampen American Capital
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which studied investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless of whether shareholders purchased their
funds in direct or sales force distribution channels. The study showed that
investors working with a professional representative have tended over time to
earn higher returns than those who invested directly. The Fund will also be
marketed on the Internet.

B-28
<PAGE> 74

CLASS A SHARES

The Fund's yield with respect to the Class A Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.47%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class A Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 7.16%.

The Fund's average total return, including the payment of the maximum
front-end sales charge, with respect to the Class A Shares for the (i) the one
year period ended June 30, 1996 was 5.33%, (ii) the five year period ended June
30, 1996 was 3.19% and (iii) the approximately 69 month period from September
28, 1990 (the commencement of the sale of Class A Shares) through June 30, 1996
was 3.63%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum front-end sales charge, with respect to the Class A Shares from
September 21, 1990 (the commencement of the sale of Class A Shares) through June
30, 1996 (as calculated in the manner described in the Prospectus under the
heading "Fund Performance") was 22.78%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum front-end sales charge, with respect to the Class A Shares from
September 21, 1990 (the commencement of the sale of Class A Shares) through June
30, 1996 (as calculated in the manner described in the Prospectus under the
heading "Fund Performance") was 26.96%.

CLASS B SHARES

The Fund's yield with respect to the Class B Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 3.87%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class B Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 6.63%.

The Fund's average total return, including the payment of the maximum CDSC,
with respect to the Class B Shares for (i) the one year period ended June 30,
1996 was 5.02%, and (ii) the approximately 60 month period from July 22, 1991
(the commencement of the sale of Class B Shares) through June 30, 1996 was
3.13%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum CDSC, with respect to the Class B Shares from July 22, 1991 (the
commencement of the sale of Class B Shares) through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 16.44%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, with respect to the Class B Shares from July 22, 1991 (the
commencement of the sale of Class B Shares) through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 16.44%.

CLASS C SHARES

The Fund's yield with respect to the Class C Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 3.87%. In determining the Fund's net
investment income for a stated 30 day period, the Fund calculates yield to
maturity on each portfolio security on a daily basis. The Fund's current
distribution rate with respect to the Class C Shares for the 30-day period
ending June 30, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 6.63%.

The Fund's average total return, including the payment of the maximum CDSC,
with respect to the Class C Shares for (i) the one year period ended June 30,
1996 was 7.03%, and (ii) the approximately 35 month

B-29
<PAGE> 75

period from August 13, 1993 (the commencement of the sale of Class C Shares)
through June 30, 1996 was 0.32%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum CDSC, with respect to the Class C Shares from August 13, 1993 (the
commencement of the sale of Class C Shares) through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 0.91%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, with respect to the Class C Shares from August 13, 1993 (the
commencement of the sale of Class B Shares) through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance
was 0.91%.

B-30
<PAGE> 76

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Short-Term Global Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Short-Term Global Income Fund (the "Fund"), including
the portfolio of investments, as of June 30, 1996, 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.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Short-Term Global Income Fund as of June 30, 1996, 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 2, 1996

B-31
<PAGE> 77

PORTFOLIO OF INVESTMENTS

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Amount
in Local
Currency Maturity U.S.$
(000) Description Coupon Date Market Value
- ----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FIXED INCOME SECURITIES 91.3%
ITALY 7.5% LIRA
Government/Agency
15,000,000 Vermilion International Trust -- BTPS....... 9.160% 12/01/97 $ 9,924,735
------------
NEW ZEALAND 8.9% NZ$
Government/Agency
17,250 New Zealand Government...................... * 09/11/96 11,637,201
------------
SPAIN 3.6% PESETA
Government/Agency
600,000 Kingdom of Spain............................ 7.300 07/30/97 4,689,192
------------
UNITED STATES 71.3% US$
Government/Agency
30,000 U.S. Treasury Note.......................... 5.000 01/31/98 29,534,700
17,500 U.S. Treasury Note.......................... 5.000 02/15/98 16,979,200
32,000 U.S. Treasury Note.......................... 6.375 05/15/99 32,080,000
15,000 U.S. Treasury Note.......................... 6.500 05/31/01 15,014,100
------------
93,608,000
------------
TOTAL FIXED INCOME SECURITIES..................................... 119,859,128
------------
SWAP TRANSACTIONS 0.0%
Goldman Sachs, 18.75 million US$ notional amount, maturing
01/30/97, payment based upon the spread between the German Mark
swap interest rate versus the 3 month German LIBOR................ (39,292)
------------
TOTAL INVESTMENTS 91.3%
(Cost $119,166,291) (a)......................................... 119,819,836
OTHER ASSETS IN EXCESS OF LIABILITIES 8.7%........................ 11,520,371
------------
NET ASSETS 100.0%................................................. $131,340,207
------------
</TABLE>

* Zero coupon bond

(a) At June 30, 1996, the cost for federal income tax purposes is $119,166,291;
the aggregate gross unrealized appreciation is $1,358,465 and the aggregate
gross unrealized depreciation is $1,392,670, resulting in net unrealized
depreciation on investments, including foreign currency translation of other
assets and liabilities, forward currency contracts and forward swap
transactions of $34,205.

The following table summarizes the portfolio composition at June 30, 1996,
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

See Notes to Financial Statements

B-32
<PAGE> 78

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $119,166,291) (Note 1)............... $119,819,836
Receivables:
Securities Sold....................................................... 12,840,473
Interest.............................................................. 1,687,063
Forward Currency Contracts (Note 5)................................... 196,556
Fund Shares Sold...................................................... 56,763
Options at Market Value (Net premiums paid of $25,497) (Note 5)......... 6,950
Other................................................................... 5,397
------------
Total Assets...................................................... 134,613,038
------------
LIABILITIES:
Payables:
Reverse Repurchase Agreements (Note 6)................................ 1,862,000
Fund Shares Repurchased............................................... 369,840
Income Distributions.................................................. 337,320
Distributor and Affiliates (Notes 2 and 7)............................ 252,266
Investment Advisory Fee (Note 2)...................................... 59,651
Custodian Bank........................................................ 1,458
Accrued Expenses........................................................ 330,319
Deferred Compensation and Retirement Plans (Note 2)..................... 59,977
------------
Total Liabilities................................................. 3,272,831
------------
NET ASSETS.............................................................. $131,340,207
============
NET ASSETS CONSIST OF:
Capital (Note 3)........................................................ $196,507,762
Net Unrealized Depreciation on Securities............................... (284,565)
Accumulated Distributions in Excess of Net Investment Income (Note 1)... (358,000)
Accumulated Net Realized Loss on Securities............................. (64,524,990)
------------
NET ASSETS.............................................................. $131,340,207
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $50,118,757 and 6,575,159 shares of capital stock issued and
outstanding) (Note 3)............................................... $ 7.62
Maximum sales charge (3.25%* of offering price)..................... .26
------------
Maximum offering price to public.................................... $ 7.88
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$81,057,362 and 10,639,329 shares of capital stock issued and
outstanding) (Note 3)............................................... $ 7.62
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$164,088 and 21,536 shares of capital stock issued and outstanding)
(Note 3)............................................................ $ 7.62
============
</TABLE>

*On sales of $25,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-33
<PAGE> 79

STATEMENT OF OPERATIONS

For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $62,358)................. $ 12,560,652
EXPENSES:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C
of $131,097, $1,019,724 and $1,665, respectively) (Note 7)........... 1,152,486
Investment Advisory Fee (Note 2)....................................... 882,054
Shareholder Services (Note 2).......................................... 373,683
Custody................................................................ 184,449
Trustees Fees and Expenses (Note 2).................................... 49,859
Interest (Note 6)...................................................... 42,719
Legal (Note 2)......................................................... 16,410
Amortization of Organizational Expenses (Note 1)....................... 2,523
Other.................................................................. 235,126
------------
Total Expenses..................................................... 2,939,309
Less Expenses Reimbursed........................................... 44,473
------------
Net Expenses....................................................... 2,894,836
------------
NET INVESTMENT INCOME.................................................. $ 9,665,816
============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments........................................................ $ 872,668
Options............................................................ 976,960
Foreign Currency Transactions...................................... (18,050,439)
------------
Net Realized Loss on Securities........................................ (16,200,811)
------------
Net Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.............................................. (20,294,494)
------------
End of the Period:
Investments........................................................ 653,545
Options............................................................ (18,547)
Forwards........................................................... (906,748)
Foreign Currency Translation....................................... (12,815)
------------
(284,565)
------------
Net Unrealized Appreciation on Securities During the Period............ 20,009,929
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES......................... $ 3,809,118
============
NET INCREASE IN NET ASSETS FROM OPERATIONS............................. $ 13,474,934
============
</TABLE>

See Notes to Financial Statements

B-34
<PAGE> 80

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended June 30, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 9,665,816 $ 19,761,456
Net Realized Loss on Securities......................... (16,200,811) (12,602,409)
Net Unrealized Appreciation/Depreciation on Securities
During the Period..................................... 20,009,929 (7,738,870)
------------ ------------
Change in Net Assets from Operations.................... 13,474,934 (579,823)
------------ ------------
Distributions from and in Excess of Net Investment
Income................................................ -0- (14,866,346)
Return of Capital Distribution (Note 1)................. (11,609,288) (7,736,408)
------------ ------------
Total Distributions*.................................... (11,609,288) (22,602,754)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..... 1,865,646 (23,182,577)
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................... 2,427,135 6,199,457
Net Asset Value of Shares Issued Through Dividend
Reinvestment.......................................... 6,370,708 12,635,688
Cost of Shares Repurchased.............................. (79,947,106) (214,719,738)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS...... (71,149,263) (195,884,593)
------------ ------------
TOTAL DECREASE IN NET ASSETS............................ (69,283,617) (219,067,170)
NET ASSETS:
Beginning of the Period................................. 200,623,824 419,690,994
------------ ------------
End of the Period (Including undistributed net
investment income of $(358,000) and $(588,190),
respectively)......................................... $131,340,207 $200,623,824
============ ============
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1996 June 30, 1995
---------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income (Note 1):
Class A Shares...................... $ -0- $ (5,617,141)
Class B Shares...................... -0- (9,240,772)
Class C Shares...................... -0- (8,387)
Class D Shares...................... -- (46)
------------ ------------
$ -0- $(14,866,346)
============ ============
Return of Capital Distribution (Note
1):
Class A Shares...................... $ (4,481,275) $ (2,908,177)
Class B Shares...................... (7,116,453) (4,822,441)
Class C Shares...................... (11,560) (5,768)
Class D Shares...................... -- (22)
------------ ------------
$(11,609,288) $ (7,736,408)
============ ============
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 81

NOTES TO FINANCIAL STATEMENTS

June 30, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Short-Term Global Income Fund (the "Fund") is
organized as a series of Van Kampen American Capital Trust (the "Trust"), a
Delaware 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's investment objective is to seek a high level of current
income, consistent with prudent investment risk through investment in a global
portfolio of investment grade debt securities denominated in various currencies
and multi-national currency units and having an average maturity of three years
or less. The Fund commenced investment operations on September 28, 1990. The
distribution of the Fund's Class B and Class C shares commenced on July 22,
1991, 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.

A. SECURITY VALUATION--Investments are stated at value using the last available
bid price or yield equivalents obtained from dealers in the over-the-counter
(OTC) or interbank market. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost.

B-36
<PAGE> 82

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of each
applicable security.

D. CURRENCY TRANSLATION--Assets and liabilities denominated in foreign
currencies and commitments under forward 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.

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, 1996, the Fund had an accumulated capital loss carryforward
for tax purposes of $64,736,057. Of this amount, $10,010,730, $53,019,433 and
$1,705,894 will expire on June 30, 2001, 2003 and 2004 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.

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 currency losses totaling
$17,134,347 were reclassified from accumulated net realized gain/loss on
securities to accumulated undistributed net investment income. In

B-37

<PAGE> 83

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

addition, a permanent book and tax basis difference due to a net operating loss
for tax purposes totaling $7,698,721 has been reclassified from accumulated
undistributed net investment income to capital.

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

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, 1996, the Fund recognized expenses of
approximately $33,500 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund. Of this amount, approximately $9,300
has been assumed by VKAC.

In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent for
the Fund. For the year ended June 30, 1996, the Fund recognized expenses of
approximately $269,400, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.

At June 30, 1996, VKAC owned 1,428 and 100 shares of Classes B and C,
respectively.

B-38
<PAGE> 84

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1996, capital aggregated $71,847,960, $124,493,824 and $165,978,
for Classes A, B and C, respectively. For the year ended June 30, 1996,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
- --------------------------------------------------------------------------
Sales:
Class A.................................. 162,018 $ 1,242,482
Class B.................................. 153,961 1,176,596
Class C.................................. 1,057 8,057
----------- ------------
Total Sales................................ 317,036 $ 2,427,135
=========== ============
Dividend Reinvestment:
Class A.................................. 356,105 $ 2,727,316
Class B.................................. 474,434 3,632,026
Class C.................................. 1,485 11,366
----------- ------------
Total Dividend Reinvestment................ 832,024 $ 6,370,708
=========== ============
Repurchases:
Class A.................................. (3,533,398) $(27,079,054)
Class B.................................. (6,899,452) (52,839,746)
Class C.................................. (3,684) (28,306)
----------- ------------
Total Repurchases.......................... (10,436,534) $(79,947,106)
=========== ============
</TABLE>

B-39
<PAGE> 85

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1995, capital aggregated $102,375,382, $184,393,612 and
$196,040, 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.................................. 147,880 $ 1,164,395
Class B.................................. 633,871 5,017,062
Class C.................................. 2,233 18,000
Class D.................................. -0- -0-
----------- -------------
Total Sales................................ 783,984 $ 6,199,457
=========== =============
Dividend Reinvestment:
Class A.................................. 640,247 $ 5,003,613
Class B.................................. 973,210 7,618,093
Class C.................................. 1,792 13,973
Class D.................................. 1 9
----------- -------------
Total Dividend Reinvestment................ 1,615,250 $ 12,635,688
=========== =============
Repurchases:
Class A.................................. (9,324,231) $ (73,225,277)
Class B.................................. (18,052,147) (141,454,897)
Class C.................................. (4,985) (38,532)
Class D.................................. (124) (1,032)
----------- -------------
Total Repurchases.......................... (27,381,487) $(214,719,738)
=========== =============
</TABLE>

B-40

<PAGE> 86

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

the expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.

For the year ended June 30, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of $1,540 and CDSC on
redeemed shares of approximately $59,300. Sales charges do not represent
expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding U.S. Government securities and short-term investments, were
$175,408,439 and $285,327,825, 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 securities. 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 foreign currency exposure and effective maturity and
duration.

B-41
<PAGE> 87

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

Transactions in options for the year ended June 30, 1996, were as follows:

<TABLE>
<CAPTION>
CONTRACTS PREMIUM
<S> <C> <C>
- ---------------------------------------------------------------------------
Outstanding at June 30, 1995.................. 11 $(1,537,634)
Options Written and
Purchased (Net)............................. 44 (115,937)
Options Terminated in Closing
Transactions (Net).......................... (49) 1,044,426
Options Expired (Net)......................... (5) 583,648
--- -----------
Outstanding at June 30, 1996.................. 1 $ (25,497)
=== ===========

</TABLE>

The description and market value of the option contract outstanding as of
June 30, 1996, are as follows:

<TABLE>
<CAPTION>
OPENING EXPIRATION MARKET
DESCRIPTION TRANSACTION DATE VALUE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
DEM Call Basket Currency Put.......... Buy 11/29/96 $6,950
======
</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, 1996, the Fund has outstanding forward currency contracts as
follows:

<TABLE>
<CAPTION>
UNREALIZED
FORWARD ORIGINAL CURRENT APPRECIATION/
CURRENCY CONTRACTS VALUE VALUE DEPRECIATION
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
BUYS TO OPEN
German Mark,
expiring 07/19/96-07/22/96... $24,490,548 $24,414,938 $ (75,610)
SELLS TO OPEN
Australian Dollar,
expiring 07/08/96-07/25/96... 4,497,779 4,484,806 12,973
German Mark,
expiring 09/25/96-09/30/96... 19,000,000 19,148,431 (148,431)
Italian Lira,
expiring 07/18/96............ 9,481,798 9,828,787 (346,989)
New Zealand Dollar,
expiring 07/11/96-08/01/96... 11,174,510 11,443,192 (268,682)
</TABLE>

B-42
<PAGE> 88

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
UNREALIZED
FORWARD ORIGINAL CURRENT APPRECIATION/
CURRENCY CONTRACTS VALUE VALUE DEPRECIATION
<S> <C> <C> <C>
- -----------------------------------------------------------------------------
Spanish Peseta,
expiring 08/12/96............ 4,461,750 4,520,013 (58,263)
Swedish Krona,
expiring 07/11/97............ 1,000,000 1,021,746 (21,746)
---------
$(906,748)
=========
</TABLE>

At June 30, 1996, the Fund had realized gains on closed but unsettled
forward currency contracts of $1,103,304 scheduled to settle between July 3,
1996 and November 4, 1996.

C. SWAP TRANSACTIONS--These securities, which are identified in the portfolio of
investments, represent an agreement between two parties to exchange a series of
cash flows based upon various indices at specified intervals.

6. BORROWINGS

In accordance with its investment policies, the Fund may borrow money from banks
or enter into reverse repurchase agreements to enable the Fund to satisfy
redemption requests and other temporary purposes.

The Fund was entered into reverse repurchase agreements under which the Fund
sells securities and agrees to repurchase them at a mutually agreed upon date
and price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities but pays interest to
the counter-party based upon a short-term interest rate. The average daily
balance of reverse repurchase agreements during the period was approximately
$1,243,000 with an average interest rate of 3.360%. At June 30, 1996, the
interest rate in effect for reverse repurchase agreements was 5.450%.

7. DISTRIBUTION AND SERVICE PLANS

Annual fees under the Plans of up to .25% for Class A and 1.00% each for
Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1996, are payments to VKAC of approximately $736,700.

B-43
<PAGE> 89

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL STRATEGIC INCOME FUND

Van Kampen American Capital 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.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the current Prospectus for the Fund (the "Prospectus")
dated as of the date hereof. 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-3
Additional Investment Considerations................................................. B-4
Description of Securities Ratings.................................................... B-26
Trustees and Officers................................................................ B-33
Investment Advisory and Other Services............................................... B-40
Custodian and Independent Accountants................................................ B-43
Portfolio Transactions and Brokerage Allocation...................................... B-43
Tax Status of the Fund............................................................... B-44
The Distributor...................................................................... B-47
Legal Counsel........................................................................ B-48
Performance Information.............................................................. B-48
Independent Accountants' Report...................................................... B-51
Financial Statements................................................................. B-52
Notes to Financial Statements........................................................ B-60
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
<PAGE> 90

THE FUND AND THE TRUST

The Fund is a separate non-diversified series of Van Kampen American Capital
Trust (the "Trust"), an open-end management investment company. The Fund was
established pursuant to a designation of series dated May 10, 1995. At present,
the Fund, Van Kampen American Capital High Yield Fund, Van Kampen American
Capital Short-Term Global Income Fund, are the only series of the Trust,
although other series may be organized and offered in the future. Each series of
the Trust will be treated as a separate corporation for Federal income tax
purposes.

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 per share (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 Trust originally was organized as Van Kampen Merritt Trust, a
Massachusetts business trust created by a Declaration of Trust dated March 14,
1986 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business Trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.

The Fund originally was organized under the name Van Kampen Merritt Strategic
Income Fund, as a sub-trust of the Massachusetts Trust. In connection with the
Massachusetts Trust's reorganization into a Delaware business trust, the Fund
was reorganized into a series of the Trust and renamed Van Kampen American
Capital Strategic Income Fund.

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.

B-2
<PAGE> 91

INVESTMENT POLICIES AND RESTRICTIONS

The investment objectives of the Fund are set forth in the Prospectus under
the caption "Investment Objectives and Policies." There can be no assurance that
the Fund will achieve its investment objectives.

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

1. Invest 25% or more of the value of its total assets in any single industry.
(Neither the U.S. government nor any of its agencies or instrumentalities
will be considered an industry for purposes of this restriction.)

2. Issue senior securities, borrow money or enter into reverse repurchase
agreements or dollar rolls in the aggregate in excess of 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing); provided
that the Fund may, with respect to up to an additional 5% of its total
assets, borrow from and enter into reverse repurchase agreements and dollar
rolls with, any entity for temporary purposes. The Fund will not mortgage,
pledge or hypothecate any assets other than in connection with borrowings,
reverse repurchase agreements, dollar rolls, and Strategic Transactions.

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-3
<PAGE> 92

(b) with regard to at least 50% of the Fund's total assets, no more than 5% of
its total assets are invested in the securities of a single issuer. These
tax-related limitations may be changed by the Trustees to the extent necessary
to comply with changes to applicable tax requirements.

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that its annual portfolio turnover rate will normally be less than
200%. Portfolio turnover will be calculated by dividing the lesser of purchases
or sales of portfolio securities by the monthly average value of the securities
in the portfolio during the year. Securities, including options, whose maturity
or expiration date at the time of acquisition were one year or less will be
excluded from such calculation. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Fund and its Shareholders.

ADDITIONAL INVESTMENT CONSIDERATIONS

The following information supplements the information provided in the
Prospectus under the headings "Investment Objectives 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

B-4
<PAGE> 93

agency guarantees the payment of the interest on and principal of these
securities. However, the guarantees do not extend to the securities' yield or
value, which are likely to vary inversely with fluctuations in interest rates,
nor do the guarantees extend to the yield or value of the Fund's shares. These
securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the principal
amounts of such underlying mortgages may generally be prepaid in whole or in
part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-Backed Securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying mortgage obligations. The remaining maturity of a
Mortgage-Backed Security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Adviser on the basis of
assumed prepayment rates with respect to such mortgages. The remaining expected
average life of a pool of mortgages underlying a Mortgage-Backed Security is a
prediction of when the mortgages will be repaid and is based upon a variety of
factors such as the demographic and geographic characteristics of the borrowers
and the mortgaged properties, the length of time that each of the mortgages has
been outstanding, the interest rates payable on the mortgages and the current
interest rate environment. While the timing of prepayments of graduated payment
mortgages differs somewhat from that of conventional mortgages, the prepayment
experience of graduated payment mortgages is basically the same as that of the
conventional mortgages of the same maturity dates over the life of the pool.

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

B-5
<PAGE> 94

agencies or instrumentalities. Mortgage pass-through securities provide for
monthly payments that are a "pass-through" of the monthly interest and principal
payments (including any prepayment) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans.

The guaranteed mortgage pass-through securities that the Fund may invest in
include those issued or guaranteed by GNMA, FNMA and FHLMC. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to security holders. GNMA
and FNMA also guarantee timely distribution of scheduled principal. FHLMC
guarantees only ultimate collection of principal on the underlying loans, which
collection may take up to one year. The Fund may also invest in other agency
securities, including but not limited to securities issued by the Small Business
Administration, Export-Import Bank of the United States, Federal Housing
Administration, Farm Credit Administration, Federal Home Loan Banks, General
Services Administration, U.S. Department of Transportation, U.S. Department of
Housing and Urban Development, and Student Loan Marketing Association. These
securities generally are not backed by the full faith and credit of the United
States.

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.

B-6
<PAGE> 95

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.

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

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all classes of a CMO on a monthly, quarterly or semi-annual basis. The principal
of and interest on the Mortgage Assets may be allocated among the several
classes of a series of a CMO in many ways. By investing in particular tranches
of a CMO with specified cash flows, the Fund may gain more predictability of
cash flows than if it had invested in the underlying Mortgage Assets. Generally,
the more predictable the cash flow of a CMO tranche, the lower the anticipated
yield will be on that tranche at the time of issuance relative to prevailing
market yields on Mortgage-Backed Securities. As part of the process of creating
more predictable cash flows on most of the tranches in a series of CMOs, one or
more tranches generally must be created that absorb most of the volatility in
the cash flows on the underlying Mortgage Assets. The yields on these tranches
are generally higher than prevailing market yields on Mortgage-Backed Securities
with similar average lives. Because of the uncertainty of the cash flows on
these tranches, and the sensitivity thereof to changes in prepayment rates on
the underlying Mortgage Assets, the market prices of and yield on these tranches
tend to be more volatile.

One or more tranches of a CMO may have coupon rates which reset periodically
at a specified increment over an index such as LIBOR. These adjustable rate
tranches are known as "floating rate CMOs," "inverse floating CMOs" and
"interest only CMOs". Floating rate CMOs may be backed by fixed rate or
adjustable 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.

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Stripped Mortgage-Backed Securities are structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of Mortgage Assets. A common type of Stripped Mortgage-Backed Securities
will have one class receiving a small portion of the interest and a larger
portion of the principal from the Mortgage Assets, while the other classes will
receive primarily interest and only a small portion of the principal. In the
most extreme case, one class will receive all of the interest (the interest-only
or "IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yields to maturity on IOs and POs are
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and principal payments may have a material
effect on yield to maturity. If the underlying Mortgage Assets experience
greater than anticipated prepayments of principal, the Fund may not fully recoup
its initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected. The market value of such Stripped
Mortgage-Backed Securities, including adjustable rate U.S. government IOs, are
subject to greater risk of fluctuation in response to changes in market interest
rates than other adjustable rate securities, and such greater risk of
fluctuation may adversely affect the ability of the Fund to achieve its
investment objective of maintaining a relatively stable net asset value.

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.

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Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic upward adjustments of the coupon rates of such
securities, resulting in higher yields. During periods of declining interest
rates, however, coupon rates may readjust downward resulting in lower yields to
the Fund. During periods of rising interest rates, changes in the coupon rate of
adjustable rate securities will lag behind changes in the market interest rate,
which may result in such security having a lower value until the coupon resets
to reflect more closely market interest rates. Investors who redeem shares of
the Fund prior to the time the coupon rates of the Fund's portfolio securities
are adjusted could suffer some loss on their investment in the Fund's shares.
Adjustable rate securities typically limit the maximum amount the coupon rate
may be adjusted during any adjustment period, in any one year and during the
term of the security. During periods of significant fluctuations in market rates
of interest the net asset value of the Fund may fluctuate more significantly
since these limits may prevent the Fund's portfolio securities from fully
adjusting to reflect market rates.

The Fund may invest in 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

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than comparable changes in the value of an equal principal amount of a fixed
rate security having similar credit quality, redemption provisions and maturity.

DISCOUNT, ZERO COUPON SECURITIES AND PAYMENT-IN-KIND SECURITIES. The Fund may
invest in securities sold at a substantial discount from their value at
maturity. Such securities include "zero coupon" and payment-in-kind securities
of governmental or private issuers. Zero coupon securities generally pay no cash
interest (or dividends in the case of preferred stock) to their holders prior to
maturity. Payment-in-kind securities allow the issuer, at its option, to make
current interest payments on such securities either in cash or additional
securities. Accordingly, such securities usually are issued and traded at a deep
discount from their face or par value and generally are subject to greater
fluctuations of market value in response to changing interest rates than
securities of comparable maturities and credit quality that pay cash interest
(or dividends in the case of preferred stock) on a current basis.

Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security and to include the
"interest" on payment-in-kind securities as income each year, even though the
holder receives no interest payment on the security during the year. Federal tax
law also requires that entities such as the Fund which seek to qualify for
pass-through federal income tax treatment as regulated 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

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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.

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. 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

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discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.

In light of the risk of Brady Bonds including, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with terms of the Brady Bonds. Many of the Brady Bonds and other income
securities in which the Fund invests are likely to be acquired at a discount.
See "Taxation."

The Salomon Brothers Brady Bond Index provides a benchmark that can be used to
compare returns of Brady Bonds with returns in other bond markets.

OTHER SOVEREIGN-RELATED DEBT. In addition to Brady Bonds, the Fund may invest
in sovereign or sovereign-related income securities. Such obligations may
include, but are limited to, participations and assignments in sovereign bank
loans, restructured external debt that has not undergone a Brady-style debt
exchange, and 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

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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.

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. If any privately placed 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

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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.

INVESTMENTS IN FOREIGN INCOME SECURITIES. Investment in foreign income
securities involves certain special risks not usually associated with investment
in domestic income securities. 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. 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.

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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 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

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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.

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.

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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, 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.

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.

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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 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

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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, 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.

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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 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

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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 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.

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 cash or liquid
securities 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 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 cash or liquid
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 cash or
liquid securities 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 cash or liquid securities 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 cash or liquid securities 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

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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.

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 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

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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 liquid 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 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

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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 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 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

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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 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):

1. 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 payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation:

2. Nature of and provisions of the obligation:

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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.

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.

SPECULATIVE GRADE

BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as
having significantly 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" is less vulnerable 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" is more vulnerable 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" is currently vulnerable 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: Debt rated "CC" is currently highly vulnerable to nonpayment. The rating
"CC" is also used for debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.

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

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.

NR: Not rated.

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<PAGE> 116

R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe payment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

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.

2. COMMERCIAL PAPER

A 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 significant speculative
characteristics.

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

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

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

3. VARIABLE RATE DEMAND BONDS

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

The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-"). 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+").

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4. 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 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.

5. PREFERRED STOCK

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

The preferred stock ratings are based on the following considerations:

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

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

3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements under the laws of bankruptcy and other laws 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 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
B predominantly speculative with respect to the issuer's capacity to pay preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
</TABLE>

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<TABLE>
<S> <C>
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 nonpaying issue.
D A preferred stock rated "D" is a nonpaying issue with the issuer in default on debt
instruments.
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.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred stock
quality, 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.
</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 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:

1. 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.

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.

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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 to B. 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.

2. SHORT-TERM DEBT

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

--Leading market positions in well-established industries.

--High rates of return on funds employed.

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

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

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

Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment 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.

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.

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

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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 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
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.

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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TRUSTEES AND OFFICERS

TRUSTEES

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.

Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.

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.
Date of Birth: 11/23/19

B-33
<PAGE> 122

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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
Date of Birth: 02/13/36 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.

R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 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.

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

B-34
<PAGE> 123

OFFICERS

Peter W. Hegel.......... Vice President Executive Vice President of the VK Adviser,
Date of Birth: AC Adviser, Van Kampen American Capital
06/25/56 Management, Inc. and Van Kampen American
Capital Advisors, Inc. Prior to September
1996, Director of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Director
of VSM Inc. Vice President of each of the
Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.

B-35
<PAGE> 124

Paul R. Wolkenberg...... Vice President Executive Vice President of VK/AC Holding,
Date of Birth: Inc., Van Kampen American Capital, the
11/10/44 Distributor and the AC Adviser. President,
Chief Executive Officer and a Director of
Van Kampen American Capital Trust Company
and ACCESS. Director of American Capital
Contractual Services, Inc. Vice President
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.

B-36
<PAGE> 125

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.

Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.

B-37
<PAGE> 126

deferred amounts based upon the return of the common shares of the funds in the
Fund Complex as more fully described below. Each fund in the Fund Complex also
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.

B-38
<PAGE> 127

COMPENSATION TABLE

B-39
<PAGE> 128

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ------------------------------------------------------------- ---------------- -------- ----------
<S> <C> <C> <C>
Edward D. Hones and Co. F/A/O................................ 17,112 C 5.91%
Edward D. Jones & Co. Custodian
FBO Herman L. Dumming IRA
EDJ #271-90019-1-5
P.O. Box 2800
Maryland Hts, MO 63043-8500

Painewebber for the Benefit of............................... 15,203 C 5.25%
Abraham Elisha Ayson
4600 14th Avenue
Apt. #4C
Brooklyn, NY 11219-2606

Merrill Lynch Pierce Fenner & Smith.......................... 5,496,895 B 8.73%
Mutual Funds Operations.................................... 20,531 C 7.09%
Attn: Book Entry
4800 Deer Lake Drive E
3rd Floor
Jacksonville, FL 32246-6484
</TABLE>

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

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

B-40
<PAGE> 129

transacted business under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
(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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 12% 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 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 Adviser will utilize at its own expense, credit analysis and research
services provided by 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(@) , 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.

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

B-41
<PAGE> 130

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 fiscal years ended June 30, 1996, June 30, 1995 and June 30, 1994, the
Fund recognized advisory expenses of $927,893, $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 fiscal years ended June 30, 1996, June 30, 1995 and June 30, 1994, the
Fund recognized expenses of approximately $0, $44,900 and $2,800, respectively,
representing the Distributor's cost of providing certain support services.

ACCOUNTING SERVICES 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 fiscal years ended June 30, 1996, June 30, 1995 and June 30, 1994, the
Fund recognized expenses of approximately $5,000, $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 fiscal years ended June 30, 1996, June 30, 1995 and June 30, 1994, the
Fund recognized expenses of approximately $8,700, $12,000 and $6,000,
respectively, representing Van Kampen American Capital, Inc.'s cost of providing
legal services.

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<PAGE> 131

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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.

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.

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<PAGE> 132

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 tax-exempt income and 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.

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<PAGE> 133

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 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 to the extent of the Fund's earnings and
profits, 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 distributed when paid,
dividends declared in October, November, or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for

B-45
<PAGE> 134

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-46
<PAGE> 135

THE DISTRIBUTOR

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, 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 Plans provide that it will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. The Plans may not be amended to increase materially the
amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments of the Plans must be
approved by the Trustees and also by the disinterested Trustees. The Plans may
be terminated with respect to either class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.

For the 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.

For the year ended June 30, 1996, the Fund has recognized expenses under the
Plans of $79,707, $569,681 and $25,454 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $65,647,

B-47
<PAGE> 136

$115,828 and $9,418 represent payments to financial intermediaries under the
Selling Agreements for Class A Shares, Class B Shares and Class C Shares,
respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (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 of the
lesser of the then current net asset value of the shares redeemed or their
initial purchase price from the Fund. Yield quotations do not reflect the
imposition of a contingent deferred sales charge, and if any such contingent
deferred sales charge imposed at the time of redemption were reflected, it would
reduce the performance quoted.

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

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.

B-48
<PAGE> 137

funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which examined investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless if shareholders purchased their funds in
direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund will also be marketed on the
Internet.

CLASS A SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 6.72%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 8.29%.

The Fund's average total return, including payment of the maximum sales
charge, for (i) the one year ended June 30, 1996 was 7.58% and (ii) the two
year, six month period from December 31, 1993, the commencement of investment
operations for Class A Shares of the Fund, through June 30, 1996 was 0.68%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum sales charge, for Class A Shares from inception through June 30,
1996 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 6.76%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum sales charge, for Class A Shares from inception through June 30,
1996 (as calculated in the manner described in the Prospectus under the heading
"Fund Performance") was 1.71%.

CLASS B SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 6.29%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 7.95%.

The Fund's average total return, including the payment of the CDSC, for (i)
the one year ended June 30, 1996 was 8.06% and (ii) the two year, six month
period from December 31, 1993, the commencement of investment operations for
Class B Shares of the Fund, through June 30, 1996 was 0.68%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, for Class B Shares from inception through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 4.67%.

The Fund's cumulative non-standardized total return, including the payment of
the CDSC, for Class B Shares from inception through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 1.72%.

CLASS C SHARES

The Fund's yield for the 30-day period ending June 30, 1996 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 6.29%. 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, 1996 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 7.96%.

B-49
<PAGE> 138

The Fund's average total return, including the payment of the CDSC, for (i)
the one year ended June 30, 1996 was 11.07% and (ii) the two year, six month
period from December 31, 1993, the commencement of investment operations for
Class C Shares of the Fund, through June 30, 1996 was 1.81%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, for Class C Shares from inception through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 4.59%.

The Fund's cumulative non-standardized total return, including the payment of
the CDSC, for Class C Shares from inception through June 30, 1996 (as calculated
in the manner described in the Prospectus under the heading "Fund Performance")
was 4.59%.

B-50
<PAGE> 139

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Strategic Income Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Strategic Income Fund (the "Fund"), including the
portfolio of investments, as of June 30, 1996, 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.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Strategic Income Fund as of June 30, 1996, 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, 1996

B-51
<PAGE> 140

PORTFOLIO OF INVESTMENTS

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Amount
in Local
Currency Maturity U.S.$
(000) Description Coupon Date Market Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS 58.0%
BANKING 7.4%
3,000 Banco del Estado - US$ (c).............. 8.390% 08/01/01 $ 3,141,540
4,100 Western Financial Savings - US$ (c)..... 8.500 07/01/03 4,143,960
------------
7,285,500
------------
CONTAINERS, PACKAGING & GLASS 0.7%
40 Anchor Glass Container Corp. - US$...... 10.250 06/30/02 28,000
700 Silligan Holdings Corp. - US$........... 13.250 12/15/02 703,500
------------
731,500
------------
DIVERSIFIED/CONGLOMERATE SERVICE 1.0%
1,000 Service Corp. International - US$....... 6.750 06/01/01 993,110
------------
ELECTRONICS 1.7%
1,000 Bell & Howell Co. - US$ (d)............. 0/11.500 03/01/05 685,000
1,000 Comdisco, Inc. - US$.................... 5.750 05/22/98 1,001,555
------------
1,686,555
------------
FINANCE 10.0%
3,000 Auxiliaire du Credit Foncier de France -
US$..................................... 5.332 09/25/02 2,730,000
3,000 Auxiliaire du Credit Foncier de France -
US$..................................... 5.000 02/18/03 2,692,500
4,000 Ford Motor Credit - US$................. 5.730 01/13/05 3,550,000
1,000 Guangdong Enterprise - US$ (c).......... 8.750 12/15/03 883,000
------------
9,855,500
------------
GROCERY 0.5%
500 Purity Supreme - US$.................... 11.750 08/01/99 542,500
------------
HEALTHCARE 1.1%
1,000 Tenet Healthcare Corp. - US$ (c)........ 10.125 03/01/05 1,060,000
------------
HOTEL, MOTEL, INNS & GAMING 0.6%
500 Showboat Marina - US$................... 13.500 03/15/03 545,000
------------
LEISURE AND AMUSEMENT 2.5%
2,500 Viacom, Inc. - US$...................... 7.750 06/01/05 2,433,765
------------
MINING 0.4%
400 Carbide/Graphite, Inc. - US$ (c)........ 11.500 09/01/03 433,000
------------
OIL & GAS 9.1%
500 Coda Energy - US$....................... 10.500 04/01/06 497,500
300 Global Marine - US$ (c)................. 12.750 12/15/99 325,500
1,500 Oleoducto Central S.A. - US$............ 9.350 09/01/05 1,472,085
4,950 Transportadora de Gas del Sur S.A. -
US$..................................... 7.750 12/23/98 4,826,250
2,000 Transportadora de Gas del Sur S.A. -
US$..................................... 10.250 04/25/01 1,990,000
------------
9,111,335
------------
PAPER 2.6%
500 Doman Industries Ltd - US$ (c).......... 8.750 03/15/04 452,500
</TABLE>

See Notes to Financial Statements

B-52
<PAGE> 141

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Amount
in Local
Currency Maturity U.S.$
(000) Description Coupon Date Market Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PAPER (CONTINUED)
500 Indah Kiat International Finance (Pulp
and Paper Corp) Global Bond - US$....... 11.375% 06/15/99 $ 525,000
500 Tjiwi Kimia International BV - US$...... 13.250 08/01/01 560,000
1,000 Willamette Industries - US$ (b)......... 7.850 07/01/26 1,023,620
------------
2,561,120
------------
PRINTING, PUBLISHING & BROADCASTING 4.2%
1,000 Century Communications - US$ (c)........ 9.750 02/15/02 995,000
500 K-III Communications - US$.............. 10.625 05/01/02 520,000
2,500 Time Warmer - US$....................... 9.150 02/01/23 2,582,475
------------
4,097,475
------------
RETAIL 3.0%
3,000 Wal-Mart Stores - US$ (c)............... 6.750 05/24/02 2,977,500
------------
TELECOMMUNICATIONS 6.6%
3,500 Cable & Wireless PLC - US$ (c).......... 6.500 12/16/03 3,333,750
1,000 Panamsat LP - US$....................... 9.750 08/01/00 1,035,000
600 Pricellular Wireless Corp - US$ (d)..... 0/12.250 10/01/03 474,000
1,000 Rogers Cablesystems - CA$............... 9.650 01/15/14 641,983
1,000 Telefonica de Argentina - US$........... 11.875 11/01/04 1,087,000
------------
6,571,733
------------
UTILITIES 6.6%
1,000 Bridas Corp - US$ (c)................... 12.500 11/15/99 1,042,500
1,000 Central Termica Guemes S.A. - US$....... 12.000 11/29/96 1,012,500
1,000 El Paso Electric Co - US$ (c)........... 7.750 05/01/01 975,000
1,500 Midland Funding Corp II - US$ (c)....... 11.750 07/23/05 1,575,000
1,000 Sodigas - US$........................... 10.500 07/06/99 1,015,000
862 Subic Power Corp - US$.................. 9.50 12/28/08 862,069
------------
6,482,069
------------
Total Corporate Bonds............................................... 57,367,662
------------
FOREIGN GOVERNMENT AND AGENCY OBLIGATIONS 33.0%
ARGENTINA 2.3%
2,000 Goldman Sachs Argentine Bocones Trust -
US$..................................... 13.375 08/15/01 2,255,000
------------
AUSTRALIA 1.5%
1,900 Australian Government - AU$............. 7.000 04/15/00 1,426,695
------------

</TABLE>

See Notes to Financial Statements

B-53
<PAGE> 142

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Amount
in Local
Currency Maturity U.S.$
(000) Description Coupon Date Market Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BRAZIL 2.4%
1,624 Brazil C Bond - US$ (e)................. 8.000% 04/15/14 $ 1,010,719
2,500 Brazil Pars - US$ (d) (e)............... 5.000/5.250 04/15/24 1,387,500
------------
2,398,219
------------
CANADA 3.4%
1,250 Canadian Government - CA$ (b)........... 7.500 03/01/01 931,663
2,500 Province of Quebec - US$................ 5.670 02/27/26 2,405,050
------------
3,336,713
------------
COLOMBIA 1.9%
2,000 Republic of Colombia - US$.............. 7.250 02/15/03 1,877,500
------------
COSTA RICA 0.7%
1,000 Banco Central Costa Rica - US$ (e)...... 6.250 05/21/10 715,000
------------
ECUADOR 0.6%
1,000 Ecuador Discount Bond - US$ (e)......... 6.0625 02/28/25 571,250
------------
ITALY 1.0%
1,500,000 Republic of Italy BTPS - ITL (b)........ 9.500 05/01/01 1,010,449
------------
MEXICO 1.3%
2,000 Mexico Par Bond Ser A - US$ (e)......... 6.250 12/31/19 1,292,500
------------
NEW ZEALAND 1.3%
2,000 New Zealand Government - NZ$............ 8.000 02/15/01 1,322,174
------------
PANAMA 2.8%
5,000 Panama Interest Reduction Bond - US$ (b)
(d)..................................... 3.500/3.750 07/17/14 2,768,750
------------
PHILIPPINES 0.9%
1,000 Philippines Government (FLIRB) - US$ (d)
(e)..................................... 5.000/6.000 06/01/08 897,500
------------
POLAND 3.5%
3,500 Poland PDI Bond - US$ (c) (d) (e)....... 3.750/4.000 10/27/14 2,686,250
1,000 Poland Registered PDI Bond - US$ (d)
(e)..................................... 3.750/4.000 10/27/14 767,500
------------
3,453,750
------------
RUSSIA 1.8%
5,000 Vneshekonombank Loans - DEM............. (f) (f) 1,763,400
------------
SPAIN 1.6%
200,000 Spanish Government - ESP (b)............ 8.400 04/30/01 1,576,970
------------
SWITZERLAND 0.1%
148 Swiss Franc............................. 118,481
------------
THAILAND 1.0%
25,000 ABN/AMRO Bank - THB..................... 9.100 08/05/97 982,059
------------
</TABLE>

See Notes to Financial Statements

B-54
<PAGE> 143

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Par Amount
in Local
Currency Maturity U.S.$
(000) Description Coupon Date Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED KINGDOM 2.1%
1,000 UK Treasury Bonds - GBP (b)............. 7.000% 11/06/01 $ 1,520,516
350 UK Treasury Bonds - GBP................. 6.750 11/26/04 508,911
------------
2,029,427
------------
URAGUAY 0.7%
1,000 Banco Central del Uruguay Ser B - US$
(e)..................................... 6.750 02/19/21 710,000
------------
VENEZUELA 2.1%
3,000 Venezuelan Debt Conversion Bond - US$
(e)..................................... 6.563 12/18/07 2,118,750
------------
Total Foreign Government and Agency
Obligations...................................................... 32,624,587
------------
US GOVERNMENT AND AGENCY OBLIGATIONS 3.0%
3,000 FNMA Note............................... 8.000 04/13/05 3,012,240
-----------
MORTGAGE BACKED OBLIGATIONS (US) 21.0%
5,807 FHLMC 1624-KZ (c)....................... 6.000 12/15/08 4,935,950
2,000 FNMA REMIC #92-33 S (Inverse Fitg)
(c)..................................... 14.400 03/25/22 1,692,500
75 FNMA REMIC #93-55 M PAC (Interest
Only)................................... 727.220 09/25/06 1,856,250
3,776 FNMA REMIC #93-180 SB (Inverse Fitg).... 4.993 09/25/00 3,280,550
5,000 FNMA REMIC #95-11A (Principal Only)
(c)..................................... * 01/25/24 3,659,375
5,410 GNMA Pool #336788 (c)................... 7.500 12/15/22 5,342,348
------------
Total Mortgage Backed Obligations (US)............................... 20,766,973
------------
SWAP TRANSACTIONS 0.0%
Goldman Sachs, 40.0 million US$ notional amount, maturing
01/23/00, payment based upon the spread between the 6 year French
Franc fixed swap interest rate versus the 6 year German Mark
fixed swap interest rate
........................................................................
(37,826)
------------
TOTAL LONG-TERM INVESTMENTS 115.0%
(Cost $113,946,239) (a).............................................. 113,733,636
LIABILITIES IN EXCESS OF OTHER ASSETS (15.0%)) ........................ (14,864,868)
------------
NET ASSETS 100.0%...................................................... $ 98,868,768
============
</TABLE>

* Zero coupon bond

(a) At June 30, 1996, cost for federal income tax purposes is $113,946,239; the
aggregate gross unrealized appreciation is $2,061,121 and the aggregate
gross unrealized gross unrealized depreciation is $2,586,548, resulting in
net unrealized depreciation on investments, foreign currency translation of
other assets and liabilities, forward currency contracts and option and
futures transactions of $525,427.

(b) Securities purchased on a when issued or delayed delivery basis.

(c) Assets segregated as collateral for when issued or delayed delivery purchase
commitments, open option, futures or swap transactions or borrowings of the
Fund.

(d) Security is a "Step-up" bond where the coupon increases, or steps up, at a
predetermined date.

See Notes to Financial Statements

B-55
<PAGE> 144

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

(e) Items 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.

(f) Item 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, 1996,
item is a non-income producing security.

The following table summarizes the portfolio composition at June 30, 1996,
based upon quality ratings issued by Standard & Poors. For securities not rated
by Standard & Poors, the Moody's rating is used.

<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION BY CREDIT QUALITY
<S> <C>
U.S. Govt. and Agency Obligations............... 20.9%
AAA............................................. 7.9
AA.............................................. 3.5
A............................................... 11.8
BBB............................................. 9.2
BB.............................................. 28.6
B............................................... 7.3
CCC............................................. 0.4
Non-Rated....................................... 10.4
-----
100.0%
=====
</TABLE>

See Notes to Financial Statements

B-56
<PAGE> 145

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $113,946,239) (Note 1).............. $113,733,636
Receivables:
Securities Sold...................................................... 13,690,475
Interest............................................................. 2,358,242
Fund Shares Sold..................................................... 314,843
Options at Market Value (Net premiums paid of $458,000) (Note 5)....... 247,000
Unamortized Organizational Expenses (Note 1)........................... 85,000
Other.................................................................. 2,438
------------
Total Assets....................................................... 130,431,634
------------
LIABILITIES:
Payables:
Securities Purchased................................................. 14,330,183
Bank Borrowings (Note 8)............................................. 12,878,262
Reverse Repurchase Agreements (Note 8)............................... 3,035,171
Income Distributions................................................. 406,193
Variation Margin on Futures (Note 5)................................. 215,872
Distributor and Affiliates (Notes 2 and 7)........................... 146,717
Investment Advisory Fee (Note 2)..................................... 74,356
Fund Shares Repurchased.............................................. 63,588
Forward Currency Contracts (Note 5).................................. 6,311
Accrued Expenses....................................................... 357,716
Deferred Compensation and Retirement Plans (Note 2).................... 48,497
------------
Total Liabilities.................................................. 31,562,866
------------
NET ASSETS............................................................. $ 98,868,768
============
NET ASSETS CONSIST OF:
Capital (Note 3)....................................................... $107,528,301
Accumulated Undistributed Net Investment Income........................ 22,912
Net Unrealized Depreciation on Securities.............................. (794,446)
Accumulated Net Realized Loss on Securities............................ (7,887,999)
------------
NET ASSETS............................................................. $ 98,868,768
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $33,826,436 and 2,803,579 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 12.07
Maximum sales charge (4.75%* of offering price).................... .60
------------
Maximum offering price to public................................... $ 12.67
============
Class B Shares:
Net asset value and offering price per share (Based on net assets
of $61,941,303 and 5,132,287 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 12.07
============
Class C Shares:
Net asset value and offering price per share (Based on net assets
of $3,101,029 and 257,163 shares of capital stock issued and
outstanding) (Note 3).............................................. $ 12.06
============
</TABLE>

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

See Notes to Financial Statements

B-57
<PAGE> 146

STATEMENT OF OPERATIONS

For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $11,751)................. $ 11,358,305
------------
EXPENSES:
Investment Advisory Fee (Note 2)....................................... 927,893
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C
of $79,707, $569,681 and $25,454, respectively) (Note 7)............. 674,842
Shareholder Services (Note 2).......................................... 163,002
Custody................................................................ 132,458
Trustees Fees and Expenses (Note 2).................................... 50,159
Amortization of Organizational Expenses (Note 1)....................... 34,074
Legal (Note 2)......................................................... 13,930
Other.................................................................. 204,927
------------
Total Operating Expenses......................................... 2,201,285
Less Expenses Reimbursed......................................... 75,046
------------
Net Operating Expenses........................................... 2,126,239
Interest Expense (Note 8)........................................ 2,065,824
------------
NET INVESTMENT INCOME.................................................. $ 7,166,242
============
NET REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments.......................................................... $ 1,456,472
Options.............................................................. (238,148)
Futures.............................................................. (97,630)
Forwards............................................................. 388,736
Foreign Currency Transactions........................................ 578,667
------------
Net Realized Gain on Securities........................................ 2,088,097
------------
Net Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................................ (1,979,896)
------------
End of the Period:
Investments.......................................................... (212,603)
Options.............................................................. (211,000)
Futures.............................................................. (277,662)
Forwards............................................................. (91,819)
Foreign Currency Translation......................................... (1,362)
------------
(794,446)
------------
Net Unrealized Appreciation on Securities During the Period............ 1,185,450
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES......................... $ 3,273,547
============
NET INCREASE IN NET ASSETS FROM OPERATIONS............................. $ 10,439,789
============
</TABLE>

See Notes to Financial Statements

B-58
<PAGE> 147

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended June 30, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income........................................ $ 7,166,242 $ 4,245,759
Net Realized Gain/Loss on Securities......................... 2,088,097 (5,113,942)
Net Unrealized Appreciation on Securities During the
Period...................................................... 1,185,450 6,772,099
----------- -----------
Change in Net Assets from Operations......................... 10,439,789 5,903,916
----------- -----------
Distributions from Net Investment Income..................... (7,166,242) (4,415,661)
Distributions in Excess of Net Investment Income (Note 1).... (721,843) (533,006)
----------- -----------
Distributions from and in Excess of Net Investment Income*... (7,888,085) (4,948,667)
Return of Capital Distribution*.............................. -0- (2,635,924)
----------- -----------
Total Distributions.......................................... (7,888,085) (7,584,591)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.......... 2,551,704 (1,680,675)
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold.................................... 29,338,222 25,816,917
Net Asset Value of Shares Issued Through Dividend
Reinvestment................................................ 3,220,366 3,244,998
Cost of Shares Repurchased................................... (20,206,493) (16,415,322)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS........... 12,352,095 12,646,593
----------- -----------
TOTAL INCREASE IN NET ASSETS................................. 14,903,799 10,965,918
NET ASSETS:
Beginning of the Period...................................... 83,964,969 72,999,051
----------- -----------
End of the Period (Including undistributed net investment
income of $22,912 and $(407,598), respectively)............. $ 98,868,768 $ 83,964,969
============ ============
</TABLE>

<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class June 30, 1996 June 30, 1995
------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income (Note 1):
Class A Shares........................... $ (2,908,823) $ (1,773,941)
Class B Shares........................... (4,768,060) (3,039,599)
Class C Shares........................... (211,202) (135,127)
------------ ------------
$ (7,888,085) $ (4,948,667)
============ ============
Return of Capital Distribution:
Class A Shares........................... $ -0- $ (957,995)
Class B Shares........................... -0- (1,618,412)
Class C Shares........................... -0- (59,517)
------------ ------------
$ -0- $ (2,635,924)
============ ============
</TABLE>

See Notes to Financial Statements

B-59
<PAGE> 148

NOTES TO FINANCIAL STATEMENTS

June 30, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Strategic Income Fund (the "Fund") is organized as a
series of Van Kampen American Capital Trust (the "Trust"), a Delaware 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's primary
investment objective is to seek to provide shareholders with high current
income, while its' secondary investment objective is to seek capital
appreciation. The Fund will allocate its investments among 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 Fund borrows
money for investment purposes which will create the opportunity for enhanced
return, but also should be considered a speculative technique and may increase
the Fund's volatility. The Fund commenced investment operations on December 31,
1993, with three classes of common shares, Class A, Class B and Class C shares.

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
over-the-counter (OTC) or interbank market. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost.

B-60
<PAGE> 149

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

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.

E. ORGANIZATIONAL EXPENSES--The Fund has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Fund's organization 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 in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.

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, 1996, the Fund had an accumulated capital loss carryforward
for tax purposes of $7,885,927. Of this amount, $4,216,449 and $3,669,478 will
expire on June 30, 2003 and 2004, 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 and timing differences related to open futures and
forward transactions at year end.

B-61
<PAGE> 150

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

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 net currency gains totaling
$1,152,353 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.

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, 1996, the Fund recognized expenses of
approximately $20,000 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund.

In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent for
the Fund. For the year ended June 30, 1996, the Fund recognized expenses of
approximately $128,300, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit.

Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.

At June 30, 1996, VKAC owned 100 shares each of Classes A, B and C.

B-62
<PAGE> 151

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

The Fund has outstanding three classes of common shares, Classes A, B and C,
each with a par value of $.01 per share. There are an unlimited number of shares
of each class authorized.

At June 30, 1996, capital aggregated $36,670,209, $67,432,261 and $3,425,831
for Classes A, B and C, respectively. For the year ended June 30, 1996,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 751,977 $ 9,046,110
Class B.................................... 1,498,860 18,147,281
Class C.................................... 178,450 2,144,831
---------- ------------
Total Sales.................................. 2,429,287 $ 29,338,222
========== ============
Dividend Reinvestment:
Class A.................................... 94,962 $ 1,139,581
Class B.................................... 163,856 1,965,307
Class C.................................... 9,612 115,478
---------- ------------
Total Dividend Reinvestment.................. 268,430 $ 3,220,366
========== ============
Repurchases:
Class A.................................... (575,267) $ (6,903,393)
Class B.................................... (1,024,433) (12,352,105)
Class C.................................... (78,275) (950,995)
---------- ------------
Total Repurchases............................ (1,677,975) $(20,206,493)
========== ============
</TABLE>

B-63
<PAGE> 152

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1995, capital 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>

<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-64
<PAGE> 153

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

For the year ended June 30, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$28,500 and CDSC on redeemed shares of approximately $261,900. Sales charges do
not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding U.S. Government Securities and short-term investments, were
$286,944,406 and $313,642,485, 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
securities. Upon disposition, a realized gain or loss is recognized accordingly,
except for exercised option contracts where the recognition of gain or loss is
postponed until the disposal of the security underlying the option contract.

Summarized below are the specific types of derivative financial instruments
used by the Fund.

B-65
<PAGE> 154

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

Transactions in options for the year ended June 30, 1996, were as follows:

<TABLE>
<CAPTION>
CONTRACTS PREMIUM
- ----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1995................... 5 $ (268,450)
Options Written and Purchased (Net)............ 2,930 (1,921,659)
Options Terminated in Closing
Transactions (Net)........................... (1,627) 1,011,934
Options Exercised.............................. (202) 56,600
Options Expired (Net).......................... (1,103) 663,575
----- -----------
Outstanding at June 30, 1996................... 3 $ (458,000)
===== ===========
</TABLE>

The descriptions and market values of the option contracts outstanding as of
June 30, 1996, are as follows:

<TABLE>
<CAPTION>
STRIKE
OPENING EXPIRATION PRICE/ MARKET
DESCRIPTION TRANSACTION DATE YIELD VALUE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Argentina Brady Bond Put...... Buy 09/03/96 53.250% $ 72,000
German Mark Put............... Buy 01/22/97 1.57 100,000
Mexican Brady Bond Put........ Buy 09/03/96 63.813% 75,000
--------
$247,000
========
</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.

Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin). The cost of securities acquired through
delivery under a contract is adjusted by the unrealized gain or loss on the
contract.

Transactions in futures contracts for the year ended June 30, 1996, were as
follows:

<TABLE>
<CAPTION>
CONTRACTS
- ------------------------------------------------------------------------
<S> <C>
Outstanding at June 30, 1995.............................. 299
Futures Opened............................................ 6,699
Futures Closed............................................ (6,767)
-----
Outstanding at June 30, 1996.............................. 231
=====
</TABLE>

B-66

<PAGE> 155

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

The futures contracts outstanding as of June 30, 1996, and the descriptions
and unrealized depreciation are as follows:

<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- ----------------------------------------------------------------------------
<S> <C> <C>
10-Year Japanese Bond Future Sept 1996--
Sells to Open................................ 2 $(14,432)
10-Year U.S. Treasury Note Future Sept 1996--
Sells to Open................................ 1 (844)
U.S. Treasury Long Bond Future Sept 1996--
Sells to Open................................ 228 (262,386)
--- ---------
231 $(277,662)
=== =========
</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, 1996, the Fund has outstanding forward currency contracts as
follows:

<TABLE>
<CAPTION>
UNREALIZED
FORWARD ORIGINAL CURRENT APPRECIATION/
CURRENCY VALUE VALUE DEPRECIATION
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BUYS TO OPEN
Italian Lira,
expiring 07/02/96............... $ 356,142 $ 356,142 $ -0-

SELLS TO OPEN
Australian Dollar,
expiring 07/03/96............... 1,034,721 1,022,935 11,786
British Pound Sterling,
expiring 07/02/96............... 647,641 650,573 (2,932)
Canadian Dollar,
expiring 07/03/96 -- 09/10/96... 2,333,266 2,333,860 (594)
Deutsche Mark,
expiring 07/02/96 -- 09/09/96... 3,416,385 3,430,434 (14,049)
New Zealand Dollar,
expiring 07/03/96 -- 07/05/96... 1,321,301 1,335,329 (14,028)
Spanish Peseta,
expiring 07/02/96 -- 09/11/96... 2,550,457 2,574,704 (24,247)
Swedish Krona,
expiring 07/13/96............... 2,000,000 2,047,755 (47,755)
------------
$(91,819)
============
</TABLE>

B-67
<PAGE> 156

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1996, the Fund had realized gains on closed but unsettled
forward currency contracts of $85,508 scheduled to settle between July 5, 1996
and July 8, 1996.

D. SWAP TRANSACTIONS--These securities, which are identified in the portfolio of
investments, represent an agreement between two parties to exchange a series of
cash flows based upon various indices at specified intervals.

E. INVERSE FLOATING SECURITY--These instruments, which are identified in the
portfolio of investments, have a coupon which 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.

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 Home Loan Mortgage Corp (FHLMC), Federal
National Mortgage Association (FNMA) or Government National Mortgage Association
(GNMA).

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.

B-68
<PAGE> 157

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

7. DISTRIBUTION AND SERVICE PLANS

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 $45,000,000 revolving credit agreement which
expires on February 28, 1997. 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,
1996, was 6.25%. An annual commitment fee of .15% 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, 1996, the average interest rate in effect for reverse
repurchase agreements was 5.59%.

The average daily balance of bank borrowings and reverse repurchase
agreements for the year ended June 30, 1996, was approximately $32,784,900 with
an average interest rate of 6.32%.

At June 30, 1996, these agreements represented 12.2% of the Fund's total
assets.

B-69