VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, POS AMI, 1997-11-13

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
POS AMI, 1997-11-13

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1997

FILE NOS. 333-14499

811-5845
================================================================================

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-2

<TABLE>
<CAPTION>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 1 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]

Amendment No. 21 [X]
</TABLE>

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)

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

(630) 684-6000
(Registrant's Telephone Number, including Area Code)

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

Copies to:

<TABLE>
<S> <C>
Wayne W. Whalen, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom General Counsel and Director
(Illinois) Van Kampen American Capital
333 W. Wacker Drive Investment Advisory Corp.
Chicago, Illinois 60606 One Parkview Plaza
(312) 407-0700 Oakbrook Terrace, Illinois 60181
</TABLE>

The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

Approximate date of proposed public offering: As soon as practicable after
the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
------------------

CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
================================================================================================================
PROPOSED* PROPOSED*
AMOUNT OF MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES SHARES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE*+
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of Beneficial
Interest............................ 225,000,000 $10.01 $2,252,250,000 $682,500
================================================================================================================
</TABLE>

* Estimated solely for the purpose of calculating the registration fee.

+ Previously paid.

================================================================================
<PAGE> 2

VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST

CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)

<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
--------------------- ---------------------
<S> <C> <C>
Part A
1. Outside Front Cover.................................... Cover Page
2. Inside Front and Outside Back Cover Page............... Cover Page; Outside Back Cover
3. Fee Table and Synopsis................................. Fund Expenses; Prospectus Summary
4. Financial Highlights................................... Financial Highlights
5. Plan of Distribution................................... Use of Proceeds; Purchasing Shares of
the Fund; Management of the Fund
6. Selling Shareholders................................... Not Applicable
7. Use of Proceeds........................................ Use of Proceeds; Investment Objective
and Policies and Special Risk Factors
8. General Description of the Registrant.................. The Fund; Investment Objective and
Policies and Special Risk Factors;
Investment Practices and Special Risks;
Description of Common Shares
9. Management............................................. Management of the Fund; Custodian,
Dividend Disbursing and Transfer Agent
10. Capital Stock, Long-Term Debt and Other Securities..... The Fund; Taxation; Distributions;
Dividend Reinvestment Plan; Repurchase
of Shares; Description of Common
Shares; Communications with
Shareholders
11. Defaults and Arrears on Senior Securities.............. Not Applicable
12. Legal Proceedings...................................... Not Applicable
13. Table of Contents of the Statement of Additional Table of Contents of the Statement of
Information............................................ Additional Information
</TABLE>
<PAGE> 3

<TABLE>
<CAPTION>
CAPTION IN SAI
--------------
<S> <C> <C>
Part B
14. Cover Page............................................. Cover Page
15. Table of Contents...................................... Cover Page
16. General Information and History........................ Not Applicable
17. Investment Objective and Policies...................... Investment Objective and Policies and
Special Risk Consideration; Investment
Restrictions; Portfolio Transactions
18. Management............................................. Trustees and Officers
19. Control Persons and Principal Holders of Securities.... Trustees and Officers
20. Investment Advisory and Other Services................. Trustees and Officers; Management of
the Fund
21. Brokerage Allocation and Other Practices............... Portfolio Transactions
22. Tax Status............................................. Taxation
23. Financial Statements................................... Independent Accountants' Report;
Financial Statements for the Year Ended
July 31, 1997; Notes to Financial
Statements
</TABLE>

Part C

Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE> 4

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VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
- -------------------------------------------------------------------------------

Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a non-
diversified, closed-end management investment company. The Fund's investment
objective is to provide a high level of current income, consistent with
preservation of capital. The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of interests in floating or
variable rate senior loans ("Senior Loans") to United States corporations,
partnerships and other entities ("Borrowers") which operate in a variety of
industries and geographical regions. Although the Fund's net asset value will
vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's net asset value
as a result of changes in interest rates. The Fund's net asset value may be
affected by changes in the credit quality of Borrowers with respect to Senior
Loan interests in which the Fund invests. The Fund's investment adviser is Van
Kampen American Capital Investment Advisory Corp. (the "Adviser"). An investment
in the Fund may not be appropriate for all investors and there is no assurance
that the Fund will achieve its investment objective. SEE "INVESTMENT OBJECTIVE
AND POLICIES AND SPECIAL RISK CONSIDERATIONS."

The Board of Trustees of the Fund currently intends, each quarter, to
consider authorizing the Fund to make tender offers for all or a portion of its
outstanding common shares of beneficial interest ("Common Shares") at the then
current net asset value of the Common Shares. An early withdrawal charge payable
to Van Kampen American Capital Distributors, Inc. ("VKAC") will be imposed on
most Common Shares held for less than five years that are accepted for
repurchase pursuant to a tender offer by the Fund. The
(Continued on next page.)
------------------

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

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

This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Common Shares of the Fund. Please
read and retain this Prospectus for future reference. A Statement of Additional
Information dated November 13, 1996, as amended on November , 1997, has been
filed with the Securities and Exchange Commission and can be obtained without
charge by calling 1-800-341-2911 or, for Telecommunications Device for the Deaf,
1-800-421-2833. A table of contents to the Statement of Additional Information
is located at page 51 of this Prospectus. This Prospectus incorporates by
reference the entire Statement of Additional Information. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials at the
SEC's internet web site (http://www.sec.gov).

------------------
VAN KAMPEN AMERICAN CAPITAL
------------------

THIS PROSPECTUS IS DATED NOVEMBER 13, 1996, AS AMENDED ON NOVEMBER , 1997.

<PAGE> 5

(Continued from previous page.)

Fund does not intend to list the Common Shares on any national securities
exchange and none of the Fund, the Adviser or VKAC intends to make a secondary
market in the Common Shares at any time. Accordingly, Common Shares of the Fund
have no history of public trading, and there is not expected to be any secondary
trading market in the Common Shares. An investment in the Common Shares should
be considered illiquid.

The Fund completed an initial public offering of its Common Shares in October,
1989. Since November 13, 1989 the Fund has engaged in a continuous offering of
its Common Shares through VKAC, as principal underwriter, and through selected
broker-dealers and financial services firms, at a price per Common Share equal
to net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000. The minimum initial
investment for tax sheltered retirement plans is $250. See "Purchasing Shares of
the Fund." The Fund has registered 225,000,000 Common Shares for sale under the
Registration Statement to which this Prospectus relates. The Fund has incurred
approximately [$830,000] in expenses in connection with the offering of such
Common Shares, which expenses have previously been charged as operating expenses
of the Fund.

Senior Loans in which the Fund may invest generally will pay interest at rates
which are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major United States bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. The Fund
will seek to achieve over time an effective yield that approximates the average
published Prime Rate of major United States banks. Senior Loans generally will
hold the most senior position in the capital structure of the Borrowers and
generally will be secured with specific collateral, which may include
guarantees. The terms of Senior Loans typically will include various restrictive
covenants which are designed to limit certain activities of the Borrowers. It is
anticipated that the proceeds of the Senior Loans in which the Fund will acquire
interests will be used primarily to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. SEE "INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK
CONSIDERATIONS."

2
<PAGE> 6

- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................... 4
Prospectus Summary.......................................... 5
Financial Highlights........................................ 14
The Fund.................................................... 16
Use of Proceeds............................................. 17
Investment Objective and Policies and Special Risk
Factors................................................... 17
Certain Characteristics of Senior Loan Interests.......... 17
Special Risk Considerations............................... 25
Investment Practices and Special Risks...................... 28
Taxation.................................................... 33
Management of the Fund...................................... 35
Distributions............................................... 37
Dividend Reinvestment Plan.................................. 37
Repurchase of Shares........................................ 39
Description of Common Shares................................ 43
Purchasing Shares of the Fund............................... 46
Communications with Shareholders............................ 48
Custodian, Dividend Disbursing and Transfer Agent........... 49
Legal Opinions.............................................. 50
Experts..................................................... 50
Additional Information...................................... 50
Table of Contents for Statement of Additional Information... 51
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND, THE FUND'S ADVISER OR VKAC. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON
SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, IN ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

3
<PAGE> 7

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FUND EXPENSES
- ------------------------------------------------------------------------------

The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund.

<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)........... None
Dividend Reinvestment Plan Fees.......................... None
Early Withdrawal Charge.................................. 0.00-3.00%
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES)
Investment Advisory and Administration Fees(1)........... 1.19%
Interest Payments on Borrowed Funds...................... 0.00%
Other Expenses........................................... 0.23%
----------
Total Annual Operating Expenses...................... 1.42%
</TABLE>

- ----------------
(1) See "Management of the Fund" for additional information.

EXAMPLE

An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:

<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Assuming no tender of Common
Shares......................... $14 $45 $78 $170
Assuming tender and repurchase of
Common Shares on last day of
period and imposition of maximum
applicable early withdrawal
charge........................... $44 $65 $88 $170
</TABLE>

This "Example" assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under Total
Annual Operating Expenses remain the same in the years shown except, as to the
Three, Five and Ten Year periods, for the completion of organization expense
amortization. The above tables and the assumptions in the Example of a 5% annual
return and reinvestment at net asset value are required by regulation of the
SEC; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Common Shares. THIS
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES, AND THE
FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.

4
<PAGE> 8

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

The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information.

THE FUND. Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company, organized as a
Massachusetts business trust on July 14, 1989. The Fund completed an initial
public offering of its common shares of beneficial interest ("Common Shares") in
October, 1989. Since November 13, 1989 the Fund has engaged in a continuous
offering of its Common Shares through Van Kampen American Capital Distributors,
Inc. ("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As
of November 4, 1997, the Fund had 646,872,517 Common Shares outstanding and had
net assets of $6,443,623,976. See "The Fund."

CONTINUOUS OFFERING. The Fund is continuously offering Common Shares through
VKAC, as principal underwriter, and through selected broker-dealers and
financial services firms, at a public offering price per Common Share equal to
net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VKAC will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000 and minimum subsequent
investment is $100. The minimum initial investment for tax sheltered retirement
plans is $250. The Fund does not intend to list the Common Shares on any
national securities exchange. The Fund may from time to time make tender offers
for all or a portion of its Common Shares. An early withdrawal charge payable to
VKAC will be imposed on most Common Shares accepted for tender that have been
held for less than five years. See "Purchasing Shares of the Fund" and
"Repurchase of Shares."

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to United States corporations, partnerships and
other entities ("Borrowers"). Although the Fund's net asset value will vary, the
Fund's policy of acquiring interests in floating or variable rate Senior Loans
is expected to minimize fluctuations in the Fund's net asset value as a result
of changes in interest rates. Senior Loans in which the Fund will purchase
interests generally pay interest at rates which are periodically redetermined by
reference to a base lending rate plus a premium. These base lending rates are
generally the prime rate offered by one or more major United States banks
("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the Certificate of
Deposit ("CD") rate or other base lending rates used by commercial lenders. The
Fund seeks to achieve over time an effective yield that approximates the average
published Prime Rate of major United States banks. The

5
<PAGE> 9

Fund's net asset value may be affected by changes in the credit quality of
Borrowers with respect to Senior Loan interests in which the Fund invests. An
investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective. As discussed below in this
Prospectus Summary under "Tender Offers," an investment in the Common Shares
should be considered illiquid.

Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent will be primarily responsible for
negotiating the loan agreement ("Loan Agreement") that establishes the relative
terms and conditions of the Senior Loan and rights of the Borrower and the
several Lenders. The Fund will invest in participations ("Participations") in
Senior Loans, will purchase assignments ("Assignments") of portions of Senior
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender"). The Fund will purchase an Assignment or
act as Original Lender with respect to a syndicated Senior Loan, initially, only
where the Agent with respect to such Senior Loan at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by
Moody's Investors Service ("Moody's")) or determined by the Adviser to be of
comparable quality. In addition, the Fund will purchase a Participation only
when the Lender selling such Participation, and any other person interpositioned
between such Lender and the Fund at the time of investment have outstanding debt
obligations rated investment grade or determined by the Adviser to be of
comparable quality. Further, the Fund will not purchase interests in Senior
Loans unless such Agent, Lender or interpositioned person has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund. With respect to any given Senior
Loan, the rights of the Fund when it acquires a Participation may be different
from, and more limited than, the rights of Original Lenders or of persons who
acquire an Assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the Participations are obtained. The
Fund may pay a fee or forgo a portion of interest payments to the Lender selling
a Participation or Assignment pursuant to the terms of such Participation or
Assignment.

6
<PAGE> 10

Loans which are not secured by any specific collateral in connection with its
investments in collateralized Senior Loans. The Fund may also acquire warrants,
equity securities and, in limited circumstances, junior debt securities in
connection with its investments in Senior Loans, as discussed below. Such equity
securities will not be treated by the Fund as Senior Loans. Investment in Senior
Loans which are not secured by specific collateral and in warrants, equity
securities and junior debt securities entails certain risks in addition to those
associated with investment in collateralized Senior Loans. Loan Agreements may
provide for various restrictive covenants designed to limit the activities of
the Borrower in an effort to protect the interests of the Lenders. Breach of
such covenants, if not waived by the Lenders, is generally an event of default
under the Loan Agreement and may give the Lenders the right to accelerate
principal and interest payments. The Adviser will consider the terms of such
restrictive covenants in deciding whether to invest in Senior Loans for the
Fund's portfolio. When the Fund holds a Participation in a Senior Loan it may
not have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver of
a restrictive covenant may have interests different from those of the Fund and
such Lenders may not consider the interests of the Fund in connection with their
votes.

Pursuant to the relevant Loan Agreement, the Borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets or would cause the
Fund to fail to meet the diversification requirements set forth under the
heading "Investment Restrictions" in the Statement of Additional Information.

In normal market conditions, at least 80% of the Fund's total assets will be
invested in Senior Loans. The Fund is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. It is currently
anticipated that the Fund's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and seven years, inclusive,
and with rates of interest which are redetermined either daily, monthly,
quarterly or semi-annually; provided, however, that the Fund may invest up to 5%
of its total assets in Senior Loans which permit the Borrower to select an
interest rate redetermination period of up to one year. Investment in Senior
Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until next interest rate redetermination of 90 days
or less. Because most Senior Loans in the Fund's portfolio will be subject to

7
<PAGE> 11

mandatory or optional prepayment and as there may be significant economic
incentives for a Borrower to prepay its Senior Loans, prepayment of Senior Loans
in the Fund's portfolio may occur. Accordingly, the actual remaining maturity of
the Fund's portfolio invested in Senior Loans may vary substantially from the
average stated maturity of the Senior Loans held in the Fund's portfolio.
However, because most Senior Loans in which the Fund may invest redetermine
interest rates at least semi-annually, the Fund and the Adviser believe that the
possibility of prepayment does not entail a significant yield risk to holders of
Common Shares.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in limited circumstances, junior debt securities acquired in
connection with the Fund's investments in Senior Loans. Such high quality,
short-term debt securities may include commercial paper rated at least in the
top two rating categories of either S&P or Moody's or unrated commercial paper
considered by the Adviser to be of comparable quality, interests in short-term
loans of Borrowers having short-term debt obligations rated or a short-term
credit rating at least in such top two rating categories or having no such
rating but determined by the Adviser to be of comparable quality, certificates
of deposit and bankers' acceptances and securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Such high quality,
short-term debt securities may pay interest at rates that are periodically
redetermined, or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may, subject to its ability to liquidate its relatively illiquid portfolio of
Senior Loans, invest up to 100% of its assets in cash and such high quality,
short-term securities. The Fund may also lend its portfolio securities to other
parties and may enter into repurchase and reverse repurchase agreements for
securities, subject to certain restrictions. For further discussion of the
Fund's investment objective and policies and its investment practices and the
associated considerations, see "Investment Objective and Policies and Special
Risk Considerations" and "Investment Practices and Special Risks."

Senior Loans historically have not been rated by nationally recognized
statistical rating organizations. Because of the collateralized nature of most
Senior Loans in the Fund's portfolio, the Fund and the Adviser believe that
ratings of other securities issued by a Borrower do not necessarily reflect
adequately the relative quality of a Borrower's Senior Loans. Therefore,
although the Adviser may consider such ratings in determining whether to invest
in a particular Senior Loan, the Adviser is not required to consider such
ratings and such ratings will not be the determinative factor in the Adviser's
analysis. The Fund may invest in Senior Loans, the Borrowers with respect to
which have outstanding debt securities which are rated below investment grade by
a nationally recognized statistical rating organization or are unrated but of
comparable quality to such securities. Debt securities rated below investment
grade, or unrated but of comparable quality,

8
<PAGE> 12

commonly are referred to as "junk bonds." The Fund will invest only in those
Senior Loans with respect to which the Borrower, in the opinion of the Adviser,
demonstrates certain of the following characteristics: sufficient cash flow to
service debt; adequate liquidity; successful operating history; strong
competitive position; experienced management; and, with respect to
collateralized Senior Loans, adequate collateral coverage of the Senior Loan. In
addition, the Adviser will consider, and may rely in part, on analyses performed
by Lenders other than the Fund.

When the Fund purchases a Participation, the Fund typically enters into a
contractual relationship with the Lender selling such Participation, but not
with the Borrower. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender selling the Participation and the Fund may not directly
benefit from the collateral supporting the Senior Loan in which it has purchased
the Participation. The Fund will only acquire Participations if the Lender
selling the Participation, and any other person interpositioned between the Fund
and such Lender (i) at the time of investment has outstanding debt or deposit
obligations rated investment grade or determined by the Adviser to be of
comparable quality and (ii) has entered into an agreement providing for the
holding of assets in safekeeping for the Fund. The Fund ordinarily will purchase
a Participation only if, at the time of such purchase, the Fund believes that
the party from whom it is purchasing such Participation is retaining an interest
in the underlying Senior Loan. The Fund believes that such policies
significantly reduce the credit risk that it assumes with respect to such Lender
or interpositioned person.

INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser"), a wholly-owned subsidiary of Van Kampen American Capital, Inc., is
the Fund's investment adviser. Van Kampen American Capital, Inc. is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios and more
than $60 billion under management or supervision. Van Kampen American Capital,
Inc.'s more than 50 open-end and 37 closed-end funds and more than 2,500 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. See "Management of the Fund."

ADMINISTRATOR. VKAC is the Fund's administrator (the "Administrator"). The
Administrator is responsible for managing the business affairs of the Fund,
subject to the supervision of the Fund's Board of Trustees. The administrative
services to be provided by the Administrator include monitoring the provisions
of the Loan Agreements and any agreements with respect to Participations and
Assignments, recordkeeping responsibilities with respect to Senior Loans in the
Fund's portfolio and providing certain services to the holders of the Fund's
securities. See "Management of the Fund."

FEES AND EXPENSES. The Fund will pay the Adviser a monthly fee at an annual
rate of 0.95% of the average net assets of the Fund (as defined), such annual
rate is reduced when average net assets exceed $4 billion. The advisory fee is
higher than the fees paid by most other management investment companies,
although it is

9
<PAGE> 13

comparable to the fees paid by several publicly offered, closed-end management
investment companies with an investment objective and policies similar to those
of the Fund. The Fund will pay the Administrator a monthly fee at an annual rate
of 0.25% of the average net assets of the Fund (as defined). See "Management of
the Fund."

DISTRIBUTIONS. The Fund's policy is to declare daily and pay monthly
distributions to holders of Common Shares of substantially all net investment
income of the Fund. Distributions to holders of Common Shares cannot be assured,
and the amount of each monthly distribution is likely to vary. Net realized
long-term capital gains, if any, are distributed to holders of Common Shares at
least annually. Holders of Common Shares may elect to have distributions
automatically reinvested in additional Common Shares. See "Distributions,"
"Taxation" and "Dividend Reinvestment Plan."

TENDER OFFERS. The Board of Trustees of the Fund currently intends, each
quarter, to consider authorizing the Fund to make tender offers for all or a
portion of its outstanding Common Shares at the then current net asset value of
the Common Shares. As of the date hereof, the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Common Shares
accepted for tender that have been held for less than five years. The Fund does
not intend to list the Common Shares on any national securities exchange and
none of the Fund, the Adviser or VKAC intends to make a secondary trading market
in the Common Shares at any time. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid. There can be no assurance that the Fund
will in fact tender for any of its Common Shares. If the Fund tenders for Common
Shares there is no guarantee that all, or any, Common Shares tendered will be
purchased. Subject to its borrowing restrictions, the Fund may incur debt to
finance repurchases of its Common Shares pursuant to tender offers; such
borrowings entail additional risks. The ability of the Fund to tender for its
Common Shares may be limited by certain requirements of the Internal Revenue
Code of 1986, as amended, that must be satisfied in order for the Fund to
maintain its desired tax status as a regulated investment company. The Fund may
be required to suspend the continuous offering of its Common Shares during the
term of any such tender offer. See "The Fund," "Purchasing Shares of the Fund"
and "Repurchase of Shares."

SPECIAL RISK CONSIDERATIONS. Illiquidity. The Fund is a closed-end
investment company designed primarily for long-term investors and not as a
trading vehicle. The Fund does not intend to list the Common Shares for trading
on any national securities exchange. There is not expected to be any secondary
trading market in the Common Shares and an investment in the Common Shares
should be considered illiquid. In the event that the Fund's Board of Trustees
does not, at any time or from time to time, authorize the Fund to engage in
tender offers for its Common Shares, it is unlikely that a holder of Common
Shares will be able to otherwise sell Common Shares to the Fund. The shares of
closed-end investment companies often trade at a discount from their net asset
values and, in the unlikely

10
<PAGE> 14

event that a secondary market for the Common Shares were to develop, the Common
Shares likewise may trade at a discount from net asset value. Because the Fund
intends to offer its Common Shares continuously at a price equal to net asset
value, it is unlikely that the Common Shares would trade at a premium to net
asset value should a secondary market for the Common Shares develop.

Borrowings. The Fund is authorized to borrow money in an amount up to 33 1/3%
of the Fund's total assets (after giving effect to the amount borrowed) for the
purpose of obtaining short-term credits in connection with tender offers by the
Fund for the Common Shares. Under the requirements of the Investment Company Act
of 1940, as amended (the "1940 Act"), the Fund, immediately after any such
borrowings, must have an asset coverage of at least 300%. Asset coverage is the
ratio which the value of the total assets of the Fund, less all liabilities and
indebtedness not represented by senior securities (as that term is defined in
the 1940 Act), bears to the aggregate amount of any such borrowings by the Fund.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of such borrowings will be senior to those of the
holders of Common Shares, and the terms of any such borrowings may contain
provisions which limit certain activities of the Fund, including the payment of
dividends to holders of Common Shares in certain circumstances. Further, the
terms of any such borrowings may, and the provisions of the 1940 Act do (in
certain circumstances), grant lenders certain voting rights in the event of
default in the payment of interest or repayment of principal. In the event that
such provisions would impair the Fund's status as a regulated investment
company, the Fund, subject to its ability to liquidate its relatively illiquid
portfolio, intends to repay the borrowings. Interest payments and fees incurred
in connection with any such borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed). See
"Repurchase of Shares."

Senior Loans. Senior Loans in which the Fund will invest generally will not be
rated by a nationally recognized statistical rating organization, will not be
registered with the SEC or any state securities commission and generally will
not be listed on any national securities exchange. Although the Fund will
generally have access to financial and other information made available to the
Lenders in connection with Senior Loans, the amount of public information
available with respect to Senior Loans will generally be less extensive than
that available for more widely rated, registered and exchange-listed securities.
As a result, the performance of the Fund and its ability to meet its investment
objective is more dependent on the analytical abilities of the Adviser than
would be the case for an investment company that invests primarily in more
widely rated, registered or exchange-listed securities. See "Investment
Objective and Policies and Special Risk Considerations."

11
<PAGE> 15

Interests in Senior Loans generally are not listed on any national securities
exchange or automated quotation system and no regular market has developed in
which interests in Senior Loans are traded. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for liquid securities. The substantial portion of the Fund's assets
invested in relatively illiquid Senior Loan interests may restrict the ability
of the Fund to dispose of its investments in Senior Loans in a timely fashion
and at a fair price, and could result in capital losses to the Fund and holders
of Common Shares. However, many of the Senior Loans in which the Fund expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in the Adviser's opinion,
enhance the relative liquidity of such interests. The risks associated with
illiquidity are particularly acute in situations where the Fund's operations
require cash, such as when the Fund tenders for its Common Shares or when the
Adviser considers it advantageous to increase the percentage of the Fund's
portfolio invested in high quality, short-term securities, and may in certain
circumstances result in the Fund engaging in borrowings to meet short-term cash
requirements. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Investments in Participations. The Fund will
purchase Participations in Senior Loans. With respect to any given Senior Loan,
the terms of Participations are arrived at through private negotiations between
the Fund and the seller of such an interest in a Senior Loan, and may result in
the Fund having rights which differ from, and are more limited than, the rights
of Lenders or of persons who acquire such interests by Assignment.
Participations typically result in the Fund having a contractual relationship
with the Lender selling the Participation, but not with the Borrower. In the
event of the insolvency of the Lender selling the Participation, the Fund may be
treated as a general creditor of such Lender, and may not have any exclusive or
senior claim with respect to such Lender's interest in, or the collateral with
respect to, the Senior Loan. As such, the Fund may incur the credit risk of the
Lender selling the Participation in addition to the credit risk of the Borrower
with respect to the Senior Loan when purchasing Participations and may not
benefit directly from the security provided by the collateral supporting the
Senior Loan with respect to which such Participation was sold. The Fund has
implemented measures designed to reduce such risk. The Fund may pay a fee or
forgo a portion of interest payments when acquiring Participations or
Assignments. See "Investment Objective and Policies and Special Risk
Considerations."

Credit Risks Associated with Senior Loans. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential

12
<PAGE> 16

decrease in the net asset value of the Fund. Although Senior Loans in which the
Fund will invest generally will be secured by specific collateral, there can be
no assurance that liquidation of such collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal or that
such collateral could be readily liquidated. In the event of bankruptcy of a
Borrower, the Fund could experience delays or limitations with respect to its
ability to realize the benefits of the collateral securing a Senior Loan. In the
event that the Fund invests a portion of its assets in Senior Loans that are not
secured by specific collateral, the Fund will not enjoy the benefits of
collateralization with respect to such Senior Loans. See "Investment Objective
and Policies and Special Risk Considerations."

Certain Investment Practices. The Fund may use various investment practices
that involve special considerations including lending its portfolio securities,
entering into when-issued and delayed delivery transactions and entering into
repurchase and reverse repurchase agreements. In addition, the Fund has the
authority to engage in interest rate and other hedging and risk management
transactions. For further discussion of these practices and associated special
considerations, see "Investment Practices and Special Risks."

Diversification. The Fund has registered as a "non-diversified" investment
company so that it will be able to invest more than 5% of the value of its
assets in the obligations of any single issuer, including Senior Loans of a
single Borrower or Participations purchased from a single Lender. The Fund does
not intend to invest, however, more than 5% of the value of its assets in
interests in Senior Loans of a single Borrower. To the extent the Fund invests a
relatively high percentage of its assets in obligations of a limited number of
issuers, the Fund will be more susceptible than a more widely diversified
investment company to any single corporate, economic, political or regulatory
occurrence. See "The Fund."

Percentage of Assets in Participations. The Fund may invest up to 100% of its
assets in Participations. The Lenders selling such Participations and other
persons interpositioned between such Lenders and the Fund with respect to such
Participations will likely conduct their principal business activities in the
bank, finance and financial services industries. Because the Fund may invest a
relatively high percentage of its assets in such Participations, the Fund may be
more susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. The Fund
has taken measures which it believes significantly reduce its exposure to such
risk. See "Investment Objective and Policies and Special Risk Considerations"
and "Investment Restrictions" in the Statement of Additional Information.

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

13
<PAGE> 17

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for one Common Share of the Fund outstanding throughout
the periods indicated)
- --------------------------------------------------------------------------------

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

<TABLE>
<CAPTION>
OCTOBER 4, 1989
(COMMENCEMENT
YEAR ENDED JULY 31 OF INVESTMENT
------------------------------------------------------------------ OPERATIONS) TO
1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $10.002 $10.046 $10.052 $10.004 $ 9.998 $9.985 $10.008 $10.000
------- ------- ------- ------- ------- ------ ------- -------
Net Investment Income.................... .701 .735 .756 .618 .600 .698 .907 .815
Net Realized and Unrealized Gain/Loss.... (.042) (.028) (.004) .015 .008 .004 (.008) .005
------- ------- ------- ------- ------- ------ ------- -------
Total from Investment
Operations............................... .659 .707 .752 .633 .608 .702 .899 .820
------- ------- ------- ------- ------- ------ ------- -------
Less:
Distributions from Net Investment
Income................................. .698 .751 .758 .585 .600 .689 .910 .812
Distributions in Excess of Net Investment
Income................................. -0- -0- -0- -0- .002 -0- .012 -0-
------- ------- ------- ------- ------- ------ ------- -------
Total Distributions........................ .698 .751 .758 .585 .602 .689 .922 .812
------- ------- ------- ------- ------- ------ ------- -------
Net Asset Value, End of Period............. $ 9.963 $10.002 $10.046 $10.052 $10.004 $9.998 $ 9.985 $10.008
======= ======= ======= ======= ======= ====== ======= =======
</TABLE>

(Continued on following page)

See Financial Statements and Notes to Financial Statements.

14
<PAGE> 18

- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for one Common Share of the Fund outstanding
throughout the periods indicated)
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
OCTOBER 4, 1989
(COMMENCEMENT
YEAR ENDED JULY 31 OF INVESTMENT
-------------------------------------------------------------------- OPERATIONS) TO
1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return(1)(2) (Non-Annualized)...... 6.79% 7.22% 7.82% 6.52% 6.17% 7.25% 9.41% 8.51%
Net Assets at End of Period (in
millions).............................. $6,237.0 $4,865.8 $2,530.1 $1,229.0 $966.7 $928.3 $997.5 $659.1
Ratio of Expenses to Average Net
Assets(1)(Annualized).................. 1.42% 1.46% 1.49% 1.53% 1.53% 1.55% 1.56% 1.59%
Ratio of Net Investment Income to Average
Net Assets(1) (Annualized)............. 7.02% 7.33% 7.71% 6.16% 5.96% 6.98% 8.91% 9.91%
Portfolio Turnover(3).................... 83% 66% 71% 74% 67% 59% 41% 53%
- ----------------
(1) If certain expenses had not been assumed by the investment adviser, total return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets (Annualized)................... N/A N/A N/A N/A N/A N/A 1.58% N/A
Ratio of Net Investment Income to
Average Net Assets (Annualized)....... N/A N/A N/A N/A N/A N/A 8.89% N/A
(2) Total Return is based upon net asset value which does not include payment of the early withdrawal charge.
(3) Calculation includes the proceeds from principal repayments and sales of variable rate senior loan
interests.
</TABLE>

See Financial Statements and Notes to Financial Statements.

15
<PAGE> 19

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

Van Kampen American Capital Prime Rate Income Trust (the "Fund") is a
non-diversified, closed-end management investment company which was organized as
a Massachusetts business trust on July 14, 1989 and which commenced investment
operations on October 4, 1989. The Fund completed an initial public offering of
its common shares of beneficial interest ("Common Shares") in October, 1989.
Since November 13, 1989, the Fund has also engaged in a continuous offering of
the Common Shares through Van Kampen American Capital Distributors, Inc.
("VKAC") (an indirect affiliate of the Fund), as principal underwriter. As of
November 4, 1997, the Fund had 646,872,517 Common Shares outstanding and had net
assets of $6,443,623,976. The net asset value per Common Share of the Fund on
November 4, 1997 was $9.96. The Fund's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 and its telephone number is
1-800-421-5666.

The Fund is a closed-end investment company designed primarily for long-term
investors and not as a trading vehicle. The Fund does not intend to list the
Common Shares for trading on any national securities exchange and none of the
Fund, Van Kampen American Capital Investment Advisory Corp. (the "Adviser") or
VKAC intends to make a secondary trading market in the Common Shares at any
time. Accordingly, there is not expected to be any secondary trading market in
the Common Shares and an investment in the Common Shares should be considered
illiquid. The Board of Trustees of the Fund currently intends each quarter to
consider authorizing the Fund to make tender offers for all or a portion of its
then outstanding Common Shares at the then current net asset value for the
Common Shares. As of the date hereof the Fund has commenced and consummated
tender offers in each quarter since the commencement of investment operations.
An early withdrawal charge payable to VKAC will be imposed on most Common Shares
held for less than five years which are accepted for repurchase pursuant to a
tender offer by the Fund. There can be no assurance that the Fund will in fact
tender for any of its Common Shares and, in the event that the Fund does not so
tender, it is unlikely that a holder of Common Shares will be able to otherwise
sell Common Shares to the Fund. If the Fund tenders for Common Shares, there is
no guarantee that all, or any, Common Shares tendered will be purchased. Subject
to its borrowing restrictions, the Fund may incur debt to finance repurchases of
its Common Shares pursuant to tender offers, which entails additional risks. The
ability of the Fund to enter into tender offers may be limited by certain
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), that
must be satisfied in order for the Fund to maintain its desired tax status as a
regulated investment company. See "Repurchase of Shares."

16
<PAGE> 20

- ------------------------------------------------------------------------------
USE OF PROCEEDS
- ------------------------------------------------------------------------------

The net proceeds from the sale of the Common Shares offered hereby will be
invested in accordance with the Fund's investment objective and policies.
Pending such investment, the proceeds may be invested in high quality,
short-term securities.

- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK FACTORS
- ------------------------------------------------------------------------------

An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Fund will achieve its investment objective.

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate senior loans ("Senior Loans") to United States
corporations, partnerships and other entities ("Borrowers"). Although the Fund's
net asset value will vary, the Fund's policy of acquiring interests in floating
or variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. The Fund seeks to
achieve over time an effective yield that approximates the average published
Prime Rate of major United States banks.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

The Fund will invest in participations ("Participations") in Senior Loans,
will purchase assignments ("Assignments") of portions of Senior Loans from third
parties and may act as one of the group of Lenders originating a Senior Loan (an
"Original Lender").

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations,

17
<PAGE> 21

mergers, acquisitions, stock repurchases, and, to a lesser extent, to finance
internal growth and for other corporate purposes of Borrowers. The Fund
currently does not intend to acquire interests in Senior Loans the proceeds of
which would be used primarily to finance construction or real estate development
projects. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities of the Borrower. The capital structure of Borrowers may
include Senior Loans, senior and junior subordinated debt (which may include
"junk bonds"), preferred stock and common stock issued by the Borrower,
typically in descending order of seniority with respect to claims on the
Borrower's assets. Senior Loans generally are secured by specific collateral,
which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants and equity securities issued by the Borrower or its affiliates as part
of a package of investments in the Borrower or its affiliates. Warrants and
equity securities will not be treated as Senior Loans and thus assets invested
in such securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in unsecured Senior Loans, warrants and equity securities only as an incident to
the intended purchase of interests in collateralized Senior Loans. Loan
Agreements may also include various restrictive covenants designed to limit the
activities of the Borrower in an effort to protect the right of the Lenders to
receive timely payments of interest on and repayment of principal of the Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to, trademarks, accounts receivable,
inventory, buildings, real estate, franchises and common and preferred stock in
its subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a Senior Loan may be secured
only by stock in the Borrower or its subsidiaries. Such collateral may consist
of assets that may not be readily liquidated, and there is no assurance that the
liquidation of such assets would satisfy fully a Borrower's obligations under a
Senior Loan.

18
<PAGE> 22

accelerate principal and interest payments. The Adviser will consider the terms
of such restrictive covenants in deciding whether to invest in Senior Loans for
the Fund's portfolio. When the Fund holds a Participation in a Senior Loan it
may not have the right to vote to waive enforcement of any restrictive covenant
breached by a Borrower. Lenders voting in connection with a potential waiver of
a restrictive covenant may have interests different from those of the Fund and
such Lenders may not consider the interests of the Fund in connection with their
votes.

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime rate offered by one or
more major United States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. The Prime Rate quoted by a major U.S. bank is
the interest rate at which such bank is willing to lend U.S. dollars to its most
creditworthy borrowers. LIBOR, as provided for in Loan Agreements, is an average
of the interest rates quoted by several designated banks as the rates at which
such banks would offer to pay interest to major financial institutional
depositors in the London interbank market on U.S. dollar denominated deposits
for a specified period of time. The CD rate, as generally provided for in Loan
Agreements, is the average rate paid on large certificates of deposit traded in
the secondary market. At least 80% of the Fund's total assets normally will be
invested in Senior Loans. In normal market conditions, at least 65% of the
Fund's assets will be invested in Senior Loans which, at the time of the Fund's
initial investment in such Senior Loans, provided the Fund with a rate of return
which was at least equal to the Prime Rate existing on the date of such initial
investment. The Fund is not subject to any restrictions with respect to the
maturity of Senior Loans held in its portfolio. It is currently anticipated that
the Fund's assets invested in Senior Loans will consist of Senior Loans with
stated maturities of between three and seven years, inclusive, and with rates of
interest which are redetermined either daily, monthly, quarterly or
semi-annually; provided, however, that the Fund may invest up to 5% of its total
assets in Senior Loans which permit the Borrower to select an interest rate
redetermination period of up to one year. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the Fund's
net asset value as a result of changes in interest rates. The Senior Loans in
the Fund's portfolio will at all times have a dollar-weighted average time until
the next interest rate redetermination of 90 days or less. As a result, as
short-term interest rates increase, interest payable to the Fund from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Fund from its investments in Senior Loans
should decrease. The amount of time required to pass before the Fund will
realize the effects of changing short-term market interest rates on its
portfolio will vary with the dollar-weighted average time until the next
interest rate redetermination on the Senior Loans in the Fund's portfolio. The
Fund may utilize certain investment practices to, among other things, shorten
the effective interest rate redetermination period of Senior Loans in its
portfolio. In such event, the Fund will consider such shortened period to be the
interest rate redetermination period of the Senior Loan; provided, however, that
the Fund will not invest in Senior Loans

19
<PAGE> 23

which permit the Borrower to select an interest rate redetermination period in
excess of one year. Because most Senior Loans in the Fund's portfolio will be
subject to mandatory and/or optional prepayment and there may be significant
economic incentives for a Borrower to prepay its loans, prepayments of Senior
Loans in the Fund's portfolio may occur. Accordingly, the actual remaining
maturity of the Fund's portfolio invested in Senior Loans may vary substantially
from the average stated maturity of the Senior Loans held in the Fund's
portfolio. As a result of expected prepayments from time to time of Senior Loans
in the Fund's portfolio, the Fund estimates that the actual average maturity of
the Senior Loans held in its portfolio will be approximately 18-24 months.

When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's net asset value will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in net asset value as a result of changes
in interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate significantly less than a portfolio of fixed-rate,
longer term obligations as a result of interest rate changes. However, changes
in prevailing interest rates can be expected to cause some fluctuation in the
Fund's net asset value. In addition to changes in interest rates, changes in the
credit quality of Borrowers will also affect the Fund's net asset value.
Further, a serious deterioration in the credit quality of a Borrower could cause
a prolonged or permanent decrease in the Fund's net asset value.

The Fund may purchase and retain in its portfolio a Senior Loan interest the
Borrower with respect to which has filed for protection under the federal
bankruptcy laws or has had an involuntary bankruptcy petition filed against it
by its creditors. As of July 31, 1997, the date of the Fund's most recent
audited financial statements, the Fund held in its portfolio and had reduced the
value of three Senior Loan interests (the aggregate value of which represented
approximately 0.88% of the value of the Fund's total assets on such date) the
Borrowers with respect to which were subject to protection under the federal
bankruptcy laws. The values of such Senior Loan interests, if any, reflect,
among other things, the Adviser's assessment of the likelihood that the Fund
ultimately will receive full repayment of the principal amount of such Senior
Loan interests, the likely duration, if any, of a lapse in the scheduled
repayment of principal and prevailing interest rates. At times, in connection
with the restructuring of a Senior Loan either outside of bankruptcy court or in
the context of bankruptcy court proceedings, the Fund may determine or be
required to accept equity securities or junior debt securities in exchange for
all or a portion of a Senior Loan interest. Depending upon, among other things,
the Adviser's evaluation of the potential value of such securities in relation
to the price that could be obtained by the Fund at any given time upon sale
thereof, the Fund may determine to hold such securities in its portfolio. Any
equity securities and junior debt securities held by the Fund will not be
treated as Senior Loans and thus

20
<PAGE> 24

will not count toward the 80% of the Fund's total assets that normally will be
invested in Senior Loans.

Senior Loans historically have not been rated by nationally recognized
statistical rating organizations. Because of the collateralized or guaranteed
nature of most Senior Loans, the Fund and the Adviser believe that ratings of
other securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest a substantial portion of its assets in Senior Loans, the Borrowers
with respect to which have outstanding debt securities which are rated below
investment grade by a nationally recognized statistical rating organization or
are unrated but of comparable quality to such securities. Debt securities rated
below investment grade or unrated but of comparable quality commonly are
referred to as "junk bonds." The Fund will invest only in those Senior Loans
with respect to which the Borrower, in the opinion of the Adviser, demonstrates
certain of the following characteristics: sufficient cash flow to service debt;
adequate liquidity; successful operating history; strong competitive position;
experienced management; and, with respect to collateralized Senior Loans,
collateral coverage that equals or exceeds the outstanding principal amount of
the Senior Loan. In addition, the Adviser will consider, and may rely in part,
on the analyses performed by the Agent and other Lenders, including such
persons' determinations with respect to collateral securing a Senior Loan.

The Fund may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Fund with
respect to such Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Fund has taken measures which it believes significantly
reduce its exposure to any risks incident to such policy, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible than are persons engaged in
some other industry to, among other things, fluctuations in interest rates,
changes in the Federal Open Market Committee's monetary policy, governmental
regulations concerning such industries and concerning capital raising activities
generally and fluctuations in the financial markets generally.

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<PAGE> 25

Borrower and the Fund may not directly benefit from the collateral supporting
the Senior Loan in which it has purchased the Participation. As a result, the
Fund may assume the credit risk of both the Borrower and the Lender selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of such Lender, and
may not benefit from any set-off between such Lender and the Borrower. The Fund
has taken the following measures in an effort to minimize such risks. The Fund
will only acquire Participations if the Lender selling the Participation, and
any other persons interpositioned between the Fund and the Lender, (i) at the
time of investment has outstanding debt or deposit obligations rated investment
grade (BBB or A-3 or higher by Standard & Poor's Ratings Group ("S&P") or Baa or
P-3 or higher by Moody's Investors Service ("Moody's")) or determined by the
Adviser to be of comparable quality and (ii) has entered into an agreement which
provides for the holding of assets in safekeeping for, or the prompt
disbursement of assets to, the Fund. Long-term debt rated BBB by S&P is regarded
by S&P as having adequate capacity to pay interest and repay principal and debt
rated Baa by Moody's is regarded by Moody's as a medium grade obligation, i.e.,
it is neither highly protected nor poorly secured. Commercial paper rated A-1 by
S&P indicates that the degree of safety regarding timely payment is considered
by S&P to be either overwhelming or very strong and issues of commercial paper
rated Prime-1 by Moody's are considered by Moody's to have a superior ability
for repayment of senior short-term debt obligations. The Fund ordinarily will
purchase a Participation only if, at the time of such purchase, the Fund
believes that the party from whom it is purchasing such Participation is
retaining an interest in the underlying Senior Loan.

The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender. Assignments are,
however, arranged through private negotiations between potential assignees and
potential assignors, and the rights and obligations acquired by the purchaser of
an Assignment may differ from, and be more limited than, those held by the
assigning Lender.

When the Fund is an Original Lender originating a Senior Loan it may share in
a fee paid to the Original Lenders. The Fund will never act as the Agent or
principal negotiator or administrator of a Senior Loan. When the Fund is a
Lender, it will have a direct contractual relationship with the Borrower, may
enforce compliance by the Borrower with the terms of the Loan Agreement and may
have rights with respect to any funds acquired by other Lenders through set-off.
Lenders also have full voting and consent rights under the applicable Loan
Agreement. Action subject to Lender vote or consent generally requires the vote
or consent of the holders of some specified percentage of the outstanding
principal amount of the Senior Loan. Certain decisions, such as reducing the
amount or increasing the time for payment of interest on or repayment of
principal of a Senior Loan, or releasing collateral therefor, frequently require
the unanimous vote or consent of all Lenders affected.

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<PAGE> 26

The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment, have outstanding debt obligations rated
investment grade or determined by the Adviser to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the holding of assets in safekeeping for, or the prompt disbursement of
assets to, the Fund.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal or interest. In
such event, the Fund could experience a decrease in net asset value.

The Fund may be required to pay and may receive various fees and commissions
in connection with purchasing, selling and holding interests in Senior Loans.
The fees normally paid by Borrowers may include three types: facility fees,
commitment fees and prepayment penalties. Facility fees are paid to Lenders upon
origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or pass along
to a purchaser of an interest in a Senior Loan from the Fund a portion of any
fees that the Fund would otherwise be entitled to.

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<PAGE> 27

Pursuant to the relevant Loan Agreement, a Borrower may be required in certain
circumstances, and may have the option at any time, to prepay the principal
amount of a Senior Loan, often without incurring a prepayment penalty. Because
the interest rates on Senior Loans are periodically redetermined at relatively
short intervals, the Fund and the Adviser believe that the prepayment of, and
subsequent reinvestment by the Fund in, Senior Loans will not have a materially
adverse impact on the yield on the Fund's portfolio and may have a beneficial
impact on income due to receipt of prepayment penalties, if any, and any
facility fees earned in connection with reinvestment.

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets or would cause the
Fund to fail to meet the diversification requirements set forth under the
heading "Investment Restrictions" in the Statement of Additional Information.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in certain limited circumstances discussed above, junior debt
securities acquired in connection with the Fund's investments in Senior Loans.
Such high quality, short-term securities may include commercial paper rated at
least in the top two rating categories of either S&P or Moody's, or unrated
commercial paper considered by the Adviser to be of similar quality, interests
in short-term loans of Borrowers having short-term debt obligations rated or a
short-term credit rating at least in such top two rating categories or having no
such rating but determined by the Adviser to be of comparable quality,
certificates of deposit and bankers' acceptances and securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. Such high
quality, short-term securities may pay interest at rates which are periodically
redetermined or may pay interest at fixed rates. If the Adviser determines that
market conditions temporarily warrant a defensive investment policy, the Fund
may invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and such high
quality, short-term debt securities. The Fund will acquire such warrants and
equity securities only as an incident to the purchase or intended purchase of
interests in collateralized Senior Loans. Although the Fund generally will
acquire interests in warrants and equity securities only when the Adviser
believes that the relative value being given by the Fund in exchange for such
interests is substantially outweighed by the potential value of such
instruments, investment in warrants and equity securities entail certain risks
in addition to those associated with investments in Senior Loans. Warrants and
equity securities have a subordinate claim on a

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<PAGE> 28

Borrower's assets as compared with debt securities and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans and thus may have an adverse impact on the ability of the
Fund to minimize fluctuations in its net asset value.

SPECIAL RISK CONSIDERATIONS

On behalf of the several Lenders, the Agent generally will be required to
administer and manage the Senior Loan and, with respect to collateralized Senior
Loans, to service or monitor the collateral. In this connection, the valuation
of assets pledged as collateral will reflect market value and the Agent may rely
on independent appraisals as to the value of specific collateral. The Agent,
however, may not obtain an independent appraisal as to the value of assets
pledged as collateral in all cases. The Fund normally will rely primarily on the
Agent (where the Fund is an Original Lender or owns an Assignment) or the
selling Lender (where the Fund owns a Participation) to collect principal of and
interest on a Senior Loan. Furthermore, the Fund usually will rely on the Agent
(where the Fund is an Original Lender or owns an Assignment) or the selling
Lender (where the Fund owns a Participation) to monitor compliance by the
Borrower with the restrictive covenants in the Loan Agreement and notify the
Fund of any adverse change in the Borrower's financial condition or any
declaration of insolvency. Collateralized Senior Loans will frequently be
secured by all assets of the Borrower that qualify as collateral, which may
include common stock of the Borrower or its subsidiaries. Additionally, the
terms of the Loan Agreement may require the Borrower to pledge additional
collateral to secure the Senior Loan, and enable the Agent, upon proper
authorization of the Lenders, to take possession of and liquidate the collateral
and to distribute the liquidation proceeds pro rata among the Lenders. If the
terms of a Senior Loan do not require the Borrower to pledge additional
collateral in the event of a decline in the value of the original collateral,
the Fund will be exposed to the risk that the value of the collateral will not
at all times equal or exceed the amount of the Borrower's obligations under the
Senior Loan. Lenders that have sold Participation interests in such Senior Loan
will distribute liquidation proceeds received by the Lenders pro rata among the
holders of such Participations. The Adviser will also monitor these aspects of
the Fund's investments and, where the Fund is an Original Lender or owns an
Assignment, will be directly involved with the Agent and the other Lenders
regarding the exercise of credit remedies. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential decrease in the net asset value of the Fund. Although, with respect to
collateralized Senior Loans, the Fund generally will invest only in Senior Loans
that the Adviser believes are secured by specific

25
<PAGE> 29

collateral, which may include guarantees, the value of which exceeds the
principal amount of the Senior Loan at the time of initial investment, there can
be no assurance that the liquidation of any such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. Some Senior Loans in which the Fund may invest are subject to the
risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate such Senior Loans to presently existing or future indebtedness
of the Borrower or take other action detrimental to the holders of Senior Loans,
such as the Fund, including, under certain circumstances, invalidating such
Senior Loans. Lenders commonly have certain obligations pursuant to the Loan
Agreement, which may include the obligation to make additional loans or release
collateral in certain circumstances.

Senior Loans in which the Fund will invest historically have not been rated by
a nationally recognized statistical rating organization, will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for rated, registered
or exchange listed securities. As a result, the performance of the Fund and its
ability to meet its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment company that
invests primarily in rated, registered or exchange listed securities.

Senior Loans are, at present, not readily marketable and may be subject to
restrictions on resale. Interests in Senior Loans generally are not listed on
any national securities exchange or automated quotation system and no regular
market has developed for such interests. Any secondary market purchases and
sales of Senior Loans generally are conducted in private transactions between
buyers and sellers. Senior Loans are thus relatively illiquid, which illiquidity
may impair the Fund's ability to realize the full value of its assets in the
event of a voluntary or involuntary liquidation of such assets. Liquidity
relates to the ability of the Fund to sell an investment in a timely manner. The
market for relatively illiquid securities tends to be more volatile than the
market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which are not readily marketable
or are subject to restrictions on resale. The substantial portion of the Fund's
assets invested in relatively illiquid Senior Loan interests may restrict the
ability of the Fund to dispose of its investments in Senior Loans in a timely
fashion and at a fair price, and could result in capital losses to the Fund and

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<PAGE> 30

holders of Common Shares. However, many of the Senior Loans in which the Fund
expects to purchase interests are of a relatively large principal amount and are
held by a relatively large number of owners which should, in the Adviser's
opinion, enhance the relative liquidity of such interests. The risks associated
with illiquidity are particularly acute in situations where the Fund's
operations require cash, such as when the Fund tenders for its Common Shares,
and may result in the Fund borrowing to meet short-term cash requirements.

To the extent that legislation or state or federal regulators that regulate
certain financial institutions impose additional requirements or restrictions
with respect to the ability of such institutions to make loans in connection
with highly leveraged transactions, the availability of Senior Loan interests
for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions may reduce or eliminate sources of financing for
certain Borrowers. Further, to the extent that legislation or federal or state
regulators that regulate certain financial institutions require such
institutions to dispose of Senior Loan interests relating to highly leveraged
transactions or subject such Senior Loan interests to increased regulatory
scrutiny, such financial institutions may determine to sell such Senior Loan
interests in a manner that results in a price which, in the opinion of the
Adviser, is not indicative of fair value. Were the Fund to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to such Senior Loan interest, the price at which the Fund
could consummate such a sale might be adversely affected.

The Fund has registered as a "non-diversified" investment company so that,
subject to its investment restrictions, it will be able to invest more than 5%
of the value of its assets in the obligations of any single issuer, including
Senior Loans of a single Borrower or Participations purchased from a single
Lender. See "Investment Restrictions" in the Statement of Additional
Information. The Fund does not intend, however, to invest more than 5% of the
value of its assets in interests in Senior Loans of a single Borrower. To the
extent the Fund invests a relatively high percentage of its assets in
obligations of a limited number of issuers, the Fund will be more susceptible
than a more widely diversified investment company to any single corporate,
economic, political or regulatory occurrence.

The Fund may use various investment practices that involve special
considerations including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Investment Practices and Special Risks."

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<PAGE> 31

- ------------------------------------------------------------------------------
INVESTMENT PRACTICES AND SPECIAL RISKS
- ------------------------------------------------------------------------------

In connection with the investment objective and policies described above, the
Fund may: engage in interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell interests in Senior Loans and other portfolio debt
securities on a "when issued" or "delayed delivery" basis, and enter into
repurchase and reverse repurchase agreements. These investment practices involve
certain special risk considerations. The Adviser may use some or all of the
following investment practices when, in the opinion of the Adviser, their use is
appropriate. Although the Adviser believes that these investment practices may
further the Fund's investment objective, no assurance can be given that these
investment practices will achieve this result.

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions may be considered to involve derivative instruments. A derivative
is a financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. There are many different types
of derivatives, with many different uses. The Fund expects to enter into these
transactions primarily to seek to preserve a return on a particular investment
or portion of its portfolio, and may also enter into such transactions to seek
to protect against decreases in the anticipated rate of return on floating or
variable rate financial instruments the Fund owns or anticipates purchasing at a
later date, or for other risk management strategies such as managing the
effective dollar-weighted average duration of the Fund's portfolio. In addition,
with respect to fixed-income securities in the Fund's portfolio or to the extent
an active secondary market develops in interests in Senior Loans in which the
Fund may invest, the Fund may also engage in hedging transactions to seek to
protect the value of its portfolio against declines in net asset value resulting
from changes in interest rates or other market changes. The Fund does not intend
to engage in such transactions to enhance the yield on its portfolio to increase
income available for distributions. Market conditions will determine whether and
in what circumstances the Fund would employ any of the hedging and risk
management techniques described below. The Fund will not engage in any of the
transactions for speculative purposes and will use them only as a means to hedge
or manage the risks associated with assets held in, or anticipated to be
purchased for, the Fund's portfolio or obligations incurred by the Fund. The
successful utilization of hedging and risk management transactions requires
skills different from those needed in the selection of the Fund's portfolio
securities. The Fund believes that the Adviser possesses the skills necessary
for the successful utilization of hedging and risk management transactions. The
Fund will incur brokerage and other costs in connection with its hedging
transactions.

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<PAGE> 32

To the extent permitted by applicable regulatory authority, the Fund may enter
into interest rate swaps or purchase or sell interest rate caps or floors. The
Fund will not sell interest rate caps or floors that it does not own. Interest
rate swaps involve the exchange by the Fund with another party of their
respective obligations to pay or receive interest, e.g., an exchange of an
obligation to make floating rate payments for an obligation to make fixed rate
payments. For example, the Fund may seek to shorten the effective interest rate
redetermination period of a Senior Loan in its portfolio the Borrower to which
has selected an interest rate redetermination period of one year. The Fund could
exchange the Borrower's obligation to make fixed rate payments for one year for
an obligation to make payments that readjust monthly. In such event, the Fund
would consider the interest rate redetermination period of such Senior Loan to
be the shorter period.

The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index exceeds a predetermined interest rate, to receive
payments of interest at the difference of the index and the predetermined rate
on a notional principal amount (the reference amount with respect to which
interest obligations are determined although no actual exchange of principal
occurs) from the party selling such interest rate cap. The purchase of an
interest rate floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payments of interest at
the difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not enter
into swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Fund.

In circumstances in which the Adviser anticipates that interest rates will
decline, the Fund might, for example, enter into an interest rate swap as the
floating rate payor or, alternatively, purchase an interest rate floor. In the
case of purchasing an interest rate floor, if interest rates declined below the
floor rate, the Fund would receive payments from its counterparty which would
wholly or partially offset the decrease in the payments it would receive in
respect of the portfolio assets being hedged. In the case where the Fund
purchases such an interest rate swap, if the floating rate payments fell below
the level of the fixed rate payment set in the swap agreement, the Fund's
counterparty would pay the Fund amounts equal to interest computed at the
difference between the fixed and floating rates over the notional principal
amount. Such payments would offset or partially offset the decrease in the
payments the Fund would receive in respect of floating rate portfolio assets
being hedged.

The successful use of swaps, caps and floors to preserve the rate of return on
a portfolio of financial instruments depends on the Adviser's ability to predict
correctly the direction and extent of movements in interest rates. Although the
Fund believes that use of the hedging and risk management techniques described
above will benefit the Fund, if the Adviser's judgment about the direction or
extent of the movement in interest rates in incorrect, the Fund's overall
performance

29
<PAGE> 33

would be worse than if it had not entered into any such transactions. For
example, if the Fund had purchased an interest rate swap or an interest rate
floor to hedge against its expectation that interest rates would decline but
instead interest rates rose, the Fund would lose part or all of the benefit of
the increased payments it would receive as a result of the rising interest rates
because it would have to pay amounts to its counterparty under the swap
agreement or would have paid the purchase price of the interest rate floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, the Adviser and the Fund believe such obligations do not
constitute senior securities. The Fund will usually enter into interest rate
swaps on a net basis, i.e., where the two parties make net payments with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued and an
amount of cash or liquid securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If the Fund enters into a swap on other than a net basis, the
Fund will maintain in the segregated account the full amount of the Fund's
obligations under each such swap. Accordingly, the Fund does not treat swaps as
senior securities. The Fund may enter into swaps, caps and floors with member
banks of the Federal Reserve System, members of the New York Stock Exchange or
other entities determined by the Adviser, pursuant to procedures adopted and
reviewed on an ongoing basis by the Board of Trustees, to be creditworthy. If a
default occurs by the other party to such transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which could
affect the Fund's rights as a creditor. The swap market has grown substantially
in recent years with a large number of banks and financial services firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps and floors are more
recent innovations and they are less liquid than swaps. There can be no
assurance, however, that the Fund will be able to enter into interest rate swaps
or to purchase interest rate caps or floors at prices or on terms the Adviser
believes are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can be
no assurance that the Fund will be able to terminate an interest rate swap or to
sell or offset interest rate caps or floors that it has purchased.

New financial products continue to be developed and the Fund may invest in any
such products as may be developed to the extent consistent with its investment
objective and the regulatory and federal tax requirements applicable to
investment companies.

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<PAGE> 34

LENDING OF PORTFOLIO HOLDINGS

The Fund may seek to increase its income by lending financial instruments in
its portfolio in accordance with present regulatory policies, including those of
the Board of Governors of the Federal Reserve System and the SEC. Such loans may
be made, without limit, to brokers, dealers, banks or other recognized
institutional borrowers of financial instruments and would be required to be
secured continuously by collateral, including cash, cash equivalents or U.S.
Treasury bills maintained on a current basis at an amount at least equal to the
market value of the financial instruments loaned. The Fund would have the right
to call a loan and obtain the financial instruments loaned at any time on five
days' notice. For the duration of a loan, the Fund would continue to receive the
equivalent of the interest paid by the issuer on the financial instruments
loaned and also would receive compensation from the investment of the
collateral. The Fund would not have the right to vote any financial instruments
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
financial instruments or in anticipation of the giving or withholding of their
consent on a material matter affecting the financial instruments. As with other
extensions of credit, risks of delay in recovery or even loss of rights in the
collateral exist should the borrower of the financial instruments fail
financially. However, the loans would be made only to firms deemed by the
Adviser to be of good standing and when, in the judgment of the Adviser, the
consideration which can be earned currently from loans of this type justifies
the attendant risk. The creditworthiness of firms to which the Fund lends its
portfolio holdings will be monitored on an ongoing basis by the Adviser pursuant
to procedures adopted and reviewed, on an ongoing basis, by the Board of
Trustees of the Fund. No specific limitation exists as to the percentage of the
Fund's assets which the Fund may lend.

"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

The Fund may also purchase and sell interests in Senior Loans and other
portfolio securities on a "when issued" and "delayed delivery" basis. No income
accrues to the Fund on such interests or securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
interests or securities. These transactions are subject to market fluctuation;
the value of the interests in Senior Loans and other portfolio debt securities
at delivery may be more or less than their purchase price, and yields generally
available on such interests or securities when delivery occurs may be higher or
lower than yields on the interests or securities obtained pursuant to such
transactions. Because the Fund relies on the buyer or seller, as the case may
be, to consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or 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 such interests or securities on such basis only with

31
<PAGE> 35

the intention of actually acquiring these interests or securities, but the Fund
may sell such interests or 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
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose 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.

REPURCHASE AGREEMENTS

The Fund may enter into repurchase agreements (a purchase of, and a
simultaneous commitment to resell, a financial instrument at an agreed upon
price on an agreed upon date) only with member banks of the Federal Reserve
System and member firms of the New York Stock Exchange. When participating in
repurchase agreements, the Fund buys securities from a vendor, e.g., a bank or
brokerage firm, with the agreement that the vendor will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Fund to earn a return on available cash at minimal market
risk, although the Fund may be subject to various delays and risks of loss if
the vendor is unable to meet its obligation to repurchase. Under the 1940 Act,
repurchase agreements are deemed to be collateralized loans of money by the Fund
to the seller. In evaluating whether to enter into a repurchase agreement, the
Adviser will consider carefully the creditworthiness of the vendor. If the
member bank or member firm that is the party to the repurchase agreement
petitions for bankruptcy or otherwise becomes subject to the U.S. Bankruptcy
Code, the law regarding the rights of the Fund is unsettled. The securities
underlying a repurchase agreement will be marked to market every business day so
that the value of the collateral is at least equal to the value of the loan,
including the accrued interest thereon, and the Adviser will monitor the value
of the collateral. No specific limitation exists as to the percentage of the
Fund's assets which may be used to participate in repurchase agreements.

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 Fund will maintain in a
segregated account with its custodian cash or liquid securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. 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

32
<PAGE> 36

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 in the Statement of Additional Information under "Investment
Restrictions." The Fund will not hold more than 5% of the value of its total
assets in reverse repurchase agreements.

- ------------------------------------------------------------------------------
TAXATION
- ------------------------------------------------------------------------------

The Fund has qualified and intends to continue to qualify each year to be
treated as a regulated investment company under Subchapter M of the Code. If the
Fund so qualifies and distributes each year to its shareholders at least 90% of
its net investment income (including, among other things, interest and net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses) in each year, the
Fund will not be required to pay federal income taxes on any income distributed
to shareholders. The Fund will not be subject to federal income tax on any net
capital gains distributed to shareholders. As a Massachusetts business trust,
the Fund will not be subject to any excise or income taxes in Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes.

Distributions. Distributions of the Fund's net investment income are taxable
to holders of Common Shares as ordinary income, whether paid in cash or
reinvested in additional Common Shares. Distributions of the Fund's net capital
gains ("capital gains dividends"), if any, are taxable to holders of Common
Shares 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. For a
summary of the tax rates applicable to capital gains (including capital gains
dividends), see "Capital Gains Rates Under the 1997 Tax Act" below. The Fund
will inform shareholders of the source and tax status of all distributions
promptly after the close of each calendar year.

Sale of Shares. Except as discussed below, selling shareholders will
generally recognize gain or loss in an amount equal to the difference between
their adjusted tax basis in the Common Shares and the amount received. If such
Common Shares are held as a capital asset, the gain or loss will be a capital
gain or loss. For a summary of the tax rates applicable to capital gains, see
"Capital Gains Rates

33
<PAGE> 37

Under the 1997 Tax Act" below. It is possible, although the Fund believes it is
unlikely, that tendering holders of Common Shares may not qualify for gain or
loss treatment as described above, which in turn may result in deemed
distributions to non-tendering holders of Common Shares. The federal income tax
consequences of the repurchase of Common Shares pursuant to tender offers will
be disclosed in the related offering documents. Any loss recognized upon a
taxable disposition of Common Shares held for six months or less will be treated
as a long-term capital loss to the extent of any capital gains dividends
received with respect to such Common Shares. For purposes of determining whether
Common Shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.

Capital Gains Rates Under the 1997 Tax Act. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act") the maximum tax rates applicable to net capital gains
recognized by individuals and other non-corporate taxpayers are (i) the same as
ordinary income rates for capital assets held for one year or less, (ii) 28% for
capital assets held for more than one year but not more than 18 months and (iii)
20% for capital assets held for more than 18 months. The maximum long-term
capital gains rate for corporations remains at 35%. The new tax rates for
capital gains under the 1997 Tax Act described above apply to distributions of
capital gains dividends by regulated investment companies such as the Fund as
well as to sales and exchanges of shares in regulated investment companies such
as the Fund. With respect to capital losses recognized on dispositions of shares
held six months or less where such losses are treated as long-term capital
losses to the extent of prior capital gains dividends received on such shares
(see "Sale of Shares" above), it is unclear how such capital losses offset the
capital gains referred to above. Shareholders should consult their own tax
advisors as to the application of the new capital gains rates to their
particular circumstances.

General. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal and state tax consequences of purchasing, holding and
disposing of Common Shares, as well as the effects of other state, local and
foreign tax laws and any proposed tax law changes.

34
<PAGE> 38

- ------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- ------------------------------------------------------------------------------

BOARD OF TRUSTEES

The management of the Fund, including general supervision of the duties
performed by the Adviser under the Advisory Agreement, is the responsibility of
the Fund's Board of Trustees.

THE ADVISER

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. Van Kampen American Capital, Inc. is an indirect
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.

Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $60 billion under management or
supervision. Van Kampen American Capital, Inc.'s more than 50 open-end and 37
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including Morgan Stanley Asset Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered broker-
dealer and investment adviser, and Morgan Stanley International are engaged in a
wide range of financial services. Their principal businesses include securities
underwriting, distribution and trading; merger, acquisition, restructuring and
other corporate finance advisory activities; merchant banking; stock brokerage
and research services; credit services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.

INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "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
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such

35
<PAGE> 39

positions. The Fund has reimbursed VKAC for costs incurred in connection with
the Fund's organization and its initial registration of the common shares in the
amount of $1,037,578. The Fund has incurred approximately [$830,000] in expenses
in connection with the offering of 225,000,000 Common Shares pursuant to this
Prospectus, which expenses have previously been charged as operating expenses of
the Fund.

For the services provided by the Adviser under the Advisory Agreement, the
Fund will pay the Adviser an annualized fee (accrued daily and paid monthly)
equal to a percentage of the average net assets of the Fund as indicated below.
The advisory fee is higher than the fees paid by most management investment
companies, although it is comparable to the fees paid by several publicly
offered, closed-end management investment companies with investment objectives
and policies similar to those of the Fund.

<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENT PER ANNUM
- ------------------------ -----------------
<S> <C>
First $4.0 Billion 0.950 of 1.00%
Next $ 3.5 Billion 0.900 of 1.00%
Next $ 2.5 Billion 0.875 of 1.00%
Over $10.0 Billion 0.850 of 1.00%
</TABLE>

PORTFOLIO MANAGEMENT. Jeffrey W. Maillet is a Senior Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since the Fund's commencement of investment operations. Mr.
Maillet has been employed by the Adviser since 1989.

THE ADMINISTRATOR. The administrator for the Fund is VKAC (in such capacity,
the "Administrator"). Its principal business address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Administrator is a wholly-owned subsidiary
of Van Kampen American Capital, Inc., Van Kampen American Capital, Inc. is an
indirect wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
The Administrator maintains offices and regional representatives in major cities
across the nation. VKAC is the principal underwriter of the Common Shares in
connection with the offering thereof by the Fund. See "Purchase of Shares."

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative fee, the Administrator will (i) monitor the provisions of the
Loan Agreements and any agreements with respect to Participations and
Assignments and be responsible for recordkeeping with respect to Senior Loans in
the Fund's portfolio; (ii) arrange for the printing and dissemination of reports
to holders of Common Shares; (iii) arrange for the dissemination of the Fund's
proxy and any tender offer materials to holders of Common Shares, and oversee
the tabulation of proxies by the Fund's transfer agent; (iv) negotiate the terms
and conditions under which custodian services will be provided to the Fund and
the fees to be paid by the Fund in connection therewith; (v) negotiate the terms
and conditions under which dividend disbursing services will be provided to the
Fund, and the fees to be paid by

36
<PAGE> 40

the Fund in connection therewith and review the provision of dividend disbursing
services to the Fund; (vi) provide the Fund's dividend disbursing agent and
custodian with such information as is required for such parties to effect
payment of dividends and distributions and to implement the Fund's dividend
reinvestment plan; (vii) make such reports and recommendations to the Board of
Trustees as the Trustees reasonably request or deem appropriate; and (viii)
provide shareholder services to holders or potential holders of the Fund's
securities.

For the services rendered to the Fund and related expenses borne by the
Administrator, the Fund pays the Administrator a fee, accrued daily and paid
monthly, at the annualized rate of 0.25% of the Fund's net assets.

- ------------------------------------------------------------------------------
DISTRIBUTIONS
- ------------------------------------------------------------------------------

The Fund's present policy is to declare daily and pay monthly distributions to
holders of Common Shares of substantially all net investment income of the Fund.
Net investment income of the Fund consists of all interest income, fee income,
other ordinary income earned by the Fund on its portfolio assets and net
short-term capital gains, less all expenses of the Fund. Expenses of the Fund
are accrued each day. Distributions to holders of Common Shares cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, are expected to be distributed to
holders of Common Shares at least annually. Holders of Common Shares may elect
to have distributions automatically reinvested in additional Common Shares. See
"Dividend Reinvestment Plan."

- ------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- ------------------------------------------------------------------------------

The Fund offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders may elect to have all distributions of dividends and all
capital gains automatically reinvested in Common Shares pursuant to the Plan.
Unless Common Shareholders elect to participate in the Plan, all Common
Shareholders will receive distributions of dividends and capital gains in cash.

State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for the Common Shareholders in administering the Plan. Participants in
the Plan will receive the equivalent in Common Shares valued on the valuation
date, at net asset value. The valuation date will be the dividend or
distribution payment date or, if that date is not a business day, the next
preceding business day.

The Plan Agent maintains each Common Shareholder's account in the Plan and
furnishes monthly written confirmations of all transactions in the accounts,
including information needed by Common Shareholders for personal and tax
records. Common Shares in the account of each Plan participant will be held by
the Plan Agent in non-certificated form in the name of the participant, and each
Common Shareholder's proxy will include those Common Shares purchased

37
<PAGE> 41

pursuant to the Plan. The Plan Agent's fees for the handling of the reinvestment
of dividends and distributions will be paid by the Fund.

In the case of Common Shareholders, such as banks, brokers or nominees, which
hold Common Shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of Common Shares certified from
time to time by the record Common Shareholders as representing the total amount
registered in the record Common Shareholder's name and held for the account of
beneficial owners who are participating in the Plan.

The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable or required to be
withheld on such dividends or distributions.

Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all Common Shareholders of the Fund at least 90 days before the
record date for the dividend distribution. The Plan also may be amended or
terminated by the Plan Agent by at least 90 days written notice to all Common
Shareholders of the Fund.

All registered Common Shareholders (other than brokers or nominees) will be
mailed information regarding the Plan, including a form with which they may
elect to participate in the Plan. Shareholders who intend to hold their Common
Shares through a broker or nominee should contact such person to confirm that
they may participate in the Plan and to determine the effect, if any, that a
transfer of the account by the shareholder to another broker or nominee will
have on continued participation in the Plan. A Common Shareholder may withdraw
from the Plan at any time by contacting the Plan Agent at the address or
telephone number set forth below. There is no penalty for non-participation in
or withdrawal from the Plan, and Common Shareholders who have previously
withdrawn from the Plan may rejoin it at any time. Changes in elections should
be directed to the Plan Agent and should include the name of the Fund and the
Common Shareholder's name and address as registered. An election to withdraw
from the Plan will, until such election is changed, be deemed to be an election
by a Common Shareholder to take all subsequent dividends and distributions in
cash. Elections will only be effective for dividends and distributions declared
after, and with a record date of at least ten days after, such elections are
received by the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan as provided above, certificates for whole Common Shares
credited to his or her account under the Plan will be issued and a cash payment
will be made for any fraction of a Common Share credited to such account. All
correspondence concerning the Plan should be directed to the Plan Agent at P.O.
418256, Kansas City, MO 64153-9256. Telephone calls concerning the Plan may be
directed to the Plan Agent between the hours of 7:00 a.m. and 7:00 p.m. Central
Standard Time at (800) 341-2911.

38
<PAGE> 42

DIVIDEND DIVERSIFICATION. A shareholder also may, upon written request by
completing the appropriate section of the application form or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and other distributions paid on Common Shares of the Fund invested into shares
of certain mutual funds advised by the Adviser or its affiliates so long as a
pre-existing account for such shares exists for the shareholder. A shareholder
may call the phone numbers shown above to obtain a list of the mutual funds
available and to request current prospectuses.

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

- ------------------------------------------------------------------------------
REPURCHASE OF SHARES
- ------------------------------------------------------------------------------

The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for all or a portion of its then
outstanding Common Shares at the net asset value of the Common Shares on the
expiration date of the tender offer. Commencement by the Fund of a tender offer
during a period in which it is simultaneously engaged in the continuous offering
of its Common Shares may be a violation of rules promulgated by the SEC under
the Securities Exchange Act of 1934. The Fund has obtained an exemption from the
SEC that would permit the Fund to make tender offers for its Common Shares while
simultaneously engaged in the continuous offering of its Common Shares. No
assurance can be given that the Fund will be able to maintain such exemption
indefinitely. If the Board of Trustees of the Fund authorizes the Fund to make
such a tender offer at such time, if any, that the Fund shall be unable to rely
on such exemption, the Fund intends to suspend the continuous offering of its
Common Shares during the term of such tender offer.

Although such tender offers, if undertaken and completed, will provide some
liquidity for holders of the Common Shares, there can be no assurance that such
tender offers will in fact be undertaken or completed or, if completed, that
they will provide sufficient liquidity for all holders of Common Shares who may
desire to sell such Common Shares. As such, investment in the Common Shares
should be considered illiquid. As of the date of this Prospectus, the Fund has
commenced and consummated tender offers in each quarter since the commencement
of investment operations. An early withdrawal charge payable to VKAC will be
imposed on most Common Shares accepted for tender by the Fund which have been
held for less than five years, as described below.

Although the Board of Trustees believes that tender offers for the Common
Shares generally would increase the liquidity of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the total assets of the
Fund and,

39
<PAGE> 43

therefore, have the effect of increasing the Fund's expense ratio. Because of
the nature of the Fund's investment objective and policies and the Fund's
portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Common Shares, to borrow money in an amount up to 33 1/3% of the
Fund's total assets, for the purpose of, among other things, obtaining
short-term credits in connection with tender offers by the Fund for Common
Shares. In this connection, the Fund may issue notes or other evidence of
indebtedness or secure any such borrowings by mortgaging, pledging or otherwise
subjecting as security the Fund's assets. Under the requirements of the 1940
Act, the Fund, immediately after any such borrowing, must have an "asset
coverage" of at least 300%. With respect to any such borrowing, asset coverage
means the ratio which the value of the total assets of the Fund, less all
liabilities and indebtedness not represented by senior securities (as defined in
the 1940 Act), bears to the aggregate amount of such borrowing by the Fund. The
rights of lenders to the Fund to receive interest on and repayment of principal
of any such borrowings will be senior to those of the holders of Common Shares,
and the terms of any such borrowings may contain provisions which limit certain
activities of the Fund, including the payment of dividends to holders of Common
Shares in certain circumstances. Further, the terms of any such borrowing may
and the 1940 Act does (in certain circumstances) grant to the lenders to the
Fund certain voting rights in the event of default in the payment of interest on
or repayment of principal. In the event that such provisions would impair the
Fund's status as a regulated investment company, the Fund, subject to its
ability to liquidate its relatively illiquid portfolio, intends to repay the
borrowings. Any borrowing will likely rank senior to or pari passu with all
other existing and future borrowings of the Fund. Interest payments and fees
incurred in connection with borrowings will reduce the amount of net income
available for payment to the holders of Common Shares. The Fund does not intend
to use borrowings for leverage purposes. Accordingly, the Fund will not purchase
additional portfolio securities at any time that borrowings, including the
Fund's commitments, pursuant to reverse repurchase agreements, exceed 5% of the
Fund's total assets (after giving effect to the amount borrowed).

The Fund has entered into a Credit Agreement dated April 17, 1997 (the "Credit
Agreement") among the Fund, as borrower, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $250,000,000 to the Fund, which is not
secured by the assets of the Fund or other collateral. The credit facility
provided pursuant to the Credit Agreement will terminate on April 16, 1998,
unless extended by its terms. As of the date of this Prospectus, the Fund had
not drawn any of the funds available under the Credit Agreement. See "Repurchase
of Shares" in the Statement of Additional Information.

40
<PAGE> 44

Should the Fund determine to make a tender offer for its Common Shares, a
notice describing the tender offer, containing information shareholders should
consider in deciding whether to tender their Common Shares and including
instructions on how to tender Common Shares will be sent to shareholders of
record. Information concerning the purchase price to be paid by the Fund and the
manner in which shareholders may ascertain net asset value during the pendency
of a tender offer will also be set forth in the notice. The Fund will purchase
all Common Shares tendered in accordance with the terms of the offer unless it
determines to terminate the offer. Costs associated with the tender will be
charged against capital. See the Statement of Additional Information for
additional information concerning repurchase of Common Stock.

Upon the death of a holder of Common Shares, VKAC will waive any early
withdrawal charge (discussed below) applicable to the first $100,000 worth of
such holder's Common Shares repurchased pursuant to a tender offer commenced
within one year of such holder's death; provided that the Fund's transfer agent
has received, on VKAC's behalf, proper notice of the death of such holder. For
this purpose, the transfer agent will be deemed to have received proper notice
of such holder's death upon its receipt of (i) a duly executed Letter of
Transmittal duly submitted in connection with a tender offer, (ii) a written
request for waiver of the early withdrawal charge, in form satisfactory to the
transfer agent, signed by the holder's duly authorized representative or
surviving tenant, (iii) appropriate evidence of death and (iv) appropriate
evidence of the authority of the representative of the deceased holder or
surviving tenant. Common Shares held in joint tenancy or tenancy in common will
be deemed to be held by a single holder (which may be either tenant in the case
of joint tenancy) and the death of any such tenant will be deemed to be the
death of such holder of Common Shares. Information concerning the waiver of the
early withdrawal charge may be obtained by contacting the Fund.

If the Fund must liquidate portfolio holdings in order to purchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Due to the requirement
for qualification as a regulated investment company under the Code that less
than 30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months, the Fund may not be able to sell
portfolio holdings held for less than three months that the Fund may wish to
sell in the ordinary course of its portfolio management, which may affect
adversely the Fund's yield. Under recently enacted legislation, this requirement
will no longer be applicable to the Fund beginning on July 1, 1998.

EARLY WITHDRAWAL CHARGE. An early withdrawal charge to recover offering
expenses will be charged in connection with most Common Shares held for less
than five years which are accepted by the Fund for repurchase pursuant to tender
offers. The early withdrawal charge will be imposed on a number of Common Shares
accepted for cash tender from a record holder of Common Shares the value of
which exceeds the aggregate value at the time the tender is accepted of (a) all

41
<PAGE> 45

Common Shares owned by such holder that were purchased more than five years
prior to such acceptance, (b) all Common Shares owned by such holder that were
acquired through reinvestment of distributions, and (c) the increase, if any, of
value of all other Common Shares owned by such holder (namely those purchased
within the five years preceding the acceptance) over the purchase price of such
Common Shares. The early withdrawal charge will be paid to VKAC. For the fiscal
years ended July 31, 1995, 1996 and 1997, VKAC received payments totalling
$1,469,000, $5,721,300 and $9,075,812, respectively, pursuant to the early
withdrawal charge. In determining whether an early withdrawal charge is payable,
it is assumed that the acceptance of a repurchase offer would be made from the
earliest purchase of Common Shares. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.

<TABLE>
<CAPTION>
YEAR OF REPURCHASE EARLY WITHDRAWAL
AFTER PURCHASE CHARGE
------------------ ----------------
<S> <C>
First........................................ 3.0%
Second....................................... 2.5%
Third........................................ 2.0%
Fourth....................................... 1.5%
Fifth........................................ 1.0%
Sixth and following.......................... 0.0%
</TABLE>

The following example will illustrate the operation of the early withdrawal
charge. Assume that an investor purchases $10,000 worth of the Fund's Common
Shares for cash through VKAC and that 21 months later the value of the account
has grown through the reinvestment of dividends and capital appreciation to
$12,000. The investor then may submit for repurchase pursuant to a tender offer
up to $2,000 worth of Common Shares without incurring an early withdrawal
charge. If the investor should submit for repurchase pursuant to a tender offer
$5,000 worth of Common Shares, an early withdrawal charge would be imposed on
$3,000 worth of the Common Shares submitted. The charge would be imposed at the
rate of 2.5% because it is in the second year after the purchase was made and
the charge would be $75.

EXCHANGES. Tendering shareholders may elect to receive, in lieu of cash, the
proceeds from the tender of Common Shares of the Fund in contingent deferred
sales charge shares ("Class B Shares") of certain open-end investment companies
distributed by VKAC ("VKAC Funds"). The Early Withdrawal Charge will be waived
for Common Shares tendered in exchange for Class B Shares in the VKAC Funds;
however, such Class B Shares immediately become subject to a contingent deferred
sales charge equivalent to the Early Withdrawal Charge on Common Shares of the
Fund. Thus, shares of such VKAC Funds may be subject to a contingent deferred
sales charge upon a subsequent redemption from the VKAC Funds. The purchase of
shares of such VKAC Fund will be deemed to have occurred at the time of the
initial purchase of the Common Shares of the Fund for calculating the applicable
contingent deferred sales charge.

42
<PAGE> 46

The prospectus for each VKAC Fund describes its investment objectives and
policies. Shareholders can obtain, without charge, a prospectus by calling
1-800-341-2911 and should consider these objectives and policies carefully
before requesting an exchange. Each exchange must involve proceeds from Common
Shares which have a net asset value of at least $500. An exchange is a taxable
event and may result in a taxable gain or loss.

- ------------------------------------------------------------------------------
DESCRIPTION OF COMMON SHARES
- ------------------------------------------------------------------------------

The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated July 14, 1989, as
amended and restated on September 19, 1989 (the "Declaration of Trust"). The
Declaration of Trust provides that the Trustees of the Fund may authorize
separate classes of shares of beneficial interest. The Trustees have authorized
an unlimited number of Common Shares. The Declaration of Trust also authorizes
the Fund to borrow money or otherwise obtain credit and in this connection issue
notes or other evidence of indebtedness. The Fund does not intend to hold annual
meetings of the holders of Common Shares.

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

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

43
<PAGE> 47

The Common Shares are not, and are not expected to be, listed for trading on
any national securities exchange nor, to the Fund's knowledge, is there, or is
there expected to be, any secondary trading market in the Common Shares. The
following table sets forth, since the commencement of the Fund's investment
operations, for the quarterly periods ending on the dates set forth below the
high and low net asset value per Common Share during such period.

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------- -------- --------
<S> <C> <C>
September 30, 1997............................. $ 9.98 $ 9.96
June 30, 1997.................................. 9.98 9.97
March 31, 1997................................. 9.99 9.97

December 31, 1996.............................. $10.01 $ 9.99
September 30, 1996............................. 10.01 10.00
June 30, 1996.................................. 10.00 10.00
March 31, 1996................................. 10.03 10.00

December 31, 1995.............................. $10.04 $10.02
September 30, 1995............................. 10.05 10.04
June 30, 1995.................................. 10.05 10.03
March 31, 1995................................. 10.07 10.02

December 31, 1994.............................. $10.06 $10.04
September 30, 1994............................. 10.05 10.03
June 30, 1994.................................. 10.05 10.03
March 31, 1994................................. 10.07 10.05

December 31, 1993.............................. $10.07 $10.00
September 30, 1993............................. 10.01 9.99
June 30, 1993.................................. 10.06 9.99
March 31, 1993................................. 10.06 10.04

December 31, 1992.............................. $10.04 $ 9.97
September 30, 1992............................. 10.02 9.99
June 30, 1992.................................. 10.01 9.98
March 31, 1992................................. 10.02 10.00

December 31, 1991.............................. $10.01 $ 9.99
September 30, 1991............................. 9.99 9.98
June 30, 1991.................................. 9.99 9.98
March 31, 1991................................. 10.00 9.99

December 31, 1990.............................. $10.00 9.99
September 30, 1990............................. 10.01 10.00
June 30, 1990.................................. 10.02 10.00
March 31, 1990................................. 10.02 10.02

December 31, 1989.............................. $10.02 $10.00
</TABLE>

44
<PAGE> 48

As of November 7, 1997, the net asset value per Common Share was $9.96. The
following table sets forth certain information with respect to the Common Shares
as of November 7, 1997:

<TABLE>
<CAPTION>
(3) (4)
AMOUNT AMOUNT
HELD OUTSTANDING
(2) BY FUND FOR EXCLUSIVE OF
(1) AMOUNT ITS OWN AMOUNT SHOWN
TITLE OF CLASS AUTHORIZED ACCOUNT UNDER (3)
-------------- ---------- ----------- ------------
<S> <C> <C> <C>
Common Shares of beneficial
interest, $.01 par value unlimited 0 647,572,008
</TABLE>

To the knowledge of the Fund, as of November 4, 1997, no person held 5% or
more of the Fund's Common Shares either beneficially or of record. Further, as
of such date, officers and trustees of the Fund as a group owned less than 1% of
the Common Shares.

ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST. The Fund's Declaration
of Trust includes provisions that could have the effect of limiting the ability
of other entities or persons to acquire control of the Fund or to change the
composition of its Board of Trustees by discouraging a third party from seeking
to obtain control of the Fund. In addition, in the event a secondary market were
to develop in the Common Shares, such provisions could have the effect of
depriving holders of Common Shares of an opportunity to sell their Common Shares
at a premium over prevailing market prices. A Trustee may be removed from office
only for cause by a written instrument signed by at least two-thirds of the
remaining Trustees or by a vote of the holders of at least two-thirds of the
Common Shares.

In addition, the Declaration of Trust requires the favorable vote of the
holders of at least two-thirds of the outstanding Common Shares then entitled to
vote to approve, adopt or authorize certain transactions with 5%-or-greater
holders of Common Shares and their associates, unless the Board of Trustees
shall by resolution have approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. See
"Repurchase of Shares--Anti-takeover Provisions" in the Statement of Additional
Information.

FUND PROPOSAL. The Fund received shareholder approval of a new fundamental
investment policy modifying existing fundamental policies and restrictions to
give the Fund the flexibility to pursue its investment objective through a fund
structure commonly known as a "master-feeder" structure and a corresponding
conversion to such structure in the future. If the Fund converts to a
master-feeder structure, shareholders of the Fund would continue to hold their
shares of the Fund and the Fund would become a feeder-fund of the master-fund.
The value of a shareholder's shares would be the same immediately after any
conversion as the value immediately before such conversion. Use of this
master-feeder structure may result in increased assets invested among the
collective investment vehicle of which the Fund would be a part, thus allowing
operating expenses to be spread over a larger asset base, potentially achieving
economies of scale. As of the date hereof, the

45
<PAGE> 49

Fund's Board of Trustees has not taken any further actions toward converting the
Fund and the Fund's Board of Trustees does not intend to effect any conversion
in which (i) the master fund does not have substantially the same management
team, investment objective, investment policies and investment restrictions as
the Fund just prior to the conversion, (ii) the value of the shareholder's
investment in Fund would not be the same immediately after the conversion as it
was immediately before such conversion or (iii) an increase in the Fund's
expense ratios is expected as a result of the conversion.

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

The Fund offers continuously its Common Shares through VKAC, the principal
underwriter of the continuous offering of the Common Shares, whose offices are
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Common
Shares will also be offered through members of the National Association of
Securities Dealers, Inc. ("NASD") or eligible non-NASD members who are acting as
brokers or agents for investors ("broker-dealers"). The Fund reserves the right
to terminate or suspend the continuous offering of its Common Shares at any time
without prior notice.

The Fund does not intend to list the Common Shares on any national securities
exchange and none of the Fund, the Adviser or VKAC, intends to make a secondary
market in the Common Shares. Accordingly, there is not expected to be any
secondary trading market in the Common Shares and an investment in the Common
Shares should be considered illiquid.

Except as discussed below under "Investments by Tax Sheltered Retirement
Plans," the minimum initial investment in the Fund is $1,000 and minimum
subsequent investment is $100.

During the continuous offering, the Common Shares will be offered by the Fund
at the public offering price next computed after an investor places an order to
purchase directly with VKAC, or with the investor's broker-dealer. The price of
Common Shares ordered through an investor's broker-dealer will be the public
offering price next determined after the Fund receives the order. Because the
Fund determines the public offering price once daily on each business day as of
5:00 p.m. Eastern time, orders placed through an investor's broker-dealer must
be transmitted to the Fund by the broker-dealer prior to such time for the
investor's order to be executed at the public offering price to be determined
that day. Any change in price due to the failure of the Fund to receive an order
prior to such time must be settled between the investor and the broker-dealer
placing the order. The public offering price is equal to the net asset value per
Common Share. There will be no initial sales charge or underwriting discount on
purchases of Common Shares.

VKAC will compensate broker-dealers participating in the continuous offering
at a rate of 3.0% of the dollar value of Common Shares purchased from the Fund
by

46
<PAGE> 50

such broker-dealers. If the Common Shares remain outstanding after one year from
the date of their original purchase, VKAC will compensate such broker-dealers at
an annual rate, paid quarterly, in an amount based on a percentage of the value
of such Common Shares, in accordance with the following schedule:

<TABLE>
<CAPTION>
ANNUAL
COMPENSATION AS A
YEAR AFTER DATE PERCENTAGE OF VALUE
OF ORIGINAL PURCHASE OF SHARES OUTSTANDING
-------------------- ---------------------
<S> <C>
First.............................................. 0.00%
Second............................................. 0.10%
Third.............................................. 0.15%
Fourth............................................. 0.20%
Fifth.............................................. 0.25%
Sixth and following................................ 0.35%
</TABLE>

At various times VKAC may implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. The value
of any such non-cash awards will not exceed $50 per person annually. These
incentives will not change the price investors pay for Common Shares or the
amount that the Fund will receive from the sale of Common Shares. The
compensation paid to broker-dealers at the time of purchase, the quarterly
payments mentioned above will be paid by VKAC out of its own assets, and not out
of the assets of the Fund. An early withdrawal charge payable to VKAC will be
imposed on most Common Shares held for less than five years that are accepted
for repurchase pursuant to a tender offer by the Fund. See "Repurchase of
Shares." The compensation paid to broker-dealers and VKAC, including the
compensation paid at the time of purchase, the quarterly payments mentioned
above and the early withdrawal charge, if any, will not in the aggregate exceed
applicable limitations. VKAC will monitor the aggregate value of all such
compensation on an ongoing basis.

Automatic Investment. Once an investor has opened an account in the Fund with
the minimum $1,000 investment, the automatic investment option may be utilized
to make regular monthly investments of $100 or more into such investor's account
with the Fund. In order to utilize this option, an investor must fill out and
sign the Automatic Investment application available from the transfer agent, the
Fund, such investor's broker or dealer, or VKAC. Once the transfer agent has
received this application, such investor's checking account at his designated
local bank will be debited each month in the amount authorized by such investor
to purchase shares of the Fund. Once enrolled in the Automatic Investment
Program, an investor may change the monthly amount or terminate participation at
any time by writing the transfer agent. Investors in the automatic investment
program will receive a confirmation of these transactions from the Fund
quarterly and their regular bank account statements will show the debit
transaction each month.

47
<PAGE> 51

Investments by Tax-Sheltered Retirement Plans. Common Shares are available for
purchase in connection with certain types of tax-sheltered retirement plans.
Employee Pension Plans ("SEP's") for employees; qualified plans for
self-employed individuals; and qualified corporate pension and profit sharing
plans for employees.

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

The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. The minimum initial investment in
connection with a tax-sheltered retirement plan is $250.

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

The illiquid nature of the Fund's Common Shares may affect the nature of
distributions from tax sheltered retirement plans and may affect the ability of
participants in such plans to rollover assets to other tax sheltered retirement
plans.
- ------------------------------------------------------------------------------
COMMUNICATIONS WITH SHAREHOLDERS
- ------------------------------------------------------------------------------

The Fund will send semi-annual and annual reports to shareholders, including a
list of the portfolio investments held by the Fund.

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc., Business Week, Forbes or
other industry publications.

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
Common Share during such a monthly distribution period and dividing the
annualized distribution by the Fund's maximum offering price per Common Share on
the last day of such period. The Fund calculates the compounded distribution
rate by adding one to the monthly distribution rate, raising the sum to the
power of 12 and subtracting one

48
<PAGE> 52

from the product. In circumstances in which the Fund believes that, as a result
of decreases in market rates of interest, its expected monthly distributions may
be less than the distributions with respect to the immediately preceding monthly
distribution period, the Fund reserves the right to calculate the distribution
rate on the basis of a period of less than one month.

Distribution rate and compounded distribution rate figures utilized by the
Fund are based on historical performance and are not intended to indicate future
performance. Distribution rate, compounded distribution rate and net asset value
per share can be expected to fluctuate over time.

The following table is intended to provide investors with a comparison of
short-term money market rates. This comparison should not be considered a
representation of future money market rates, nor what an investment in the Fund
may earn or what an investor's yield or total return may be in the future. These
comparisons may be used in advertisements and in information furnished to
present or prospective shareholders.

<TABLE>
<CAPTION>
COMPARISON OF PRIME RATE,
CERTIFICATE OF DEPOSIT RATE, MONEY MARKET RATE AND
LONDON INTER-BANK OFFERED RATE
(AVERAGE OF CALENDAR YEAR)
-----------------------------------------------------------------------------------------------------------
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Rate(1)........ 15.06% 10.78% 12.06% 9.99% 8.38% 8.15% 9.24% 10.88% 10.01% 8.46% 6.25% 6.00% 8.50% 8.83% 8.50%
C.D. Rate(2)......... 12.57 9.27 10.68 8.25 6.51 7.01 7.91 9.08 8.17 5.91 3.76 3.28 6.90 5.93
Money Market
Rate(3)............. 11.70 8.20 9.58 7.50 6.17 5.89 6.77 8.53 7.82 5.44 3.36 2.70 3.75 5.47
LIBOR(4)............. 9.18 9.81 8.75 8.00 6.37 7.43 9.62 8.37 7.56 4.25 3.43 3.37 6.50 5.49
</TABLE>

- ---------------
(1) The Prime Rate quoted by a major U.S. bank is the base rate on corporate
loans at large U.S. money center commercial banks. Source: Federal Reserve
Bulletin.

(2) The Certificate of Deposit Rate represents the average annual rate paid on
large six-month CDs traded in the secondary market. Source: Bloomberg.

(3) The Money Market Rate represents Donoghue's Money Fund Averages for taxable
money market funds.

(4) The London Inter-Bank Offered Rate represents the rate at which most
creditworthy international banks dealing in Eurodollars charge each other
for large loans. Source: Bloomberg.

- ------------------------------------------------------------------------------
CUSTODIAN, DIVIDEND DISBURSING AND TRANSFER AGENT
- ------------------------------------------------------------------------------

State Street Bank and Trust Company, 225 West Franklin Street, P.O. Box 1713,
Boston, Massachusetts 02105-1713, is the custodian of the Fund and has custody
of the 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. State Street Bank and
Trust Company also will perform certain accounting services for the Fund
pursuant to the Fund

49
<PAGE> 53

Accounting Agreement between it and the Fund. ACCESS Investor Services, Inc.,
P.O. Box 418256, Kansas City, Missouri 64141-9256 is the dividend disbursing and
transfer agent of the Fund.

- ------------------------------------------------------------------------------
LEGAL OPINIONS
- ------------------------------------------------------------------------------

Certain legal matters in connection with the Common Shares offered hereby have
been passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom
(Illinois).

- ------------------------------------------------------------------------------
EXPERTS
- ------------------------------------------------------------------------------

The financial statements for the period ended July 31, 1997, included in the
Statement of Additional Information, have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants, given
on the authority of said firm as experts in auditing and accounting.

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

The Prospectus and the Statement of Additional Information do not contain all
of the information set forth in the Registration Statement that the Fund has
filed with the SEC. The complete Registration Statement may be obtained from the
SEC upon payment of the fee prescribed by its rules and regulations.

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

50
<PAGE> 54

The Table of Contents for the Statement of Additional Information is as
follows:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B- 2
Investment Restrictions..................................... B- 8
Trustees and Officers....................................... B-10
Portfolio Transactions...................................... B-15
Management of the Fund...................................... B-16
Net Asset Value............................................. B-17
Taxation.................................................... B-19
Repurchase of Shares........................................ B-21
Independent Accountants' Report............................. B-24
Financial Statements for the Year Ended July 31, 1997....... B-25
Notes to Financial Statements............................... B-40
</TABLE>

51
<PAGE> 55

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

NUMBER 1-800-341-2911.

PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-421-5666.

DEALERS--FOR DEALER
INFORMATION, CALL
1-800-421-5666. FOR WIRE ORDERS
CALL ACCESS INVESTOR
SERVICES, INC.'S TOLL FREE
NUMBER--1-800-231-7166

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

DIAL 1-800-421-2833

FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-847-2424
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Principal Underwriter

VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

Dividend Disbursing and Transfer Agent

ACCESS INVESTOR
SERVICES, INC.
P.O. BOX 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Prime Rate Income Trust

Custodian

STATE STREET BANK AND
TRUST COMPANY

225 West Franklin Street, P.O. Box 1713

Boston, MA 02105-1713
Attn: Van Kampen American Capital
Prime Rate Income Trust

Legal Counsel

SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606

Independent Accountants

KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 56

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

PRIME RATE
INCOME TRUST

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

P R O S P E C T U S

NOVEMBER 13, 1996

AS AMENDED ON NOVEMBER , 1997

------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
- ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 57

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

STATEMENT OF ADDITIONAL INFORMATION

Van Kampen American Capital Prime Rate Income Trust, formerly known as Van
Kampen Merritt Prime Rate Income Trust (prior to October 11, 1995) (the "Fund"),
is a non-diversified, closed-end management investment company whose investment
objective is to provide a high level of current income, consistent with
preservation of capital. This Statement of Additional Information is not a
prospectus, but should be read in conjunction with the Prospectus for the Fund
dated November 13, 1996, as amended on November , 1997, (the "Prospectus").
This Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-341-2911, or for Telecommunications Device for the Deaf, 1-800-421-2833.
This Statement of Additional Information incorporates by reference the entire
Prospectus.

TABLE OF CONTENTS

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.

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED NOVEMBER 13, 1996, AS AMENDED
ON NOVEMBER , 1997

B-1
<PAGE> 58

INVESTMENT OBJECTIVE AND POLICIES
AND SPECIAL RISK CONSIDERATIONS

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate Senior Loans to Borrowers. Although the Fund's net
asset value will vary, the Fund's policy of acquiring interests in floating or
variable rate Senior Loans is expected to minimize the fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund's net
asset value may be affected by changes in the credit quality of Borrowers with
respect to Senior Loan interests in which the Fund invests. The Fund seeks to
achieve over time an effective yield that approximates the average published
Prime Rate of major United States banks. An investment in the Fund may not be
appropriate for all investors and is not intended to be a complete investment
program. No assurance can be given that the Fund will achieve its investment
objective.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt (which
may include "junk bonds"), preferred stock and common stock issued by the
Borrower, typically in descending order of seniority with respect to claims on
the Borrower's assets. Senior Loans generally are secured by specific
collateral, which may include guarantees. In connection with the acquisition of
collateralized Senior Loans, the Fund may invest up to 5% of its total assets in
Senior Loans which are not secured by any collateral. Such unsecured Senior
Loans would constitute an interim financing intended to be refinanced through,
in whole or in part, a collateralized Senior Loan. In the event that the Fund
invests a portion of its assets in Senior Loans that are not secured by specific
collateral, the Fund will not enjoy the benefits associated with
collateralization with respect to such Senior Loans and such Senior Loans may
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Senior Loans. As discussed below, the Fund may also acquire
warrants and equity securities issued by the Borrower or its affiliates as part
of a package of investments in the Borrower or its affiliates. Warrants and
equity securities will not be treated as Senior Loans and thus assets invested
in such securities will not count toward the 80% of the Fund's total assets that
normally will be invested in Senior Loans. The Fund will acquire such interests
in unsecured Senior Loans, warrants and equity securities only as an incident to
the intended purchase of interests in collateralized Senior Loans. Loan
Agreements may also include various restrictive covenants designed to limit the
activities of the Borrower in an effort to protect the right of the Lenders to
receive timely payments of interest on and repayment of principal of the Senior
Loans. In order to borrow money pursuant to collateralized Senior Loans, a
Borrower will frequently, for the term of the Senior Loan, pledge as collateral
assets, including but not limited to, trademarks, accounts receivable,
inventory, buildings, real estate, franchises and common and

B-2
<PAGE> 59

preferred stock in its subsidiaries. In addition, in the case of some Senior
Loans, there may be additional collateral pledged in the form of guarantees by
and/or securities of affiliates of the Borrowers. In certain instances, a Senior
Loan may be secured only by stock in the Borrower or its subsidiaries. Such
collateral may consist of assets that may not be readily liquidated, and there
is no assurance that the liquidation of such assets would satisfy fully a
Borrower's obligations under a Senior Loan.

Restrictive covenants may include mandatory prepayment provisions arising from
excess cash flows and typically include restrictions on dividend payments,
specific mandatory minimum financial ratios, limits on total debt and other
financial tests. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the applicable Loan Agreement and may give
the Lenders the right to accelerate principal and interest payments. The Adviser
will consider the terms of such restrictive covenants in deciding whether to
invest in Senior Loans for the Fund's portfolio. When the Fund holds a
Participation in a Senior Loan it may not have the right to vote to waive
enforcement of any restrictive covenant breached by a Borrower. Lenders voting
in connection with a potential waiver of a restrictive covenant may have
interests different from those of the Fund and such Lenders may not consider the
interests of the Fund in connection with their votes.

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally the Prime Rate, LIBOR, the CD
rate or other base lending rates used by commercial lenders. The Prime Rate
quoted by a major U.S. bank is the interest rate at which such bank is willing
to lend U.S. dollars to its most creditworthy borrowers. LIBOR, as provided for
in Loan Agreements, is an average of the interest rates quoted by several
designated banks as the rates at which such banks would offer to pay interest to
major financial institutional depositors in the London interbank market on U.S.
dollar denominated deposits for a specified period of time. The CD rate, as
generally provided for in Loan Agreements, is the average rate paid on large
certificates of deposit traded in the secondary market. At least 80% of the
Fund's total assets normally will be invested in Senior Loans. In normal market
conditions, at least 65% of the Fund's assets will be invested in Senior Loans
which, at the time of the Fund's initial investment in such Senior Loans,
provided the Fund with a rate of return which was at least equal to the Prime
Rate existing on the date of such initial investment. The Fund is not subject to
any restrictions with respect to the maturity of Senior Loans held in its
portfolio. It is currently anticipated that the Fund's assets invested in Senior
Loans will consist of Senior Loans with stated maturities of between three and
seven years, inclusive, and with rates of interest which are redetermined either
daily, monthly, quarterly or semi-annually; provided, however, that the Fund may
invest up to 5% of its total assets in Senior Loans which permit the Borrower to
select an interest rate redetermination period of up to one year. Investment in
Senior Loans with longer interest rate redetermination periods may increase
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Senior Loans in the Fund's portfolio will at all times have a
dollar-weighted average time until the next interest rate redetermination of 90
days or less. As a result, as short-term interest rates increase, interest
payable to the Fund from its investments in Senior Loans should increase, and as
short-term interest rates decrease, interest payable to the Fund from its
investments in Senior Loans should decrease. The amount of time required to pass
before the Fund will realize the effects of changing short-term market interest
rates on its portfolio will vary with the dollar-weighted average time until the
next interest rate redetermination on the Senior Loans in the Fund's portfolio.
The Fund may utilize certain investment practices to, among other things,
shorten the effective interest rate redetermination period of Senior Loans in
its portfolio. In such event, the Fund will consider such shortened period to be
the interest rate redetermination period of the Senior Loan; provided, however,
that the Fund will not invest in Senior Loans which permit the Borrower to
select an interest rate redetermination period in excess of one year. Because
most Senior Loans in the Fund's portfolio will be subject to mandatory and/or
optional prepayment and there may be significant economic incentives for a
Borrower to prepay its loans, prepayments of Senior Loans in the Fund's
portfolio may occur. Accordingly, the actual remaining maturity of the Fund's
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Fund's portfolio. As a result of
expected prepayments from time to time of Senior Loans in the Fund's portfolio,
the Fund estimates that the actual average maturity of the Senior Loans held in
its portfolio will be approximately 18-24 months.

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When interest rates decline, the value of a portfolio invested in fixed-rate
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a portfolio invested in fixed-rate obligations can be expected to
decline. Although the Fund's net asset value will vary, the Fund's management
expects the Fund's policy of acquiring interests in floating or variable rate
Senior Loans to minimize fluctuations in net asset value as a result of changes
in interest rates. Accordingly, the Fund's management expects the value of the
Fund's portfolio to fluctuate significantly less than a portfolio of fixed-rate,
longer term obligations as a result of interest rate changes. However, changes
in prevailing interest rates can be expected to cause some fluctuation in the
Fund's net asset value. In addition to changes in interest rates, changes in the
credit quality of Borrowers will also effect the Fund's net asset value.
Further, a serious deterioration in the credit quality of a Borrower could cause
a prolonged or permanent decrease in the Fund's net asset value.

Senior Loans generally are not rated by nationally recognized statistical
rating organizations. Because of the collateralized and/or guaranteed nature of
most Senior Loans, the Fund and the Adviser believe that ratings of other
securities issued by a Borrower do not necessarily reflect adequately the
relative quality of a Borrower's Senior Loans. Therefore, although the Adviser
may consider such ratings in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis. The Fund
may invest in Senior Loans, the Borrowers with respect to which have outstanding
debt securities which are rated below investment grade by a nationally
recognized statistical rating organization or are unrated but of comparable
quality to such securities. Debt securities rated below investment grade or
unrated but of comparable quality commonly are referred to as "junk bonds." The
Fund will invest only in those Senior Loans with respect to which the Borrower,
in the opinion of the Adviser, demonstrates certain of the following
characteristics: sufficient cash flow to service debt; adequate liquidity;
successful operating history; strong competitive position; experienced
management; and, with respect to collateralized Senior Loans, collateral
coverage that equals or exceeds the outstanding principal amount of the Senior
Loan. In addition, the Adviser will consider, and may rely in part, on the
analyses performed by the Agent and other Lenders, including such persons'
determinations with respect to collateral securing a Senior Loan.

Participations by the Fund in a Lender's portion of a Senior Loan typically
result in the Fund having a contractual relationship only with such Lender, not
with the Borrower. The Fund has the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by such Lender of such payments from the
Borrower. In connection with purchasing Participations, the Fund generally will
have no right to enforce compliance by the Borrower with the terms of the Loan
Agreement, nor any rights with respect to any funds acquired by other Lenders
through set-off against the Borrower and the Fund may not directly benefit from
the collateral supporting the Senior Loan in which it has purchased the
Participation. As a result, the Fund may assume the credit risk of both the
Borrower and the Lender selling the Participation. In the event of the
insolvency of the Lender selling a Participation, the Fund may be treated as a
general creditor of such Lender, and may not benefit from any set-off between
such Lender and the Borrower. The Fund has taken the following measures in an
effort to minimize such risks. The Fund will only acquire Participations if the
Lender selling the Participation, and any other persons interpositioned between
the Fund and the Lender, (i) at the time of investment has outstanding debt or
deposit obligations rated investment grade (BBB or A-3 or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or P-3 or higher by Moody's Investors
Service ("Moody's")) or determined by the Adviser to be of comparable quality
and (ii) has entered into an agreement which provides for the holding of

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assets in safekeeping for, or the prompt disbursement of assets to, the Fund.
Long-term debt rated BBB by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa by Moody's is regarded by
Moody's as a medium grade obligation, i.e., it is neither highly protected nor
poorly secured. Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is considered by S&P to be either overwhelming
or very strong and issues of commercial paper rated Prime-1 by Moody's are
considered by Moody's to have a superior ability for repayment of senior
short-term debt obligations. The Fund ordinarily will purchase a Participation
only if, at the time of such purchase, the Fund believes that the party from
whom it is purchasing such Participation is retaining an interest in the
underlying Senior Loan. In the event that the Fund does not so believe, it will
only purchase such a Participation if, in addition to the requirements set forth
above, the party from whom the Fund is purchasing such Participation (i) is a
bank, a member of a national securities exchange or other entity designated in
the Investment Company Act of 1940, as amended ("1940 Act"), as qualified to
serve as a custodian for a registered investment company and (ii) has been
approved as a custodian by the Board of Trustees of the Fund (a "Designated
Custodian").

The Fund will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to such Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by the Adviser to be of comparable quality. In addition,
the Fund will purchase a Participation only where the Lender selling such
Participation, and any other person interpositioned between such Lender and the
Fund at the time of investment have outstanding debt obligations rated
investment grade or determined by the Adviser to be of comparable quality.
Further, the Fund will not purchase interests in Senior Loans unless such Agent,
Lender or interpositioned person has entered into an agreement which provides
for the prompt disbursement of assets to the Fund.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should such an Agent, Lender or assignor with respect to
an Assignment interpositioned between the Fund and the Borrower become insolvent
or enter FDIC receivership or bankruptcy, any interest in the Senior Loan of
such person and any loan payment held by such person for the benefit of the Fund
should not be included in such person's estate. If, however, any such amount
were included in such person's estate, the Fund would incur certain costs and
delays in realizing payment or could suffer a loss of principal and/or interest.
In such event, the Fund could experience a decrease in net asset value.

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origination of a Senior Loan. Commitment fees are paid to Lenders on an ongoing
basis based upon the undrawn portion committed by the Lenders of the underlying
Senior Loan. Lenders may receive prepayment penalties when a Borrower prepays
all or part of a Senior Loan. The Fund will receive these fees directly from the
Borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Senior Loan by
way of Assignment. Whether or not the Fund receives a facility fee from the
Lender in the case of an Assignment, or any fees in the case of a Participation,
depends upon negotiations between the Fund and the Lender selling such
interests. When the Fund is an assignee, it may be required to pay a fee, or
forgo a portion of interest and any fees payable to it, to the Lender selling
the Assignment. Occasionally, the assignor will pay a fee to the assignee based
on the portion of the principal amount of the Senior Loan which is being
assigned. A Lender selling a Participation to the Fund may deduct a portion of
the interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or pass along
to a purchaser of an interest in a Senior Loan from the Fund a portion of any
fees that the Fund would otherwise be entitled to.

During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and, in certain limited circumstances discussed above, junior debt
securities acquired in connection with the Fund's investments in Senior Loans.
If the Adviser determines that market conditions temporarily warrant a defensive
investment policy, the Fund may invest, subject to its ability to liquidate its
relatively illiquid portfolio of Senior Loans, up to 100% of its assets in cash
and such high quality, short-term debt securities. The Fund will acquire such
warrants and equity securities only as an incident to the purchase or intended
purchase of interests in collateralized Senior Loans. Although the Fund
generally will acquire interests in warrants and equity securities only when the
Adviser believes that the relative value being given by the Fund in exchange for
such interests is substantially outweighed by the potential value of such
instruments, investment in warrants and equity securities entail certain risks
in addition to those associated with investments in Senior Loans. Warrants and
equity securities have a subordinate claim on a Borrower's assets as compared
with debt securities and junior debt securities have a subordinate claim on such
assets as compared with Senior Loans. As such, the values of warrants and equity
securities generally are more dependent on the financial condition of the
Borrower and less dependent on fluctuations in interest rates than are the
values of many debt securities. The values of warrants, equity securities and
junior debt securities may be more volatile than those of Senior Loans and thus
may have an adverse impact on the ability of the Fund to minimize fluctuations
in its net asset value.

SPECIAL RISK CONSIDERATIONS

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as to the value of assets pledged as collateral in all cases. The Fund normally
will rely primarily on the Agent (where the Fund is an Original Lender or owns
an Assignment) or the selling Lender (where the Fund owns a Participation) to
collect principal of and interest on a Senior Loan. Furthermore, the Fund
usually will rely on the Agent (where the Fund is an Original Lender or owns an
Assignment) or the selling Lender (where the Fund owns a Participation) to
monitor compliance by the Borrower with the restrictive covenants in the Loan
Agreement and notify the Fund of any adverse change in the Borrower's financial
condition or any declaration of insolvency. Collateralized Senior Loans will
frequently be secured by all assets of the Borrower that qualify as collateral,
which may include common stock of the Borrower or its subsidiaries.
Additionally, the terms of the Loan Agreement may require the Borrower to pledge
additional collateral to secure the Senior Loan, and enable the Agent, upon
proper authorization of the Lenders, to take possession of and liquidate the
collateral and to distribute the liquidation proceeds pro rata among the
Lenders. If the terms of a Senior Loan do not require the Borrower to pledge
additional collateral in the event of a decline in the value of the original
collateral, the Fund will be exposed to the risk that the value of the
collateral will not at all times equal or exceed the amount of the Borrower's
obligations under the Senior Loan. Lenders that have sold Participation
interests in such Senior Loan will distribute liquidation proceeds received by
the Lenders pro rata among the holders of such Participations. The Adviser will
also monitor these aspects of the Fund's investments and, where the Fund is an
Original Lender or owns an Assignment, will be directly involved with the Agent
and the other Lenders regarding the exercise of credit remedies. Senior Loans,
like other corporate debt obligations, are subject to the risk of non-payment of
scheduled interest or principal. Such non-payment would result in a reduction of
income to the Fund, a reduction in the value of the Senior Loan experiencing
non-payment and a potential decrease in the net asset value of the Fund.
Although, with respect to collateralized Senior Loans, the Fund generally will
invest only in Senior Loans that the Adviser believes are secured by specific
collateral, which may include guarantees, the value of which exceeds the
principal amount of the Senior Loan at the time of initial investment, there can
be no assurance that the liquidation of any such collateral would satisfy the
Borrower's obligation in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated. In the
event of bankruptcy of a Borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a Senior Loan is
collateralized by stock in the Borrower or its subsidiaries, such stock may lose
all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. In the event that the Fund does not believe that a perfected
security interest has been obtained with respect to a collateralized Senior
Loan, the Fund will only obtain an interest in such Senior Loan if the Agent is
a Designated Custodian. Some Senior Loans in which the Fund may invest are
subject to the risk that a court, pursuant to fraudulent conveyance or other
similar laws, could subordinate such Senior Loans to presently existing or
future indebtedness of the Borrower or take other action detrimental to the
holders of Senior Loans, such as the Fund, including, under certain
circumstances, invalidating such Senior Loans. Lenders commonly have certain
obligations pursuant to the Loan Agreement, which may include the obligation to
make additional loans or release collateral in certain circumstances.

Senior Loans in which the Fund will invest generally will not be rated by a
nationally recognized statistical rating organization, will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for rated, registered
and/or exchange listed securities. As a result, the performance of the Fund and
its ability to meet its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment company that
invests primarily in rated, registered and/or exchange listed securities.

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market for more liquid securities. The Fund has no limitation on the amount of
its assets which may be invested in securities which are not readily marketable
or are subject to restrictions on resale. The substantial portion of the Fund's
assets invested in relatively illiquid Senior Loan interests may restrict the
ability of the Fund to dispose of its investments in Senior Loans in a timely
fashion and at a fair price, and could result in capital losses to the Fund and
holders of Common Shares. However, many of the Senior Loans in which the Fund
expects to purchase interests are of a relatively large principal amount and are
held by a relatively large number of owners which should, in the Adviser's
opinion, enhance the relative liquidity of such interests. The risks associated
with illiquidity are particularly acute in situations where the Fund's
operations require cash, such as when the Fund tenders for its Common Shares,
and may result in the Fund borrowing to meet short-term cash requirements.

INVESTMENT RESTRICTIONS

The Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority (defined as the lesser of (i) 67% or more of the voting securities
present at a meeting of shareholders, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy at such
meeting, or (ii) more than 50% of the outstanding voting securities) of the
Fund's outstanding Common Shares. All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without shareholder approval. If a percentage restriction on investment or use
of assets set forth below is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing market values will not be
considered a deviation from policy. In accordance with the foregoing, 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. For
purposes of this restriction, the term issuer includes both the Borrower
under a Loan Agreement and the Lender selling a Participation to the Fund
together with any other persons interpositioned between such Lender and
the Fund with respect to a Participation.

2. Purchase any security if, as a result of such purchase, more than 25% of
the Fund's total assets (taken at current value) would be invested in the
securities of Borrowers and other issuers having their principal business
activities in the same industry (the electric, gas, water and telephone
utility industries, commercial banks, thrift institutions and finance
companies being treated as separate industries for purposes of this
restriction); provided, that this limitation shall not apply with respect
to obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.

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<PAGE> 65

3. Issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that the Fund may borrow up to an additional 5% of its total assets for
temporary purposes, or pledge its assets other than to secure such
issuance or in connection with hedging transactions, when-issued and
delayed delivery transactions and similar investment strategies. The Fund
will not purchase additional portfolio securities at any time that
borrowings, including the Fund's commitments pursuant to reverse
repurchase agreements, exceed 5% of the Fund's total assets (after giving
effect to the amount borrowed).

4. Make loans of money or property to any person, except for obtaining
interests in Senior Loans in accordance with its investment objective,
through loans of portfolio securities or the acquisition of securities
subject to repurchase agreements.

5. Buy any security "on margin." Neither the deposit of initial or variation
margin in connection with hedging transactions nor short-term credits as
may be necessary for the clearance of such transactions is considered the
purchase of a security on margin.

6. Sell any security "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except to the extent that the hedging transactions in which the Fund may
engage would be deemed to be any of the foregoing transactions.

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 or granting of
interests in Senior Loans or other securities acquired by the Fund.

8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under Loan Agreements would be deemed to constitute such control or
participation.

9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisitions. The Fund will rely on
representations of Borrowers in Loan Agreements in determining whether
such Borrowers are investment companies.

10. Buy or sell oil, gas or other mineral leases, rights or royalty contracts
except pursuant to the exercise by the Fund of its rights under Loan
Agreements. In addition, the Fund may purchase securities of issuers which
deal in, represent interests in or are secured by interests in such
leases, rights or contracts.

11. Purchase or sell real estate, commodities or commodities contracts except
pursuant to the exercise by the Fund of its rights under Loan Agreements,
except to the extent the interests in Senior Loans the Fund may invest in
are considered to be interests in real estate, commodities or commodities
contracts and except to the extent that hedging instruments the Fund may
invest in are considered to be commodities or commodities contracts.

12. Notwithstanding the investment policies and restrictions of the Fund, upon
approval of the Board of Trustees, the Fund may invest all or part of its
investable assets in a management investment company with substantially
the same investment objective, policies and restrictions as the Fund.

For purposes of investment restriction number 2, the Fund will consider all
relevant factors in determining whether to treat the Lender selling a
Participation and any persons interpositioned between such Lender and the Fund
as an issuer, including: the terms of the Loan Agreement and other relevant
agreements (including inter-creditor agreements and any agreements between such
person and the Fund's custodian); the credit quality of such Lender or
interpositioned person; general economic conditions applicable to such Lender or
interpositioned person; and other factors relating to the degree of credit risk,
if any, of such Lender or interpositioned person incurred by the Fund.

Pursuant to requirements of Minnesota law, the Fund will not invest more than
30% of its total assets in restricted debt securities; invest more than 15% of
its total assets in illiquid securities (excluding restricted debt securities);
invest in securities carrying more than 10% of the voting rights of an issuer;
invest in more than 10% of the equity securities of any one issuer; or invest
more than 10% of its total assets in securities of real estate investment trusts
or other investment companies, in each case except as permitted by the

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<PAGE> 66

Minnesota Commissioner of Securities. For purposes of the foregoing, instruments
and securities not subject to the registration provisions of the Securities Act
of 1933 are not considered restricted securities and an illiquid security is any
security that in the Adviser's view cannot be sold at a fair price within a
commercially reasonable period of time.

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 it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. 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 the
annual portfolio turnover rate of the Fund will not be in excess of 100%. A high
rate of portfolio turnover involves correspondingly greater expenses than a
lower rate, which expenses must be borne by the Fund and its shareholders. High
portfolio turnover also may result in the realization of substantial net
short-term capital gains. Due to the requirement for qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"), that less than 30% of the Fund's annual gross income be derived
from the disposition of securities held for less than three months, the Fund may
not be able to sell portfolio holdings held for less than three months that the
Fund may wish to sell in the ordinary course of management, which may affect
adversely the Fund's yield. Under recently enacted legislation, this requirement
will no longer be applicable to the Fund beginning on July 1, 1998.

TRUSTEES AND OFFICERS

The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five years and their affiliations, if any,
with the Adviser, Van Kampen American Capital Asset Management, Inc. (the "AC
Adviser"), Van Kampen American Capital Management, Inc., Van Kampen American
Capital Distributors, Inc., Van Kampen American Capital, Inc., Van Kampen
American Capital Advisors, Inc., ACCESS Investor Services, Inc., Van Kampen
Merritt Equity Advisors Corp., Van Kampen American Capital Insurance Agency of
Illinois, Inc., VK/AC System, Inc., Van Kampen American Capital RecordKeeping
Services, Inc., American Capital Contractual Services, Inc., Van Kampen American
Capital Trust Company, Van Kampen American Capital Exchange Corporation, or
VK/AC Holding, Inc. (affiliates of the Adviser). Unless otherwise noted the
address of each of the Trustees and officers is One Parkview Plaza, Oakbrook
Terrace, IL 60181.

DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is President, Chief Operating Officer and a Director
of the Adviser, AC Adviser, Van Kampen American Capital Advisors, Inc., and Van
Kampen American Capital Management, Inc. He is also an Executive Vice President
and Director of VK/AC Holding, Inc., Van Kampen American Capital, Inc. Mr.
McDonnell is President and a Director of Van Kampen Merritt Equity Advisors
Corp. He is the President and a Trustee of other investment companies advised by
the Adviser and the AC Adviser. Prior to April of 1997, he was a Director of Van
Kampen Merritt Equity Holdings Corp. Prior to September of 1996, Mr. McDonnell
was Chief Executive Officer and Director of MCM Group, Inc., McCarthy, Crisanti
& Maffei, Inc. and Chairman and Director of MCM Asia Pacific Company, Limited
and MCM (Europe) Limited. Prior to July of 1996, Mr. McDonnell was President,
Chief Operating Officer and Trustee of VSM Inc. and VCJ Inc. Prior to December,
1991, Mr. McDonnell was Senior Vice President of Van Kampen Merritt Inc. His
address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

THEODORE A. MYERS, DATE OF BIRTH 08/03/30, TRUSTEE. Mr. Myers is a Senior
Financial Advisor of Qualitech Steel Corporation, a manufacturer of special
quality bar products, as well as iron carbide (a steel scrap substitute). Mr.
Myers is a Director of COVA Series Trust of COVA Financial Life Insurance
(formerly known as Xerox Life). He is also a member of the Arthur Anderson Chief
Financial Officer Advisory Committee. Prior to 1997, Mr. Myers was a Director of
McLouth Steel, and prior to July of 1996, Mr. Myers was an Executive Vice
President and Chief Financial Officer of Qualitech Steel Corporation. Prior to
August, 1993, Mr. Myers was Senior Vice President, Chief Financial Officer and a
Director of Foods Brand America (formerly known as Doskocil Companies, Inc.), a
food processing and distribution company. Prior to January, 1990, Mr. Myers was
Vice President and Chief Financial Officer of Inland Steel Industries. His
address is

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<PAGE> 67

550 Washington Avenue, Glencoe, Illinois 60022. Mr. Myers is also a Trustee of
other investment companies advised by the Adviser.

ROD DAMMEYER, DATE OF BIRTH 11/05/40, TRUSTEE. Mr. Dammeyer is Managing
Director of EGI (Equity Group Investments, Inc.) Corporate Investments, a
division of Equity Group Investments, Inc., a company that makes private equity
investments in other companies, and President, Chief Executive Officer and
Director of Anixter International Inc., a value-added provider of integrated
networking and cabling solutions that support business information and network
infrastructure requirements (employed by Anixter since 1985). Prior to 1997, Mr.
Dammeyer was President, Chief Executive Officer and a Director of Great American
Management & Investment, Inc., a diversified manufacturing company. He is also a
Director of Teletech Holdings Inc., Lukens, Inc., Falcon Building Products,
Inc., Revco D.S., Inc., Jacor Communications, Inc., Capsure Holdings Corp., IMC
Global Inc., Antec Corporation and a member of the Chase Manhattan Corporation
National Advisory Board. Mr. Dammeyer was previously a Director of Santa Fe
Energy Resources, Inc., Lomas Financial Corporation, Santa Fe Pacific
Corporation, Q-Tel, S.A. de C.V. and Servicios Financieros Quadrum, S.A. His
address is Two North Riverside Plaza, Suite 1950, Chicago, Illinois 60606. Mr.
Dammeyer is also a Trustee of other investment companies advised by the Adviser.

DAVID C. ARCH, DATE OF BIRTH 07/17/45, TRUSTEE. Mr. Arch is Chairman and Chief
Executive Officer of Blistex Inc., a consumer health care product's
manufacturer. Director of Elmhurst College and the Illinois Manufacturers'
Association. His address is 1800 Swift Drive, Oak Brook, Illinois 60521. Mr.
Arch is also a Trustee of other investment companies advised by the Adviser.

HOWARD J KERR, DATE OF BIRTH 11/17/35, TRUSTEE. Mr. Kerr is President and Chief
Executive Officer of Pocklington Corporation, Inc., an investment holding
company. Mr. Kerr is also a Director of Canbra Foods, Ltd., a Canadian oilseed
crushing, refining, processing and packaging operation. Prior to 1991, Mr. Kerr
was President, Chief Executive Officer and Chairman of the Board of Directors of
Grabill Aerospace Industries, Ltd. His address is 736 North Western Ave., P.O.
Box 317, Lake Forest, Illinois 60045. Mr. Kerr is a Trustee of other investment
companies advised by the Adviser.

HUGO F. SONNENSCHEIN, DATE OF BIRTH 11/14/40, TRUSTEE. Mr. Sonnenschein is
President of the University of Chicago. Mr. Sonnenschein is a member of the
Board of Trustees of the University of Rochester and a member of its investment
committee. Prior to July, 1993, Mr. Sonnenschein was Provost of Princeton
University, and, from 1988 to 1991, Mr. Sonnenschein was Dean of the School of
Arts and Sciences at the University of Pennsylvania. Mr. Sonnenschein is a
member of the National Academy of Sciences and a fellow of the American Academy
of Arts and Sciences. His address is 5801 South Ellis Avenue, Suite 502,
Chicago, Illinois 60637. Mr. Sonnenschein is also a trustee of other investment
companies advised by the Adviser.

WAYNE W. WHALEN,* DATE OF BIRTH 08/22/39, TRUSTEE. Mr. Whalen is a partner in
the law firm of Skadden, Arps, Slate, Meagher & Flom (Illinois). His address is
333 West Wacker Drive, Chicago, Illinois 60606. Mr. Whalen is also a Trustee of
other investment companies advised by the Adviser and the AC Adviser.

PETER W. HEGEL, DATE OF BIRTH 06/25/56, VICE PRESIDENT. Mr. Hegel is Executive
Vice President and Portfolio Manager of the Adviser. He is Executive Vice
President of the AC Adviser, Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Advisors, Inc. Prior to July of 1996, Mr. Hegel was
a Director of VSM Inc. Prior to September of 1996, Mr. Hegel was a Director of
McCarthy, Crisanti & Maffei, Inc. His address is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. He is Vice President of other investment companies
advised by the Adviser and the AC Adviser.

JEFFREY W. MAILLET, DATE OF BIRTH 09/30/56, VICE PRESIDENT. Mr. Maillet is
Senior Vice President and Portfolio Manager of the Adviser. He is Senior Vice
President of Van Kampen American Capital Management, Inc., and the AC Adviser.
His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

RONALD A. NYBERG, DATE OF BIRTH 07/29/53, VICE PRESIDENT AND SECRETARY. Mr.
Nyberg is Executive Vice President, General Counsel, Secretary and Director of
Van Kampen American Capital, Inc., VK/AC Holding, Inc. He is also Executive Vice
President, General Counsel and Director of Van Kampen Merritt Equity Holdings
Corp. Mr. Nyberg is also Executive Vice President, General Counsel and Assistant
Secretary of ACCESS Investor Services, Inc., and Executive Vice President,
General Counsel, Assistant Secretary and

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Director of the Adviser, the AC Adviser, Van Kampen American Capital Advisors,
Inc., Van Kampen American Capital Management, Inc., Van Kampen American Capital
Distributors, Inc., Van Kampen American Capital Exchange Corporation, American
Capital Contractual Services, Inc., and Van Kampen American Capital Trust
Company. Prior to April of 1997, he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt Equity Advisors Corp. Prior to July
of 1996, Mr. Nyberg was Executive Vice President and General Counsel of VSM Inc.
and Executive Vice President and General Counsel of VCJ Inc. Prior to September
of 1996, he was General Counsel of McCarthy, Crisanti & Maffei, Inc. He is a
Vice President and Secretary of other investment companies advised by the
Adviser and the AC Adviser, and is a Director of ICI Mutual Insurance Co., a
provider of insurance to members of the Investment Company Institute. Prior to
March of 1991, Mr. Nyberg was Secretary of Van Kampen Merritt Inc., the Adviser
and McCarthy, Crisanti & Maffei, Inc. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.

EDWARD C. WOOD, III, DATE OF BIRTH 01/11/56, VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER. Mr. Wood is Senior Vice President of the Adviser, the AC Adviser, and
Van Kampen American Capital Management, Inc. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Mr. Wood is Vice President and Chief Financial
Officer of other investment companies advised by the Adviser and the AC Adviser.

CURTIS W. MORELL, DATE OF BIRTH 08/04/46, VICE PRESIDENT AND CHIEF ACCOUNTING
OFFICER. Mr. Morell is Senior Vice President of the Adviser and the AC Adviser.
His address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Morell is Vice
President and Chief Accounting Officer each of other investment companies
advised by the Adviser and the AC Adviser.

NICHOLAS DALMASO, DATE OF BIRTH 03/01/65, ASSISTANT SECRETARY. Mr. Dalmaso is
Vice President, Assistant Secretary and Attorney of Van Kampen American Capital,
Inc. Mr. Dalmaso is also Vice President and Assistant Secretary of the Adviser,
the AC Adviser, Van Kampen American Capital Distributors, Inc., Van Kampen
American Capital Advisors, Inc. and Van Kampen American Capital Management, Inc.
His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Prior to
May 1992, attorney for Cantwell & Cantwell, a Chicago law firm. Mr. Dalmaso is
Assistant Secretary of other investment companies advised by the Adviser and the
AC Adviser.

SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., VK/AC Holding, Inc., and Senior Vice President,
Deputy General Counsel and Secretary of Van Kampen American Capital
Distributors, Inc., the Adviser, the AC Adviser, Van Kampen American Capital
Advisors, Inc., ACCESS Investor Services, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VK/AC System, Inc. and Van Kampen American
Capital RecordKeeping Services, Inc., Van Kampen American Capital Exchange
Corporation, American Capital Contractual Services, Inc., Van Kampen American
Capital Management, Inc., and Van Kampen Merritt Equity Advisors Corp. Prior to
April of 1997, Senior Vice President, Deputy General Counsel and Secretary of
Van Kampen American Capital Services, Inc. and Van Kampen Merritt Holdings Corp.
Prior to September of 1996, Mr. Martin was Deputy General Counsel and Secretary
of McCarthy, Crisanti & Maffei, Inc., and prior to July of 1996, he was Senior
Vice President, Deputy General Counsel and Secretary of VSM Inc. and VCJ Inc.
His address in One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Martin
is an Assistant Secretary of other investment companies advised by the Adviser
and the AC Adviser.

WESTON B. WETHERELL, DATE OF BIRTH 06/15/56, ASSISTANT SECRETARY. Mr. Wetherell
is Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Distributors, Inc.,
the Adviser, the AC Adviser, Van Kampen American Capital Management, Inc., and
Van Kampen American Capital Advisors, Inc. Prior to September of 1996, Mr.
Wetherell was Assistant Secretary of McCarthy, Crisanti & Maffei, Inc. His
address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Wetherell
is an Assistant Secretary of other investment companies advised by the Adviser
and the AC Adviser.

HUEY P. FALGOUT, JR., DATE OF BIRTH 11/15/63, ASSISTANT SECRETARY. Mr. Falgout
is Assistant Vice President and an Attorney of Van Kampen American Capital, Inc.
He is Assistant Vice President and Assistant Secretary of the Adviser and the AC
Adviser, ACCESS Investor Services, Inc., American Capital Contractual Services,
Inc., Van Kampen American Capital Management, Inc., Van Kampen American

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Capital Exchange Corporation, Van Kampen American Capital Advisors, Inc. and Van
Kampen American Capital Distributors, Inc. His address is 2800 Post Oak Blvd.,
Houston, TX 77056. Mr. Falgout is Assistant Secretary of other investment
companies advised by the adviser and the AC Adviser.

JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, TREASURER. Mr. Sullivan is First Vice
President of the Adviser and the AC Adviser. His address is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. Mr. Sullivan is Treasurer of other investment
companies advised by the Adviser and the AC Adviser.

STEVEN M. HILL, DATE OF BIRTH 10/16/64, ASSISTANT TREASURER. Mr. Hill is
Assistant Vice President of the Adviser and the AC Adviser. His address is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Hill is Assistant
Treasurer of other investment companies advised by the Adviser and the AC
Adviser.

TANYA M. LODEN, DATE OF BIRTH 11/19/59, CONTROLLER. Ms. Loden is Vice President
of the Adviser and the AC Adviser. Her address is 2800 Post Oak Blvd., Houston,
TX 77056. Ms. Loden is Controller of other investment companies advised by the
Adviser and the AC Adviser.

MICHAEL ROBERT SULLIVAN, DATE OF BIRTH 03/30/33, ASSISTANT CONTROLLER. Mr.
Sullivan is Assistant Vice President of the Adviser and the AC Adviser. His
address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Sullivan is Assistant
Controller of other investment companies advised by the Adviser and the AC
Adviser.

*Such trustees are "interested persons" as defined in the 1940 Act.
Mr. McDonnell is an interested person of the Adviser and the Fund by
reason of his position at the Adviser. Mr. Whalen is an interested
person of the Fund by reason of his law firm having acted as legal
counsel to the Fund.

The officers and Trustees as a group own less than 1% of the Fund's outstanding
Common Shares. The compensation of the officers and trustees who are affiliated
persons (as defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
trustees of the Fund. During the next year, the Fund expects to pay the Trustees
who are not affiliated persons of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. an annual fee of $2,500
and $250 per meeting of the Board of Trustees and each committee meeting, as
well as reimbursement of expenses incurred in connection with such meetings.
Under the Fund's retirement plan, trustees who are not affiliated with the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc., have at least ten years of service and retire at or after
attaining the age of 60, are eligible to receive a retirement benefit equal to
the annual retainer for each of the ten years following such trustee's
retirement. Under certain conditions, reduced benefits are available for early
retirement. Under the Fund's deferred compensation plan, a trustee who is not
affiliated with the Adviser, Van Kampen American Capital Distributors, Inc. or
Van Kampen American Capital, Inc. can elect to defer receipt of all or a portion
of the trustee's fees earned by such trustee until such trustee's retirement.
The deferred compensation earns a rate of return determined by reference to the
Fund or other Van Kampen American Capital closed-end investment companies
advised by the Adviser as selected by the trustee. To the extent permitted by
the 1940 Act, the Fund may invest in securities of other Van Kampen American
Capital closed-end investment companies advised by the Adviser in order to match
the deferred compensation obligation. The deferred compensation plan is not
funded and obligations thereunder represent general unsecured claims against the
general assets of the Fund. Subject to certain exceptions and limitations, as
fully described in Section 5.3 of the Fund's Declaration of Trust on file with
the SEC, the Fund indemnifies every Trustee and officer of the Fund against
liabilities and expenses reasonably incurred or paid in connection with any
claim, action, suit or proceeding in which he becomes involved by virtue of his
being or having been a Trustee or officer. Such indemnification is unavailable
for any Trustee or officer who is deemed to have engaged in willful misfeasance,
bad faith, gross negligence or reckless disregard of his duties or to not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Fund. As more fully described in the Fund's Declaration of
Trust, a Trustee may be removed by a vote of not less than two-thirds of the
outstanding Common Shares and, in certain circumstances, holders of Common
Shares may call a meeting to remove a Trustee. The Fund is required to assist in
communications with holders of Common Shares regarding such a meeting.

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COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM THE FUND AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME(1) FROM THE FUND(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
David C. Arch.................... $4,257 $ 254 $2,500 $138,500
Rod Dammeyer..................... 4,257 445 2,500 138,500
Howard J Kerr.................... 4,257 766 2,500 138,500
Theodore A. Myers................ 4,257 1,618 2,500 138,500
Hugo F. Sonnenschein............. 4,257 364 2,500 138,500
Wayne W. Whalen.................. 4,250 496 2,500 138,500
</TABLE>

- ---------------
(1) Mr. McDonnell is an affiliated person of the Adviser, Van Kampen American
Capital Distributors, Inc. and Van Kampen American Capital, Inc., and does
not receive compensation or retirement benefits from the Fund.

(2) The amounts shown in this column are the Aggregate Compensation of the Fund
before deferral by the trustees under the deferred compensation plan during
its last completed fiscal year ended July 31, 1997. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year ended July 31, 1997: Mr. Dammeyer $3,757; Mr. Sonnenschein
$3,757; Mr. Kerr $3,757; and Mr. Whalen $3,750. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
the Fund as of July 31, 1997 is as follows: Mr. Dammeyer $13,816; Mr.
Sonnenschein $15,419; Mr. Kerr $12,513; and Mr. Whalen $11,178. The
deferred compensation plan is described above the 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 defined below) as selected by the respective trustee. To
the extent permitted by the 1940 Act, the Fund may invest in securities of
these funds selected by the trustees in order to match the deferred
compensation obligation.

(3) The amounts shown in this column are the Pension or Retirement Benefit
Accruals by the Fund for the fiscal year ended July 31, 1997. The
retirement plan is described above the table.

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

(5) The "Fund Complex" consists of 37 investment companies advised by the
Adviser that have the same members on each investment company's Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 37 investment companies in the Fund
Complex for the year ended December 31, 1996 before deferral by the
trustees under the deferred compensation plan. The following trustees
deferred compensation paid by the Fund Complex during the calendar year
ended December 31, 1996: Mr. Dammeyer $129,500; Mr. Sonnenschein $129,500;
Mr. Kerr $129,500; and Mr. Whalen $129,500. The deferred compensation plan
is described above the table. The cumulative deferred compensation
(including interest) accrued with respect to each trustee as of December
31, 1996 is as follows: Mr. Dammeyer $348,355; Mr. Sonnenschein $412,893;
Mr. Kerr $353,943; and Mr. Whalen $283,562. Amounts deferred are retained
by the respective fund and earn a rate of return determined by reference to
either the return on the Common Shares of the Fund or common shares of
other funds in the Fund Complex (as defined below) as selected by the
respective trustee. To the extent permitted by the 1940 Act, the respective
fund may invest in securities of the funds selected by the trustees in
order to match the deferred compensation obligation. The Adviser also
serves as investment adviser for other investment companies; however, with
the exception of Messrs. McDonnell and Whalen, the Trustees are not
trustees of other investment companies. Combining the Fund Complex with
other investment companies advised by the Adviser, Mr. Whalen received
Total Compensation of $243,375 for the year ended December 31, 1996.

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<PAGE> 71

PORTFOLIO TRANSACTIONS

With respect to interests in Senior Loans, the Fund generally will engage in
privately negotiated transactions for purchase or sale in which the Adviser will
negotiate on behalf of the Fund. The Fund may be required to pay fees, or forgo
a portion of interest and any fees payable to the Fund, to the Lender selling
Participations or Assignments to the Fund. The Adviser will determine the
Lenders from whom the Fund will purchase Assignments and Participations by
considering their professional ability, level of service, relationship with the
Borrower, financial condition, credit standards and quality of management.
Although the Fund intends generally to hold interests in Senior Loans until
maturity or prepayment of the Senior Loan, the illiquidity of Senior Loans may
restrict the ability of the Adviser to locate in a timely manner persons willing
to purchase the Fund's interests in Senior Loans at a fair price should the Fund
desire to sell such interests. See "Investment Objective and Policies."

With respect to investments other than in Senior Loans, 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
and the Adviser, including quotations necessary to determine the value of the
Fund's net assets. Any research benefits so obtained are available for all
clients of the Adviser. Because statistical and other research information only
supplements the research efforts of the Adviser and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
reduce materially its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Adviser may take into
consideration the fact that certain firms have sold Common Shares of the Fund
and that certain firms provide market, statistical or other research information
to the Fund and the Adviser and may select firms that are affiliated with the
Fund, the Adviser, Van Kampen American Capital Distributors, Inc. ("VKAC") or
Van Kampen American Capital, Inc. For the fiscal years ended July 31, 1995, 1996
and 1997, the Fund paid brokerage commissions of $211,000, $179,000 and $51,563,
respectively.

If it is believed to be in the best interest of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of services
described above, even if 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 the Adviser did not
consider the broker's furnishing of such 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 the services.

If purchases or sales of financial instruments for the Fund and for one or
more other investment companies or clients advised by the Adviser are considered
at or about the same time, transactions in such financial instruments will be
allocated among the several investment companies and clients, in a manner deemed
equitable by the Adviser, to each such investment company or client, taking into
account their respective sizes and the aggregate amount of financial instruments
to be purchased or sold. Although in some cases this procedure could have a
detrimental effect on the price paid by the Fund for the financial instrument or
the volume of the financial instrument purchased by the Fund, the ability to
participate in volume transactions and to negotiate lower commissions, fees and
expenses possibly could benefit the Fund.

Although the Adviser will be responsible for the management of the Fund's
portfolio, the policies and practices in this regard must be consistent with the
foregoing and will be subject at all times to review by the Trustees of the
Fund. The Fund anticipates that the annual portfolio turnover rate will not
exceed 100%.

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 affiliates of the Fund, or to affiliates of such persons, 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 financial instruments 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 review of all factors deemed relevant, the Trustees will consider
from time to time whether the advisory fee will be reduced by all or a portion
of the brokerage commissions given to brokers that are affiliated with the Fund.

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<PAGE> 72

MANAGEMENT OF THE FUND

THE ADVISER

The Adviser was incorporated as a Delaware corporation in 1982. The Adviser is
a wholly-owned subsidiary of Van Kampen American Capital, Inc. Van Kampen
American Capital, Inc. is an indirect wholly-owned subsidiary of Morgan Stanley,
Dean Witter, Discover & Co. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

Morgan Stanley, Dean Witter, Discover & Co. and various of its directly or
indirectly owned subsidiaries, including Morgan Stanley Asset Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.

INVESTMENT ADVISORY AGREEMENT

The investment advisory agreement (the "Advisory Agreement") between the
Adviser and the Fund was approved by the shareholders of the Fund at a
shareholders meeting held on October 23, 1996 and will continue in effect until
May 30, 1997 and thereafter from year to year, unless earlier terminated as
described below, if approved annually (a) by the Trustees of the Fund or by a
majority of the Fund's Common Shares and (b) by a majority of the Trustees who
are not parties to the agreement or interested persons of any such party, in
compliance with the requirements of the 1940 Act. The Advisory Agreement may be
terminated without penalty upon 60 days written notice by either party (in the
case of the Fund, such termination may be effected by the Board of Trustees or
by a majority of the Common Shares) and will automatically terminate in the
event of assignment. The Adviser may in its sole discretion from time to time
waive all or a portion of the advisory fee or reimburse the Fund for all or a
portion of its other expenses.

The investment advisory agreement (the "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 financial institutions through whom
the Fund's portfolio transactions are executed. The Adviser also furnishes
necessary facilities and equipment, and permits its officers and employees to
serve without compensation as trustees and officers of the Fund if duly elected
to such positions. For the fiscal years ended July 31, 1995, 1996 and 1997, the
Fund recognized investment advisory fees pursuant to the Advisory Agreement of
$16,722,752, $36,408,493 and $52,313,966, respectively.

The Advisory Agreement specifies that the Adviser will reimburse the Fund for
annual expenses of the Fund which exceed the most stringent limits prescribed by
any State in which the Common Shares are offered for sale. The most stringent
limit as of the date of this Prospectus, as affecting the Fund, requires the
Adviser to reimburse the Fund to the extent that aggregate expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.

The Advisory 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 Advisory Agreement relates,

B-16
<PAGE> 73

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
Advisory Agreement.

The Trustees are responsible for the overall management and supervision of the
Fund's affairs. The Adviser's activities are subject to the review and
supervision of the Trustees to whom the Adviser renders periodic reports of the
Fund's investment activities. The Advisory Agreement continues in effect from
year to year only if specifically approved by the Trustees, and by the
disinterested Trustees, or the Fund's holders of Common Shares in compliance
with the requirements of the 1940 Act. The Advisory Agreement may be terminated
without penalty upon 60 days' written notice by either party and will terminate
automatically in the event of assignment.

THE ADMINISTRATOR

The administrator for the Fund is Van Kampen American Capital Distributors,
Inc. (in such capacity, the "Administrator"), who is an affiliate of the
Adviser. For the fiscal years ended July 31, 1995, 1996 and 1997, the Fund
recognized administrative fees pursuant to the Administration Agreement of
$4,400,724, $9,614,696 and $13,976,102, respectively.

The Fund pays all other expenses incurred in the operation of the Fund
including, but not limited to, direct charges relating to the purchase and sale
of financial instruments in its portfolio, interest charges, fees and expenses
of legal counsel and independent auditors, taxes and governmental fees, cost of
share certificates, expenses (including clerical expenses) of issuance, sale or
repurchase of any of the Fund's portfolio holdings, expenses in connection with
the Fund's dividend reinvestments, membership fees in trade associations,
expenses of registering and qualifying the Common Shares of the Fund for sale
under federal and state securities laws, expenses of printing and distributing
reports, notices and proxy materials to existing holders of Common Shares,
expenses of filing reports and other documents filed with governmental agencies,
expenses of annual and special meetings of holders of Common Shares, fees and
disbursements of the transfer agents, custodians and sub-custodians, expenses of
disbursing dividends and distributions, fees, expenses and out-of-pocket costs
of Trustees of the Fund who are not affiliated with the Adviser, insurance
premiums, indemnification and other expenses not expressly provided for in the
Advisory Agreement or the Administration Agreement and any extraordinary
expenses of a nonrecurring nature.

OTHER AGREEMENTS

LEGAL SERVICES AGREEMENT. The Fund and each of the other funds advised by the
Adviser and distributed by VKAC have entered into a Legal Services Agreements
pursuant to which Van Kampen American Capital, Inc. 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 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 VKAC also receive legal services from Van Kampen American
Capital, Inc. Of the total costs for legal services provided to funds
distributed by VKAC, 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.

NET ASSET VALUE

The net asset value per share of the Fund's Common Shares is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities, and dividing the result by the number of Common Shares outstanding.
The net asset value will be computed on each business day as of 5:00 p.m.
Eastern time. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.

The value of the Fund's portfolio will be determined by the Adviser, following
guidelines established and periodically reviewed by the Trustees. Interests in
Senior Loans will be valued by the Adviser on behalf of the

B-17
<PAGE> 74

Fund on the basis of market quotations and transactions in instruments which the
Adviser believes may be comparable to Senior Loan interests with respect to the
following characteristics: credit quality, interest rate, interest rate
redetermination period and maturity. Such instruments may include commercial
paper, negotiable certificates of deposit and short-term variable rate
securities which have adjustment periods comparable to the Senior Loan interests
in the Fund's portfolio. In determining the relationship between such
instruments and the Senior Loan interests in the Fund's portfolio, the Adviser
will consider on an ongoing basis, among other factors, (i) the credit
worthiness of the Borrower and (ii) the current interest rate, the period until
next interest rate redetermination and maturity of such Senior Loan interests.
It is expected that the Fund's net asset value will fluctuate as a function of
interest rate and credit factors. Because of the short-term nature of such
instruments, however, the Fund's net asset value is expected to fluctuate less
in response to changes in interest rates than the net asset values of investment
companies with portfolios consisting primarily of fixed-income or longer term
securities. The Adviser believes that Lenders selling Senior Loan interests or
otherwise involved in a Senior Loan transaction may tend, in valuing Senior Loan
interests for their own account, to be less sensitive to interest rate and
credit quality changes and, accordingly, the Adviser does not intend to rely
solely on such valuations in valuing the Senior Loan interests for the Fund's
account. In addition, because a secondary trading market in Senior Loans has not
yet fully developed, in valuing Senior Loans, the Adviser may not rely solely on
but may consider, to the extent the Adviser believes such information to be
reliable, prices or quotations provided by banks, dealers or pricing services
with respect to secondary market transactions in Senior Loans. To the extent
that an active secondary market in Senior Loan interests develops to a reliable
degree, the Adviser may rely to an increasing extent on such market prices and
quotations in valuing the Senior Loan interests in the Fund's portfolio. In
light of the senior nature of Senior Loan interests included in the Fund's
portfolio and taking into account the Fund's access to non-public information
with respect to Borrowers relating to such Senior Loan interests, the Adviser
does not currently believe that consideration on a systematic basis of ratings
provided by any nationally recognized statistical rating organization or price
fluctuations with respect to long- or short-term debt of such Borrowers
subordinate to the Senior Loans of such Borrowers is necessary for the
determination of the value of such Senior Loan interests. Accordingly, the
Adviser generally does not systematically consider (but may consider in certain
instances) and, in any event, does not rely upon such ratings or price
fluctuations in determining the value of Senior Loan interests in the Fund's
portfolio.

Other portfolio securities (other than short-term obligations, but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, portfolio
securities will be valued at the last sale price on the exchange that is the
primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps will be determined in accordance with a discounted present
value formula and then confirmed by obtaining a bank quotation.

Short-term obligations which mature in 60 days or less are valued at amortized
cost, if their original term to maturity when acquired by the Fund was 60 days
or less, or are valued at amortized cost using their value on the 61st day prior
to maturity, if their original term to maturity when acquired by the Fund was
more than 60 days, unless in each case this is determined not to represent fair
value. Repurchase agreements will be valued at cost plus accrued interest.
Securities for which there exist no price quotations or valuations and all other
assets are valued at fair value as determined in good faith by or on behalf of
the Trustees.

[The Fund's net asset value has ranged from a high of $10.07 to a low of $9.97
since its commencement of investment operations on October 4, 1989. During such
time the world has experienced a number of significant political and economic
events. In 1989, East and West Germany moved toward unification and high yield
bonds experienced significant defaults. In 1990, Germany reunified, Iraq invaded
Kuwait and the Dow reached 3,000. During 1991, the U.S. experienced and recorded
negative growth in Gross Domestic Product, the Gulf War began, the Soviet Union
collapsed and U.S. unemployment reached an eight year high. In 1992, the ERM
crashed, beginning a currency crisis and Bill Clinton was elected. In 1993,
Israel and the PLO signed a peace accord, long-term treasury rates fell to
5.79%, NAFTA was approved and the Dow Jones

B-18
<PAGE> 75

Industrial Average reached a new high. During 1994, the Fed began its first
interest rate tightening in 5 years, and on December 6, 1994, Orange County,
California, together with its pooled investment funds, filed for protection
under Chapter 9 of the Federal Bankruptcy Code. In 1995, the Federal Reserve
Board eased short-term rates first in July and for a second and final time in
December. There was a partial government shutdown in November and the Dow
crossed 5200 in December. Currently, in 1996, The Fed once again eased short-
term rates in January. In June, Alan Greenspan was appointed for a third term.
In July, inflation fears caused the stock market to sell off, Small
Capitalization stocks to decline and technology stocks to sell off. The Dow
crossed 6000 in October and President Bill Clinton was re-elected for a second
term in November.]

TAXATION

FEDERAL TAXATION

The Fund has qualified and intends to continue to qualify each year to be
treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to loans of securities and gains from the sale or other disposition
of securities or certain other related income; (b) derive less than 30% of its
gross income from gains from the sale or other disposition of securities and
certain other investments held for less than three months (the "short-short
rule"); and (c) diversify its holdings so that at the end of each quarter of the
Fund's taxable year (i) at least 50% of the value of the Fund's assets is
represented by cash, U.S. government securities, securities of other regulated
investment companies, and other securities which, with respect to any one
issuer, do not represent more than 5% of the value of the Fund's assets or more
than 10% of the voting securities of such issuer, and (ii) not more than 25% of
the value of the Fund's assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other regulated
investment companies). Under recently enacted legislation, the short-short rule
described above will no longer be applicable to the Fund beginning on July 1,
1998.

If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including among other things, interest
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. As a Massachusetts business trust,
the Fund will not be subject to any excise or income taxes in Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes.

In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income for such year and
at least 98% of its capital 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 was
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.

B-19
<PAGE> 76

Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may 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 recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.

Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income 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 gross income be derived from the disposition of securities
held for less than three months. Under recently enacted legislation, this
requirement will no longer be applicable to the Fund beginning on July 1, 1998.

Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.

DISTRIBUTIONS

Distributions of the Fund's net investment income are taxable to Shareholders
as ordinary income, whether paid in cash or reinvested in additional Shares.
Distributions of the Fund's net capital gains ("capital gains dividends"), if
any, are taxable to Common 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 Common Shares and, after
such adjusted tax basis is reduced to zero, will constitute capital gains to
such holder (assuming such Common Shares are held as a capital asset). For a
summary of the tax rates applicable to capital gains (including capital gains
dividends), see "Capital Gains Rates Under the 1997 Tax Act" below. It is not
expected that any portion of the distributions from the Fund will be eligible
for the dividends received deduction for corporations. The Fund will inform
Shareholders of the source and tax status of all distributions promptly after
the close of each calendar year.

Shareholders receiving distributions in the form of additional Common 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 Common Shares
received, determined as of the distribution date. The basis of such Common
Shares will equal the fair market value of such shares 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
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, in 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

B-20
<PAGE> 77

identification number (in the case of individuals, their social security number)
and certain required certifications, or who are otherwise subject to backup
withholding.

SALE OF SHARES

Except as discussed below, selling Shareholders will generally recognize gain
or loss in an amount equal to the difference between their adjusted tax basis in
the Common Shares and the amount received. If such Common Shares are held as a
capital asset, the gain or loss will be a capital gain or loss. For a summary of
the tax rates applicable to capital gains, see "Capital Gains Rates Under the
1997 Tax Act" below. It is possible, although the Fund believes it is unlikely,
that tendering holders of Common Shares may not qualify for gain or loss
treatment as described above, which in turn may result in deemed distributions
to non-tendering holders of Common Shares. The federal income tax consequences
of repurchase of Common Shares pursuant to tender offers will be disclosed in
the related offering documents. Any loss recognized upon a taxable disposition
of Common Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such Common Shares. For purposes of determining whether Common Shares have
been held for six months or less, the holding period is suspended for any
periods during which the Shareholder's risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related property
or through certain options or short sales.

CAPITAL GAINS RATES

Capital Gains Rates Under the 1997 Tax Act. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rates applicable to net capital gains
recognized by individuals and other non-corporate taxpayers are (i) the same as
ordinary income rates for capital assets held for one year or less, (ii) 28% for
capital assets held for more than one year but not more than 18 months and (iii)
20% for capital assets held for more than 18 months. The 1997 Tax Act did not
affect the maximum long-term capital gains rate for corporations, which remains
at 35%. The new tax rates for capital gains under the 1997 Tax Act described
above apply to distributions of capital gains dividends by regulated investment
companies such as the Fund as well as to sales and exchanges of shares in
regulated investment companies such as the Fund. With respect to capital losses
recognized on dispositions of shares held six months or less where such losses
are treated as long-term capital losses to the extent of prior capital gains
dividends received on such shares (see "Sale of Shares" above), it is unclear
how such capital losses offset the capital gains referred to above. Shareholders
should consult their own tax advisors as to the application of the new capital
gains rates to their particular circumstances.

GENERAL

The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their advisers regarding the specific
federal tax consequences of purchasing, holding and disposing of Common Shares,
as well as the effects of state, local and foreign tax laws and any proposed tax
law changes.

REPURCHASE OF SHARES

The Fund has entered into a Credit Agreement dated April 17, 1997 (the "Credit
Agreement") among the Fund, as borrower, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $250,000,000 to the Fund, which is not
secured by the assets of the Fund or other collateral. The credit facility
provided pursuant to the Credit Agreement will terminate on April 16, 1998,
unless extended by its terms. As of the date of this Prospectus, the Fund had
not drawn down any of the funds available under the Credit Agreement. See
"Repurchase of Shares" in the Statement of Additional Information.

Even if a tender offer has been made, the Trustees' announced policy, which
may be changed by the Trustees, is that the Fund cannot accept tenders if (1) in
the reasonable judgment of the Trustees, there is not sufficient liquidity of
the assets of the Fund; (2) such transactions, if consummated, would (a) impair
the

B-21
<PAGE> 78

Fund's status as a regulated investment company under the Code (which would make
the Fund a taxable entity, causing the Fund's taxable income to be taxed at the
Fund level, as more fully described in "Taxation") or (b) result in a failure to
comply with applicable asset coverage requirements; or (3) there is, in the
Board of Trustees' reasonable judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or otherwise
materially adversely affecting the Fund, (b) suspension of or limitation on
prices for trading securities generally on any United States national securities
exchange or in the over-the-counter market, (c) declaration of a banking
moratorium by federal or state authorities or any suspension of payment by banks
in the United States or New York State, (d) limitation affecting the Fund or the
issuers of its portfolio securities imposed by federal or state authorities on
the extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition which would have a
material adverse effect on the Fund or the holders of its Common Shares if
Common Shares were repurchased. The Trustees may modify these conditions in
light of experience.

Any tender offer made by the Fund for its Common Shares will be at a price
equal to the net asset value of the Common Shares determined at the close of
business on the day the offer ends. During the pendency of any tender offer by
the Fund, the Fund will calculate daily the net asset value of the Common Shares
and will establish procedures which will be specified in the tender offer
documents, to enable Common Shareholders to ascertain readily such net asset
value. The relative illiquidity of some of the Fund's portfolio securities could
adversely impact the Fund's ability to calculate net asset value in connection
with determinations of pricing for tender offers, if any. Each offer will be
made and Common Shareholders notified in accordance with the requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, either by
publication or mailing or both. Each offering document will contain such
information as is prescribed by such laws and the rules and regulations
promulgated thereunder.

Tendered Common Shares that have been accepted and repurchased by the Fund
will be held in treasury and may be retired by the Board of Trustees. Treasury
Common Shares will be recorded and reported as an offset to Shareholders' equity
and accordingly will reduce the Fund's total assets. If Treasury Common Shares
are retired, Common Shares issued and outstanding and capital in excess of par
value will be reduced accordingly.

If the Fund must liquidate portfolio securities in order to repurchase Common
Shares tendered, the Fund may realize gains and losses. Such gains may be
realized on securities held for less than three months. Because of the
limitation of 30% on the portion of the Fund's gross income that may be derived
from the sale or disposition of stocks and securities held less than three
months (in order to retain the Fund's tax status as a regulated investment
company under the Code), such gains would reduce the ability of the Fund to sell
other securities held for less than three months that the Fund may wish to sell
in the ordinary course of its portfolio management which may adversely affect
the Fund's yield.

ANTI-TAKEOVER PROVISIONS

For purposes of these provisions, a 5%-or-greater holder of Common Shares (a
"Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding Common Shares of the Fund. The
transactions subject to these special approval requirements are: (i) the merger
or consolidation of the Fund or any subsidiary of the Fund with or into any
Principal Shareholder; (ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash; (iii) the sale, lease or exchange of all or any
substantial part of the assets of the Fund to any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period);
or (iv) the sale, lease or exchange to the Fund or any subsidiary thereof, in
exchange for securities of the Fund, of any assets of any Principal Shareholder
(except assets having an aggregate fair market value of less than $1,000,000,
aggregating for the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).

B-22
<PAGE> 79

The Board of Trustees has determined that the voting requirements described
above, which are greater than the minimum requirements under Massachusetts law
or the 1940 Act, are in the best interests of shareholders generally. Reference
should be made to the Declaration of Trust on file with the SEC for the full
text of these provisions.

FUND PROPOSAL

The Fund received shareholder approval of a new fundamental investment policy
modifying existing fundamental policies and restrictions to give the Fund the
flexibility to pursue its investment objective through a fund structure commonly
known as a "master-feeder" structure and a corresponding conversion to such
structure in the future. If the Fund converts to a master-feeder structure,
shareholders of the Fund would continue to hold their shares of the Fund and the
Fund would become a feeder-fund of the master-fund. The value of a shareholder's
shares would be the same immediately after any conversion as the value
immediately before such conversion. Use of this master-feeder structure may
result in increased assets invested among the collective investment vehicle of
which the Fund would be a part, thus allowing operating expenses to be spread
over a larger asset base, potentially achieving economies of scale. As of the
date hereof, the Fund's Board of Trustees has not taken any further actions
toward converting the Fund and the Fund's Board of Trustees does not intend to
effect any conversion in which (i) the master fund does not have substantially
the same management team, investment objective, investment policies and
investment restrictions as the Fund just prior to the conversion, (ii) the value
of the shareholder's investment in Fund would not be the same immediately after
the conversion as it was immediately before such conversion or (iii) an increase
in the Fund's expense ratios is expected as a result of the conversion.

B-23
<PAGE> 80

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Prime Rate Income Trust:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Prime Rate Income Trust (the "Trust"), including the
portfolio of investments, as of July 31, 1997, and the related statements of
operations and cash flows 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 Trust'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 and variable rate
senior loan interests owned as of July 31, 1997, by correspondence with the
custodian and selling or agent banks; where replies were not received we
performed other auditing procedures. 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 Prime Rate Income Trust as of July 31,
1997, the results of its operations and cash flows 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
September 8, 1997

B-24
<PAGE> 81

PORTFOLIO OF INVESTMENTS

July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount Stated
(000) Borrower Maturity* Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS 85.1%
AEROSPACE/DEFENSE 1.6%
$10,103 Aerostructures Corp., Term Loan -- Manufacturer and
assembler of structural aircraft parts...................... 09/30/03 to 09/30/04 $ 10,124,643
11,740 Alliant Techsystems, Inc., Term Loan -- Manufacturer of
ordnance, composite metals.................................. 03/15/01 11,756,648
8,807 Fiberite, Inc., Term Loan -- Manufacturer of composite
fibers...................................................... 12/31/01 8,815,769
49,167 Gulfstream Delaware Corp., Term Loan -- Aircraft
manufacturer................................................ 09/30/02 49,246,746
5,503 L-3 Communications Corp., Term Loan -- Provider of secure
communications systems...................................... 03/31/03 to 03/31/06 5,513,187
4,975 MAG Aerospace Industries, Inc., Term Loan -- Supplier of
waste and trash systems to the aerospace industry........... 06/15/03 5,000,386
8,000 Tri-Star, Inc., Term Loan -- Distributor of aerospace
fasteners................................................... 09/30/03 8,054,020
------------
98,511,399
------------
AUTOMOTIVE 2.5%
8,500 American Bumper and Manufacturing Co., Term Loan --
Manufacturer of light truck
and SUV bumpers............................................. 04/30/04 8,520,286
17,972 Blue Bird Body Co., Term Loan -- Manufacturer of school
buses....................................................... 11/19/03 18,007,785
1,833 Blue Bird Body Co., Revolving Credit........................ 11/19/03 1,833,352
28,000 Cambridge Industries, Inc., Term Loan -- Manufacturer of
plastic components for automobiles.......................... 06/30/05 28,036,930
16,411 Collins & Aikman Products Co., Term Loan -- Manufacturer of
auto interiors, home interiors and wallpaper................ 01/13/02 to 12/31/02 16,442,619
17,265 Columbus-McKinnon Corp., Term Loan -- Manufacturer of
material handling equipment................................. 09/30/01 to 09/30/03 17,308,551
4,648 Columbus-McKinnon Corp., Revolving Credit................... 09/30/01 4,649,341
9,975 Exide Corp., Term Loan -- Manufacturer of auto and
industrial batteries........................................ 06/15/01 9,978,764
15,928 Hayes Wheels International, Inc., Term Loan -- Designer and
manufacturer of car and truck wheels........................ 07/31/04 to 07/31/05 15,967,934
11,780 Numatics, Inc., Term Loan -- Manufacturer of pneumatic fluid
power equipment............................................. 12/31/03 11,814,486
10,000 The Plastech Group, Term Loan -- Manufacturer and designer
of thermoplastic automotive parts........................... 04/01/02 to 04/01/04 10,004,286
10,009 Stanadyne Automotive Corp., Term Loan -- Manufacturer of
diesel injection devices and engine parts................... 12/31/01 10,009,175
------------
152,573,509
------------
BROADCASTING 4.5%
25,170 American Radio Systems Corp., Revolving Credit -- Radio
station owner/operator...................................... 12/31/04 25,297,215
12,570 Benedek Broadcasting Corp., Term Loan -- Television station
owner/operator.............................................. 05/01/01 to 11/01/02 12,602,962
26,667 Chancellor Broadcasting Co., Term Loan -- Radio station
owner/operator.............................................. 06/30/04 26,795,212
1,465 Chancellor Broadcasting Co., Revolving Credit............... 06/30/04 1,576,621
53,571 Evergreen Media Corp. of Los Angeles, Term Loan -- Radio
station owner/operator...................................... 06/30/05 53,736,606
7,029 Evergreen Media Corp. of Los Angeles, Revolving Credit...... 06/30/05 7,093,795
9,227 Jacor Communications, Inc., Term Loan -- Radio station
owner/operator.............................................. 06/12/04 9,255,306
10,919 Katz Media Corp., Term Loan -- Media representation firm.... 12/31/04 10,937,087
1,693 Katz Media Corp., Revolving Credit.......................... 12/31/04 1,698,250
15,000 Patterson Broadcasting, Inc., Term Loan -- Radio station
operator.................................................... 06/30/04 15,050,540
9,427 River City Broadcasting, L.P., Term Loan -- Midwestern radio
station owner/operator...................................... 12/31/99 9,454,087
10,710 SFX Broadcasting, Inc., Revolving Credit -- Radio station
owner/operator.............................................. 06/30/05 10,743,623
45,200 Sinclair Broadcasting, Term Loan -- Television and radio
station owner/operator...................................... 12/31/04 45,264,651
21,614 Sullivan Broadcasting, Term Loan -- Television station
owner/operator.............................................. 12/31/03 21,641,709
383 Sullivan Broadcasting, Revolving Credit..................... 12/31/03 384,611
3,677 Universal Outdoor, Inc., Term Loan -- Outdoor advertiser.... 09/20/03 3,677,330
15,500 Universal Outdoor, Inc., Revolving Credit................... 09/30/03 15,575,146
9,926 Young Broadcasting, Inc., Term Loan -- Television station
operator.................................................... 09/30/03 9,964,365
------------
280,749,116
------------
BUILDING/HOUSING 2.0%
19,454 Behr Process Corp., Term Loan -- Manufacturer of paint...... 03/31/02 to 03/31/05 19,473,155
1,412 Behr Process Corp., Revolving Credit........................ 03/31/02 1,411,789
</TABLE>

See Notes to Financial Statements

B-25
<PAGE> 82

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

BUILDING/HOUSING (CONTINUED)
$13,750 Falcon Building Products, Inc., Term Loan -- Manufacturer of
building products........................................... 06/30/05 $ 13,802,083
59,750 National Gypsum Co., Term Loan -- Manufacturer of
wallboard................................................... 09/20/03 59,792,054
23,602 Walter Industries, Inc., Term Loan -- Home builder.......... 01/22/02 to 01/22/03 23,644,962
5,443 Walter Industries, Inc., Revolving Credit................... 01/22/02 5,529,537
------------
123,653,580
------------
<CAPTION>
CABLE 11.0%
<S> <C> <C> <C>
23,107 Adelphia Cable Partners, L.P., Revolving Credit -- Cable
television operator......................................... 12/31/03 23,230,162
22,500 Bresnan Communications Co., L.P., Term Loan -- Cable
television systems operator................................. 03/31/06 22,653,552
5,970 Cable Systems International, Inc., Term Loan -- Manufacturer
of electrical wire and cable................................ 12/31/02 5,984,166
12,000 Cablevision of Ohio, Term Loan -- Cable television
owner/operator.............................................. 12/31/05 12,016,335
46,500 Charter Communications Entertainment I, Term Loan -- Cable
television systems operator................................. 06/30/04 46,531,468
10,414 Charter Communications Entertainment II, Term Loan -- Cable
television systems operator................................. 06/30/05 to 12/31/05 10,429,793
3,169 Charter Communications Entertainment II, Revolving Credit... 06/30/05 3,169,433
32,000 Charter Communications Entertainment II & Long Beach, Term
Loan -- Cable television systems operator................... 03/31/06 32,123,089
47,500 Chelsea Communications, Inc., Term Loan -- Cable television
systems operator............................................ 12/31/04 47,553,724
21,034 Classic Cable, Inc., Term Loan -- Cable television systems
operator.................................................... 06/30/05 21,074,828
16,717 Coaxial Communications of Central Ohio, Term Loan -- Cable
television systems operator................................. 12/31/99 16,718,050
25,875 Comcast MH Holdings, Inc., Revolving Credit -- Cable
television systems operator................................. 12/31/03 25,903,002
2,406 CSG Systems, Inc., Term Loan -- Communications management
consultant.................................................. 12/31/00 2,407,886
45,037 Falcon Holdings Group, L.P., Term Loan -- Cable television
systems operator............................................ 07/11/05 45,086,436
9,260 Falcon Holdings Group, L.P., Revolving Credit............... 07/11/05 9,309,094
26,500 Frontiervision Operating Partners, L.P., Term Loan -- Cable
television systems operator................................. 06/30/05 26,557,637
22,778 Garden State Cablevision, L.P., Revolving Credit -- Cable
television systems owner/operator........................... 06/30/05 22,778,667
33,971 Hilton Head Communications, L.P., Revolving Credit -- Cable
television systems operator................................. 06/30/03 34,138,774
11,000 Insight Communication Co., L.P., Term Loan -- Cable
television systems operator................................. 03/31/05 11,027,541
8,200 Insight Communication Co., L.P., Revolving Credit........... 03/31/05 8,233,263
18,500 InterMedia Partners IV, L.P., Term Loan -- Cable television
systems owner/operator...................................... 01/01/05 18,523,830
6,139 James Cable Partners, L.P., Term Loan -- Cable television
systems operator............................................ 06/30/00 6,152,799
500 James Cable Partners, L.P., Revolving Credit................ 06/30/00 501,935
7,000 Lenfest Communications, Inc., Term Loan -- Cable television
systems operator............................................ 09/30/03 7,019,193
7,350 Lenfest Communications, Inc., Revolving Credit.............. 09/30/03 7,393,215
67,313 Marcus Cable Operating Co., Term Loan -- Cable television
systems operator............................................ 12/31/02 to 04/30/04 67,464,833
3,095 Marcus Cable Operating Co., Revolving Credit................ 12/31/02 3,118,008
5,000 Mark Twain Cablevision, L.P., Term Loan -- Cable television
systems operator............................................ 06/30/04 5,026,115
10,800 Northland Cable Television, Inc., Term Loan -- Cable
television systems operator................................. 09/30/04 10,837,489
47,500 TCI Pacific, Inc., Term Loan -- Cable television systems
operator.................................................... 12/31/04 47,581,205
7,890 TCI Southeast, Inc., Revolving Credit -- Cable television
systems operator............................................ 06/30/01 7,906,536
30,714 Triax Midwest Associates, Term Loan -- Cable television
systems operator............................................ 06/30/04 to 06/30/05 30,813,692
2,730 Triax Midwest Associates, Revolving Credit.................. 06/30/04 2,738,720
27,029 TW Fanch, Revolving Credit -- Cable television systems
operator.................................................... 12/31/04 27,145,560
19,600 UCA Group, Revolving Credit -- Cable television systems
operator.................................................... 09/30/03 19,683,974
------------
688,834,004
------------
</TABLE>

See Notes to Financial Statements

B-26
<PAGE> 83

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

CHEMICAL 3.3%
$11,396 Cedar Chemicals Corp., Term Loan -- Manufacturer of
fertilizer.................................................. 10/30/03 $ 11,417,257
7,448 Geo Specialty Chemicals, Inc., Term Loan -- Manufacturer of
specialty chemicals......................................... 09/25/02 to 03/25/04 7,492,121
7,923 Hampshire Chemical Co., Term Loan -- Manufacturer of
specialty chemicals......................................... 09/01/03 7,925,963
47,507 Huntsman Group Holdings, Term Loan -- Integrated chemical,
plastic and packaging producer.............................. 12/31/02 to 12/31/04 47,581,975
4,340 Huntsman Group Holdings, Revolving Credit................... 12/31/02 4,353,815
20,000 Huntsman Specialty Chemical Corp., Term Loan -- Manufacturer
of specialty chemicals...................................... 03/15/04 to 03/15/05 20,018,076
10,000 Pioneer Americas Acquisition Corp., Term Loan --
Manufacturer of water treatment chemicals................... 12/31/06 10,014,993
12,147 Reid Plastics, Inc., Term Loan -- Manufacturer of plastic
bottles..................................................... 11/12/03 12,206,517
10,633 Rexene Corp., Term Loan -- Manufacturer of petrochemicals... 03/31/04 10,652,407
2,334 Rexene Corp., Revolving Credit.............................. 03/31/04 2,338,333
15,000 Rheox, Inc., Term Loan -- Manufacturer of chemical
additives................................................... 01/30/04 15,034,447
43,311 Sterling Chemicals, Inc., Term Loan -- Manufacturer of
commodity petrochemicals.................................... 09/30/04 43,441,922
6,692 Texas Petrochemicals Corp., Term Loan -- Processor of
petrochemicals.............................................. 06/30/04 6,705,414
5,958 Thoro System Products, Inc., Term Loan -- Manufacturer of
chemicals for construction industry......................... 03/31/00 6,077,072
------------
205,260,312
------------
<CAPTION>

ELECTRIC/ELECTRONICS 2.3%
<S> <C> <C> <C>
12,504 Amphenol Corp., Term Loan -- Designer, manufacturer and
marketer of electric/electronic connectors.................. 05/19/05 to 05/19/06 12,531,152
6,100 Anacomp, Inc., Term Loan -- Provider of micrographics....... 03/31/01 6,124,218
6,825 Banker's Systems, Inc., Term Loan -- Supplier of compliance
services.................................................... 11/01/02 6,826,372
31,625 Berg Electronics, Inc., Term Loan -- Manufacturer of
electronic connectors....................................... 12/31/02 31,653,108
21,350 Bridge Information Systems, Inc., Term Loan -- Provider of
financial and analytical services........................... 12/31/01 to 12/31/02 21,404,869
17,000 Cooperative Computing Inc./Triad Systems Corp., Term Loan --
Provider of information services............................ 02/27/03 17,084,550
2,290 Exide Electronics Group, Inc., Term Loan -- Manufacturer of
uninterruptible power supply products....................... 04/08/02 2,292,629
3,600 Exide Electronics Group, Inc., Revolving Credit............. 04/08/02 3,607,067
9,000 HG Holdings, Inc., Term Loan -- Provider of payment and
information processing...................................... 06/30/01 9,024,511
9,950 Phase Metrics, Inc., Term Loan -- Designer and manufacturer
of computer production test equipment....................... 11/27/01 9,984,590
8,358 Rowe International, Inc., Term Loan -- Manufacturer of
jukeboxes and electronic equipment (a)...................... 12/31/97 7,104,583
9,000 Sarcom, Inc., Term Loan -- Provider of information
technology.................................................. 12/31/02 9,000,900
8,775 Viasystems, Inc., Term Loan -- Manufacturer of PCB
equipment................................................... 06/30/04 to 06/30/05 8,803,727
------------
145,442,276
------------
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 84

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

ENTERTAINMENT/LEISURE 6.5%
$83,470 AMF Bowling, Inc., Term Loan -- Manufacturer of integrated
bowling equipment........................................... 03/31/01 to 03/31/04 $ 83,563,184
1,422 AMF Bowling, Inc., Revolving Credit......................... 03/31/01 1,422,600
7,911 DW Investment, Inc., Revolving Credit -- Communications and
entertainment conglomerate.................................. 06/28/00 7,911,631
33,000 Fleer Corp., Term Loan -- Publisher of children's
magazines (a) (b)........................................... 02/28/02 30,096,000
8,000 KSL Recreation Group, Inc., Term Loan -- Leisure, recreation
and travel.................................................. 04/30/05 to 04/30/06 8,021,758
1,500 KSL Recreation Group, Inc., Revolving Credit................ 04/30/04 1,500,578
15,566 M.W. Manufacturers, Term Loan -- Manufacturer of sporting
goods and table games....................................... 09/15/02 15,581,134
59,231 Mafco Finance Corp., Term Loan -- Holding company........... 03/20/99 59,478,864
924 Mafco Finance Corp., Revolving Credit....................... 03/20/99 923,097
28,571 Metro-Goldwyn-Mayer, Term Loan -- Movie/television
producer.................................................... 09/30/02 28,999,796
29,600 Metro-Goldwyn-Mayer, Revolving Credit....................... 09/30/01 30,368,734
20,000 Orion Pictures Corp., Term Loan -- Theatrical production.... 07/10/02 20,098,918
2,000 Orion Pictures Corp., Revolving Credit...................... 07/10/02 2,024,069
24,130 Six Flags Theme Parks, Term Loan -- Theme park operator..... 06/23/03 24,130,994
6,700 Sportcraft, Ltd., Term Loan -- Supplier of high quality
branded sporting goods...................................... 12/31/02 6,730,872
8,250 TW Recreational Services, Inc., Term Loan -- Provider of
food and services for state and national parks.............. 09/30/02 8,266,189
15,000 Vail Resorts, Inc., Term Loan -- Resort operator............ 04/15/04 15,016,221
56,441 Viacom, Inc., Term Loan -- Entertainment media/television
programming................................................. 04/01/02 to 04/02/02 56,487,810
5,085 Viacom, Inc., Revolving Credit.............................. 04/01/02 5,094,614
------------
405,717,063
------------
FINANCE 0.5%
3,562 Ark Asset Holdings, Inc., Term Loan -- Institutional money
manager..................................................... 11/30/01 3,562,559
7,000 Blackstone Capital Co., Term Loan -- Financial services..... 05/31/99 7,018,686
7,000 Blackstone Capital Co., Revolving Credit.................... 05/31/99 7,018,320
14,842 OSI Holdings Corp., Term Loan -- Provider of accounts
receivable management services.............................. 11/01/03 14,865,900
------------
32,465,465
------------
FOOD/BEVERAGE 4.1%
10,808 American Italian Pasta Co., Term Loan -- Pasta products
producer.................................................... 02/28/04 10,832,003
11,500 Amerifoods, Inc., Term Loan -- Manufacturer of snack foods
and bakery products......................................... 06/30/01 to 06/30/02 10,925,000
7,400 Ameriserve Food Distribution, Inc., Term Loan -- Systems
food service distributor.................................... 06/30/04 to 06/30/06 7,407,428
4,137 Edwards Baking Corp., Term Loan -- Manufacturer of bakery
products.................................................... 09/30/00 to 10/31/02 4,146,877
4,839 Ghiradelli Chocolate Co., Term Loan -- Manufacturer of
chocolate products.......................................... 03/30/03 4,864,112
9,936 IM Stadium, Inc., Term Loan -- Sports stadium concessions... 12/31/02 to 12/31/03 9,956,757
36,000 International Home Foods, Inc., Term Loan -- Manufacturer
and marketer of branded food products....................... 09/30/04 36,077,918
17,758 President Baking Co., Inc., Term Loan -- Bread/bread
products manufacturer....................................... 12/30/02 17,692,751
39,676 Rykoff-Sexton, Inc., Term Loan -- Distributor and
manufacturer of food and related non-food products.......... 10/31/02 to 04/30/03 39,731,676
45,054 S.C International Services, Term Loan -- In-flight food
services.................................................... 09/30/00 to 09/30/03 45,089,242
13,880 Select Beverages, Inc., Term Loan -- Independent bottler.... 06/30/01 to 06/30/02 13,881,757
24,762 Stroh Brewery Co., Term Loan -- Beer manufacturer........... 06/30/03 24,834,478
20,138 Van De Kamp's, Inc., Term Loan -- Processor and distributor
of frozen foods............................................. 04/30/03 to 09/30/03 20,181,133
6,708 Windsor Quality Food Co., LTD, Term Loan -- Processor of
frozen foods................................................ 12/31/01 6,725,529
------------
252,346,661
------------
</TABLE>

See Notes to Financial Statements

B-28

<PAGE> 85

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

FOOD STORES 3.6%
$48,000 Bruno's, Inc., Term Loan -- Southeastern retail food chain
operator.................................................... 04/15/05 $ 48,076,707
12,805 Carr-Gottstein Foods, Term Loan -- Alaska based retail food
chain operator.............................................. 12/31/02 12,810,784
11,440 Core-Mark International, Inc., Revolving Credit -- Wholesale
distributor................................................. 06/30/01 11,518,259
5,079 Harvest Foods, Inc., Term Loan -- Mississippi based retail
food chain operator (a) (b)................................. 06/30/02 304,724
30,455 Pathmark Stores, Inc., Term Loan -- New Jersey based retail
food chain operator......................................... 06/15/01 to 12/15/01 30,525,118
1,018 Pathmark Stores, Inc., Revolving Credit..................... 06/15/01 1,068,928
3,293 Ralph's Grocery Co., Revolving Credit -- Los Angeles,
California based retail food chain operator................. 02/15/03 3,303,407
54,827 Ralph's Grocery Co., Term Loan.............................. 02/15/03 to 02/15/04 54,887,876
51,376 Smith's Food and Drug Centers, Term Loan -- Food and drug
retailer.................................................... 11/01/03 to 05/01/05 51,424,039
10,157 Star Markets Co., Inc., Term Loan -- New England based
retail food chain operator.................................. 12/31/02 to 12/31/03 10,169,269
1,961 Star Markets Co., Inc., Revolving Credit.................... 01/31/01 1,963,343
------------
226,052,454
------------
FUEL RETAILER 0.2%
11,981 TravelCenters of America, Inc., Term Loan -- Operator of
truckstops nationwide....................................... 03/31/05 12,022,962
------------
HEALTHCARE 5.7%
16,389 Alaris Medical Systems, Inc., Term Loan -- Infusion systems
provider.................................................... 08/01/02 to 05/01/05 16,402,412
1,344 Alaris Medical Systems, Inc., Revolving Credit.............. 08/01/02 1,344,104

5,800 ASC Network Corp., Term Loan -- Operator of free-standing
outpatient surgery centers.................................. 06/30/01 to 06/30/03 5,831,417
6,500 Charter Behavioral, Revolving Credit -- Provider of
behavorial healthcare services.............................. 06/17/02 6,547,092
59,493 Community Health Systems, Inc., Term Loan -- Southeast and
Southwest hospital operator/provider of healthcare
services.................................................... 12/31/03 to 12/31/05 59,667,358
37,500 Corning Clinical Labs, Inc., Term Loan -- Clinical testing
laboratory operator......................................... 12/05/02 to 12/05/03 37,659,498
4,900 Coventry Corp., Term Loan -- Health maintenance
organization................................................ 04/01/98 4,900,000
55,824 Dade International, Inc., Term Loan -- Medical equipment
manufacturer/marketer....................................... 12/31/02 to 12/31/04 55,958,413
27,500 FPA Medical Management, Inc., Term Loan -- Healthcare
provider.................................................... 09/30/01 27,541,372
15,755 Graphic Controls Corp., Term Loan -- Manufacturer of medical
equipment................................................... 09/28/03 15,775,341
18,566 Integrated Health Services, Inc., Revolving Credit --
Provider of post-acute healthcare services.................. 06/30/02 18,767,746
6,920 Medical Specialties Group, Inc., Term Loan -- Supplier of
medical pumps and consumables............................... 06/30/01 to 06/30/04 6,945,058
9,905 Mediq/PRN Life Support Services, Inc., Term Loan -- Rents
movable critical care equipment............................. 09/30/04 9,946,087
18,315 Merit Behavioral Corp., Term Loan -- Psychiatric hospital
operator.................................................... 10/06/03 18,337,461
60,000 National Medical Care, Inc., Term Loan -- Kidney dialysis
service provider............................................ 09/30/03 60,213,995
7,143 NEN Acquisition, Inc., Term Loan -- Manufacturer of
consumable radio-isotopic biochemicals...................... 03/31/05 7,177,954
5,000 Prime Medical Services, Inc., Term Loan -- Provider of
lithotripsy services........................................ 04/30/03 5,016,230
------------
358,031,538
------------
MANUFACTURING 7.4%
9,500 Arena Brands, Inc., Term Loan -- Manufacturer of hats....... 06/01/02 9,500,000
618 Arena Brands, Inc., Revolving Credit........................ 06/01/02 617,500

7,444 CII Carbon, L.L.C., Term Loan -- Calcined coke producer..... 09/30/04 7,471,622
12,281 Calmar, Inc., Term Loan -- Manufacturer of dispensing and
spray products.............................................. 09/15/03 to 03/15/04 12,287,342
9,797 CBP Resources, Inc., Term Loan -- Manufacturer of animal
feed ingredients............................................ 09/30/03 9,820,078
47,052 Dal-Tile Group, Inc., Term Loan -- Ceramic tile and floor
covering manufacturer/retailer.............................. 12/31/02 to 12/31/03 47,258,814
3,181 Dal-Tile Group, Inc., Revolving Credit...................... 12/31/02 3,185,304
20,918 Desa International, Term Loan -- Diversified manufacturer of
heaters, fireplaces and specialty tools..................... 02/28/03 20,978,724
9,321 Ebel USA, Inc., Term Loan -- Manufacturer of luxury time
pieces...................................................... 09/30/01 9,320,793
3,795 Essex Group, Inc., Revolving Credit -- Manufacturer of
electrical wire and cable................................... 10/31/01 3,814,274
52,500 Evenflo & Spalding Holdings Corp., Term Loan -- Manufacturer
of branded sporting goods/juvenile products................. 09/30/03 to 09/30/06 52,535,651
2,700 Evenflo & Spalding Holdings Corp., Revolving Credit......... 09/30/03 2,700,083

</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 86

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

MANUFACTURING (CONTINUED)
$ 7,458 Fairchild Semiconductor Corp., Term Loan -- Manufacturer of
semiconductors.............................................. 03/11/03 $ 7,476,780
6,239 Fairchild Holding Corp., Term Loan -- Manufacturer of
fasteners for the aerospace industry........................ 07/28/00 6,270,040
18,726 Foamex, L.P., Term Loan -- Manufacturer/marketer of flexible
polyurethane................................................ 06/30/03 to 06/30/06 18,739,035
2,148 Foamex, L.P., Revolving Credit.............................. 06/12/03 2,148,398
20,000 Furniture Brands, Term Loan -- Manufacturer and marketer of
furniture................................................... 06/30/07 20,002,098
9,950 IAH Acquisition Corp., Term Loan -- Manufacturer,
distributor and retailer of safety shoes.................... 01/31/05 9,994,717
6,451 Identity Group, Inc., Term Loan -- Designer, manufacturer
and distributor of identity products........................ 11/22/03 6,473,437
28,000 International Wire Group, Term Loan -- Manufacturer of auto,
appliance, and communication wires.......................... 09/30/03 28,028,172
9,196 IPC, Inc., Term Loan -- Manufacturer of packaging
materials................................................... 09/30/01 9,204,025
2,389 IPC, Inc., Revolving Credit................................. 09/30/01 2,393,890
6,400 Jet Plastica Industries, Inc., Term Loan -- Manufacturer of
disposable tableware products............................... 12/31/02 to 12/31/04 6,426,191
28,502 Johnstown America, Term Loan -- Manufacturer of railcars.... 03/31/03 28,509,304
30,373 Lifestyle Furnishings International, LTD, Term Loan --
Manufacturer/designer of residential
furniture and fabrics in the United States.................. 08/30/04 30,438,540
5,700 Mettler-Toledo, Inc., Term Loan -- Manufacturer/marketer of
weighing instruments........................................ 12/31/04 5,711,585
5,514 Rayovac Corp., Term Loan -- Manufacturer of battery and
lighting products........................................... 09/30/03 to 09/30/04 5,524,419
10,000 RBX Corp., Term Loan -- Manufacturer of rubber products..... 12/31/03 10,009,366
9,670 RTI Funding Corp., Term Loan -- Manufacturer of building
blocks for children......................................... 02/08/03 to 02/08/04 9,695,378
9,571 Safelite Glass Corp., Term Loan -- Manufacturer/installer of
auto glass replacements..................................... 12/19/02 to 12/19/04 9,601,142
10,043 Signature Brands, Inc., Term Loan -- Manufacturer of small
appliances.................................................. 08/15/01 9,995,883
6,957 Simmons Co., Term Loan -- Manufacturer and distributor of
bedding..................................................... 03/31/03 6,969,300
11,550 Superior Telecom, Inc., Revolving Credit -- Manufacturer of
copper wire and cable....................................... 10/31/01 11,604,039
25,000 UCAR International, Inc., Term Loan -- Manufacturer of
graphite/carbide electrodes................................. 12/31/02 25,024,408
6,241 U.F. Acquisition, Term Loan -- Provider of fixtures and
storage for retailer stores................................. 12/15/02 6,279,757
5,000 Walco International, Inc., Term Loan -- Distributor of
animal health products...................................... 03/31/04 5,020,114
1,129 Windy Hill Pet Food Co., Term Loan -- Manufacturer of pet
food products............................................... 12/31/03 1,151,839
------------
462,182,042
------------
MINING/METALS 1.2%
11,149 Alliance Coal Corp., Term Loan -- Coal mining............... 12/31/01 to 12/31/02 11,185,078
25,000 AMAX Gold, Inc., Term Loan -- Gold and silver mining and
processing.................................................. 12/31/01 25,092,291
13,406 Anker Coal Group, Inc., Term Loan -- Coal mining............ 06/30/04 13,451,613
4,904 Centennial Resources, Inc., Term Loan -- Coal mining........ 03/31/02 to 03/31/04 4,924,460
8,836 Fairmont Minerals, Ltd., Term Loan -- Silica sand and gravel
producer.................................................... 02/28/03 8,866,840
8,705 U.S. Silica Co., Term Loan -- Producer of industrial
silica...................................................... 12/31/03 8,745,832
------------
72,266,114
------------
PAPER 5.8%
26,864 Crown Paper, Term Loan -- Producer of value-added paper
products.................................................... 08/23/02 26,875,139
2,205 Crown Paper, Revolving Credit............................... 08/23/02 2,211,852
4,500 CST Office Products, Corp., Term Loan -- Manufacturer and
distributor of stock computer forms......................... 12/31/01 4,549,109
18,367 Fort Howard Corp., Term Loan -- Paper manufacturer.......... 03/31/02 to 12/31/02 18,392,422
105,623 Jefferson Smurfit Corp., Term Loan -- Manufacturer of
corrugated paper products................................... 04/30/01 to 10/31/02 105,688,457
19,329 S.D. Warren Co., Term Loan -- Manufacturer of coated-free
paper....................................................... 04/26/04 19,359,202
15,500 St. Laurent Paper Products L.L.C., Term Loan -- Producer of
integrated pulp and paper................................... 05/31/03 to 05/31/04 15,548,140
161,202 Stone Container Corp., Term Loan -- Manufacturer of paper
products.................................................... 04/01/00 to 10/01/03 162,054,522
7,163 Stronghaven, Inc., Term Loan -- Manufacturer of corrugated
containers.................................................. 05/15/04 7,198,943
------------
361,877,786
------------
</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 87

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

PERSONAL/NON-DURABLE 1.9%
$ 9,500 Chattem, Inc., Term Loan -- Manufacturer and marketer of OTC
pharmaceuticals............................................. 06/30/04 $ 9,530,143
17,728 Mary Kay Cosmetics, Inc., Term Loan -- Direct cosmetic
sales....................................................... 03/06/04 17,790,789
1,495 Mary Kay Cosmetics, Inc., Revolving Credit.................. 03/06/04 1,508,587
6,774 Personal Care Group, Inc., Term Loan -- Manufacturer and
marketer of consumer products............................... 04/03/03 6,809,694
25,000 Playtex Products, Inc., Term Loan -- Manufacturer of beauty
aid and hygiene products.................................... 09/15/03 25,024,748
55,000 Revlon Consumer Products Corp., Term Loan -- Manufacturer of
cosmetics................................................... 05/30/02 55,084,915
------------
115,748,876
------------
PRINTING/PUBLISHING 3.8%
20,669 Advanstar Communications, Term Loan -- Trade magazine
publisher................................................... 12/31/02 to 12/21/03 20,753,848
22,332 ADVO, Inc., Term Loan -- Direct mail marketer............... 03/31/04 22,368,125
46,262 American Media Operations, Inc., Term Loan --
Magazine/newspaper publisher................................ 09/30/01 to 09/30/02 46,101,442
303 American Media Operations, Inc., Revolving Credit........... 09/30/01 310,077
9,000 Cygnus Publishing, Inc., Term Loan -- Magazine publisher.... 06/05/05 9,030,452
7,663 Garden State Newspapers, Inc., Term Loan -- Suburban
newspaper operator.......................................... 03/31/04 7,693,937
14,063 Garden State Newspapers, Inc., Revolving Credit............. 06/30/03 14,128,227
25,270 Journal News, Inc., Term Loan -- Multiple newspaper
printer..................................................... 12/31/02 25,266,988
19,000 K-III Communications, Term Loan -- Tabloids, magazines and
other media publisher....................................... 06/30/04 19,013,444
33,000 Morris Communications, Inc., Term Loan -- Newspaper
Operator.................................................... 03/31/04 to 06/30/05 33,020,379
19,763 Peterson Publishing Co., L.L.C., Term Loan -- Publisher of
consumer magazines.......................................... 12/31/02 to 09/30/04 19,830,090
12,000 Polyfibron Technologies, Inc., Term Loan --
Manufacturer/marketer of consumable printing products....... 12/28/03 12,022,274
8,455 Von Hoffman Press, Inc., Term Loan -- Manufacturer of
textbooks................................................... 05/30/03 to 05/30/05 8,472,845
------------
238,012,128
------------
RESTAURANTS 0.1%
943 Carvel Corp., Term Loan -- Soft ice cream products
franchiser.................................................. 12/31/98 942,752
4,099 Long John Silver's Restaurants, Inc., Term Loan -- Retail
seafood restaurant owner/operator........................... 09/30/04 4,321,833
------------
5,264,585
------------
RETAIL 2.8%
12,000 Brylane, L.P., Term Loan -- Catalog retailer of apparel..... 02/28/03 12,030,041
32,500 Camelot Music, Inc., Term Loan -- Retail distributor of
music and video cassettes (a) (b)........................... 02/28/02 24,384,089
17,086 Color Tile, Inc., Term Loan -- National retailer of floor
and wall covering products (a).............................. 12/31/98 6,663,504
2,111 Color Tile Holdings, Inc., Revolving Credit -- National
retailer of floor and wall covering products (a)............ 12/31/97 2,075,208
7,960 CSK Auto, Inc., Term Loan -- Auto parts retailer............ 10/31/03 8,040,763
7,320 CSK Auto, Inc., Revolving Credit............................ 10/31/03 7,388,770
22,059 Fleming Cos., Inc., Revolving Credit -- Food marketing,
distribution................................................ 07/25/04 22,169,428
5,956 Kirkland's Holdings, Term Loan -- Retailer of decorative
home accessories and gift items............................. 06/30/02 5,972,258
10,603 Luxottica Group SPA, Term Loan -- Manufacturer and
distributor of eyeglasses................................... 06/30/01 10,603,434
7,430 Nebraska Book Co., Inc., Term Loan -- Used book
distributor................................................. 10/31/03 7,433,091
26,416 Payless Cashways, Inc., Term Loan -- Building products
retailer.................................................... 11/20/00 24,003,549
11,318 Payless Cashways, Inc., Revolving Credit.................... 11/20/00 10,223,132
10,820 Peebles, Inc., Term Loan -- Mid-Atlantic retailer........... 06/09/02 10,886,280
18,333 QVC, Inc., Term Loan -- Home shopping television network.... 02/15/02 18,361,826
1,198 Service Merchandise Co., Inc., Revolving Credit -- Catalog
retailer.................................................... 06/08/99 1,435,029
5,000 Vitamin Shoppe Industries, Inc., Term Loan --
Retailer/marketer of vitamins............................... 05/15/04 5,000,273
------------
176,670,675
------------

</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 88

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

TEXTILES 1.4%
$11,270 American Marketing Industries, Inc., Term Loan --
Manufacturer of textiles.................................... 11/30/02 $ 11,296,781
9,000 GFSI, Inc., Term Loan -- Designer, manufacturer and marketer
of sportswear............................................... 03/31/04 9,013,766
5,731 Homemaker Industries, Inc., Term Loan -- Manufacturer of
braided rugs................................................ 06/30/04 5,760,878
6,361 Ithaca Industries, Inc., Term Loan -- Manufacturer of
undergarments and hosiery................................... 08/31/99 6,474,571
1,477 Ithaca Industries, Inc., Revolving Credit................... 08/31/99 1,581,289
14,602 Johnston Industries, Inc., Term Loan -- Diversified
manufacturer of home furnishings and textiles............... 03/28/03 14,658,368
33,575 London Fog Industries, Inc., Term Loan -- Manufacturer of
rainwear and outerwear (c).................................. 05/31/02 25,443,975
7,700 Maxim Group, Inc., Term Loan -- Retailer of floor
coverings................................................... 12/31/01 to 09/30/03 7,747,777
7,128 William Carter Co., Term Loan -- Manufacturer of children's
clothing.................................................... 10/30/03 7,152,798
------------
89,130,203
------------
TRANSPORTATION 1.4%
17,999 Atlas Air, Inc., Revolving Credit -- Air cargo carrier...... 06/30/98 18,056,753
12,500 Atlas Freighter Leasing, Inc., Term Loan -- Air cargo
carrier..................................................... 05/29/04 12,529,385
19,000 Continental Airlines, Inc., Term Loan -- Airline passenger
carrier..................................................... 07/31/02 19,076,061
40,000 Evergreen International Aviation, Inc., Term Loan -- Air
cargo carrier............................................... 05/31/02 to 05/31/03 40,178,065
------------
89,840,264
------------
WIRELESS COMMUNICATIONS 8.4%
28,875 Arch Communications, Inc., Term Loan -- Wireless
communications operator..................................... 12/31/02 to 12/31/03 28,950,593
5,844 Arch Communications, Inc., Revolving Credit................. 12/31/02 5,928,287
4,950 Clarity Telecom, Inc., Term Loan -- Seller and servicer of
telephone systems and software.............................. 11/30/02 4,968,009
4,839 Comcast Cellular Corp., Revolving Credit -- Cellular systems
operator.................................................... 09/30/03 4,933,284
5,000 International Data Response Corp., Term Loan -- Manufacturer
of plastic components for automobiles....................... 12/31/01 to 12/31/02 5,018,598
6,585 Intesys Technologies, Inc., Term Loan -- Equipment
manufacturer for telecommunications/autos................... 12/31/01 6,586,107
12,500 Metrocall, Inc., Term Loan -- Provider of paging services... 12/31/04 12,599,996
9,090 Metrocall, Inc., Revolving Credit........................... 12/31/04 9,268,791
64,005 Mobilemedia Communications, Inc., Term Loan -- Nationwide
paging operator............................................. 06/30/02 to 06/30/03 61,505,295
2,556 Mobilemedia Communications, Inc., Revolving Credit.......... 06/30/02 2,461,828
96,363 Nextel Finance Co., Term Loan -- Wireless communications
service provider............................................ 03/31/03 to 06/30/03 96,684,664
13,895 Nextel Finance Co., Revolving Credit........................ 03/30/03 14,908,697
12,310 Shared Technologies, Inc., Term Loan -- Provider of shared
telecommunications services................................. 03/30/01 to 03/31/03 12,339,171
933 Shared Technologies, Inc., Revolving Credit................. 03/30/01 938,191
13,050 Skytel Corp., Revolving Credit -- Paging and personal
communications services operator............................ 12/31/01 13,081,162
65,000 Sprint Spectrum L.P., Term Loan -- PCS provider/wireless
communications.............................................. 01/31/01 to 01/31/02 65,444,358
55,000 Sprint, Lucent Technologies Vendor Facility, Term Loan --
PCS provider/wireless communications........................ 06/30/01 55,485,626
11,305 Sprint, Northern Telecom Vendor Facility, Term Loan -- PCS
provider/wireless communications............................ 03/31/05 11,936,672
9,500 Teletouch Communications, Inc., Term Loan -- Provider of
paging services............................................. 11/30/03 9,605,152
5,727 USA Mobile Communications, Inc. II, Revolving Credit --
Wireless communications operator............................ 06/30/02 5,789,300
30,000 Western PCS II Corp., Term Loan -- PCS Owner/Operator....... 12/31/03 30,258,072
65,000 Western Wireless Corp., Term Loan -- Cellular and personal
communications services operator............................ 03/31/05 65,026,173
------------
523,718,026
------------
OTHER 3.1%
3,510 AES Cemig Funding Corp., Term Loan -- Electric utility
provider.................................................... 05/27/98 3,581,368
2,790 AESEBA Funding Corp., Term Loan -- Electric utility
provider.................................................... 05/27/98 2,847,094
29,286 Allied Waste Industries, Inc., Term Loan -- Solid waste
management.................................................. 12/05/03 29,309,498
1,086 Allied Waste Industries, Inc., Revolving Credit............. 12/05/03 1,085,738
11,000 American Disposal Services, Inc., Term Loan -- Solid waste
management.................................................. 05/30/04 11,049,831
5,306 Avis Rent-a-Car, Inc., Term Loan -- Car rental services..... 12/31/00 5,420,623
7,375 Borg-Warner Security Corp., Revolving Credit -- Protection
services.................................................... 03/31/02 7,474,653
16,275 Brand Scaffold Services, Inc., Term Loan -- Industrial
scaffolding rental services................................. 09/30/02 to 09/30/04 16,346,813
</TABLE>

See Notes to Financial Statements

B-32
<PAGE> 89

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

OTHER (CONTINUED)
$ 8,000 Key Energy Group, Inc., Term Loan -- Operator of oil service
rigs........................................................ 06/30/04 $ 8,015,162
8,778 Kindercare Learning Centers, Inc., Term Loan -- Provider of
educational and child care services......................... 03/21/06 8,777,991
20,156 LES, Inc., Term Loan -- Provider of hazardous and industrial
waste services.............................................. 05/15/03 to 05/15/05 20,190,945
9,555 Loewen Group, Inc., Revolving Credit -- Funeral home and
cemetery owner/operator..................................... 05/29/02 9,609,291
7,625 RIGCO North America, L.L.C., Term Loan -- Lessor of
semi-submersible offshore drilling rigs..................... 09/30/98 7,653,804
22,616 Ryder TRS, Inc., Term Loan -- Rental truck/trailer
operator.................................................... 10/31/01 22,654,291
418 Ryder TRS, Inc., Revolving Credit........................... 10/31/01 419,217
5,000 Smarte Carte Corp., Term Loan -- Airport carts and storage
lockers..................................................... 06/30/03 5,017,535
5,120 U.S. Office Products Co., Revolving Credit -- Office
products supplier........................................... 08/21/01 5,172,059
17,498 United Stationers, Inc., Term Loan -- Distributor of office
paper products.............................................. 10/31/03 17,516,522
10,000 24 hour Fitness, Inc., Term Loan -- Fitness center
operator.................................................... 12/31/00 10,057,584
-------------
192,200,019
-------------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 85.1%......... 5,308,571,057
-------------
EQUITIES 0.3%
AFC Enterprises, Inc. (604,251 common shares) (d) (e)............................. 3,625,506
Best Products Co., Inc. (297,480 common shares) (e)............................... 0
Best Products Co., Inc. (Warrants for 28,080 common shares) (e)................... 0
Dan River, Inc. (10,975 common shares) (e)........................................ 1,967,353
Classic Cable, Inc. (Warrants for 760 common shares) (e).......................... 0
Flagstar Cos., Inc. (8,755 common shares) (e)..................................... 3,694
London Fog Industries, Inc. (10,833,012 common shares) (d) (e).................... 0
London Fog Industries, Inc. ($19,181,547 par amount of preferred stock, 17.5%
coupon, maturity 05/31/02) (c) (d)................................................ 9,590,774
Nextel Communications, Inc. (Warrants for 60,000 common shares) (d) (e)........... 547,500
Rigco N.A., L.L.C. (Warrants for .325% interest of company's fully diluted
equity)........................................................................... 16,250
Sarcom, Inc. (43 common shares) (e)............................................... 0
-------------
TOTAL EQUITIES.................................................................... 15,751,077
-------------
TOTAL LONG-TERM INVESTMENTS 85.4%
(Cost $5,355,782,290)............................................................. 5,324,322,134
-------------
SHORT-TERM INVESTMENTS
COMMERCIAL PAPER 4.5%
AT&T Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.76%)................... 30,000,000
Avery Dennison ($30,000,000 par, maturing 08/01/97, yielding 5.83%)............... 30,000,000
Baker Hughes, Inc. ($30,000,000 par, maturing 08/01/97, yielding 5.83%)........... 30,000,000
Cargill, Inc. ($30,000,000 par, maturing 08/05/97, yielding 5.52%)................ 29,981,600
Comdisco, Inc. ($30,000,000 par, maturing 08/08/97 to 08/26/97, yielding 5.67% to
5.72%)............................................................................ 29,932,486
McDonald's Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.80%)............. 30,000,000
McKesson Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.90%)............... 30,000,000
Nabisco, Inc. ($30,000,000 par, maturing 08/04/97 to 08/18/97, yielding 5.60% to
5.69%)............................................................................ 29,932,779
Pacificorp ($15,000,000 par, maturing 09/03/97, yielding 5.51%)................... 14,924,238
Pitney Bowes Credit Corp. ($3,600,000 par, maturing 08/01/97, yielding 5.75%)..... 3,600,000
Sara Lee Corp. ($15,000,000 par, maturing 08/01/97, yielding 5.50%)............... 15,000,000
XTRA, Inc. ($11,920,000 par, maturing 08/21/97 to 09/11/97, yielding 5.74% to
5.75%)............................................................................ 11,863,006
-------------
TOTAL COMMERCIAL PAPER............................................................ 285,234,109
-------------
SHORT-TERM LOAN PARTICIPATIONS 9.6%
Alltel Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.88%)................. 30,000,000
American Stores Co. ($30,000,000 par, maturing 10/06/97, yielding 5.82% to
5.84%)............................................................................ 30,000,000
Anadarko Pete Corp. ($30,000,000 par, maturing 08/05/97 to 08/07/97, yielding
5.64% to 5.74%)................................................................... 30,000,000
Army and Air Force Service Exchange ($30,000,000 par, maturing 08/08/97, yielding
5.63%)............................................................................ 30,000,000
Baxter International, Inc. ($30,000,000 par, maturing 08/11/97 to 08/13/97,
yielding 5.64% to 5.65%).......................................................... 30,000,000
</TABLE>

See Notes to Financial Statements

B-33
<PAGE> 90

PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

Borrower Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM LOAN PARTICIPATIONS (CONTINUED)
Bell Atlantic Networks ($18,000,000 par, maturing 08/05/97 to 08/06/97, yielding
5.50%)............................................................................ $ 18,000,000
Centex Corp. ($30,000,000 par, maturing 08/01/97, yielding 5.95%)................. 30,000,000
Champion International Corp. ($15,000,000 par, maturing 08/15/97, yielding
5.72%)............................................................................ 15,000,000
Conagra, Inc. ($30,000,000 par, maturing 08/06/97 to 08/07/97, yielding 5.70% to
5.73%)............................................................................ 30,000,000
Englehard Corp. ($30,000,000 par, maturing 08/01/97 to 08/22/97, yielding 5.56% to
5.87%)............................................................................ 30,000,000
Enron Corp. ($30,000,000 par, maturing 08/12/97, yielding 5.70%).................. 30,000,000
FMC Corp. ($30,000,000 par, maturing 08/22/97, yielding 5.67% to 5.74%)........... 30,000,000
Gillette Co. ($30,000,000 par, maturing 08/01/97, yielding 5.83%)................. 30,000,000
Hertz Corp. ($25,000,000 par, maturing 08/08/97 to 08/15/97, yielding 5.54% to
5.56%)............................................................................ 25,000,000
IKON Office Solutions, Inc. ($30,000,000 par, maturing 08/08/97 to 08/22/97,
yielding 5.73% to 5.76%).......................................................... 30,000,000
Mapco, Inc. ($30,000,000 par, maturing 08/04/97 to 08/21/97, yielding 5.70% to
5.71%)............................................................................ 30,000,000
Mead Corp. ($15,600,000 par, maturing 08/01/97, yielding 5.90%)................... 15,600,000
National Rural Utilities Coop Financial ($15,000,000 par, maturing 08/19/97,
yielding 5.55%)................................................................... 15,000,000
Nipsco Capital Markets, Inc. ($13,400,000 par, maturing 08/01/97, yielding
5.70%)............................................................................ 13,400,000
Nipsco, Inc. ($7,000,000 par, maturing 08/29/97, yielding 5.56%).................. 7,000,000
Ralston Purina Co. ($10,000,000 par, maturing 08/01/97, yielding 5.73%)........... 10,000,000
Tandy Corp. ($28,800,000 par, maturing 08/01/97 to 08/06/97, yielding 5.70% to
5.77%)............................................................................ 28,800,000
Tyson Foods ($30,000,000 par, maturing 08/14/97, yielding 5.67%).................. 30,000,000
Union Pacific Corp. ($30,000,000 par, maturing 08/01/97 to 09/02/97, yielding
5.70% to 5.81%)................................................................... 30,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS.............................................. 597,800,000
--------------
TOTAL SHORT-TERM INVESTMENTS 14.1%
(Cost $883,034,109)............................................................... 883,034,109
--------------
TOTAL INVESTMENTS 99.5%
(Cost $6,238,816,399)............................................................. 6,207,356,243
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%........................................ 29,611,538
--------------
NET ASSETS 100.0%................................................................. $6,236,967,781
==============
</TABLE>

(a) Non-income producing Senior Loan interest.

(b) This Borrower has filed for protection in federal bankruptcy court.

(d) Restricted security.

(e) Non-income producing security as this stock currently does not declare
dividends.

* Senior Loans in the Trust's portfolio generally are subject to mandatory
and/or optional prepayment. Because of these mandatory prepayment conditions
and because there may be significant economic incentives for a Borrower to
prepay, prepayments of Senior Loans in the Trust's portfolio may occur. As a
result, the actual remaining maturity of Senior Loans held in the Trust's
portfolio may be substantially less than the stated maturities shown.
Although the Trust is unable to accurately estimate the actual remaining
maturity of individual Senior Loans, the Trust estimates that the actual
average maturity of the Senior Loans held in its portfolio will be
approximately 18-24 months.

** Senior Loans in which the Trust invests generally pay interest at rates which
are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the prime rate offered by
one or more major United States banks, (ii) the lending rate offered by one
or more major European banks, such as the London Inter-Bank Offered Rate
("LIBOR") and (iii) the certificate of deposit rate. Senior loans are
generally considered to be restricted in that the Trust ordinarily is
contractually obligated to receive approval from the Agent Bank and/or
borrower prior to the disposition of a Senior Loan.

See Notes to Financial Statements

B-34
<PAGE> 91

STATEMENT OF ASSETS AND LIABILITIES

July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $6,238,816,399)..................... $6,207,356,243
Receivables:
Interest and Fees......................................... 45,388,748
Fund Shares Sold.......................................... 22,968,427
Investments Sold.......................................... 756,297
Other....................................................... 37,212
--------------
Total Assets............................................ 6,276,506,927
--------------
LIABILITIES:
Deferred Facility Fees...................................... 18,108,152
Payables:
Income Distributions...................................... 6,801,132
Custodian Bank............................................ 5,097,027
Investment Advisory Fee................................... 4,954,975
Administrative Fee........................................ 1,329,198
Distributor and Affiliates................................ 941,888
Fund Shares Repurchased................................... 374,442
Accrued Expenses............................................ 1,863,989
Deferred Compensation and Retirement Plans.................. 68,343
--------------
Total Liabilities....................................... 39,539,146
--------------
NET ASSETS.................................................. $6,236,967,781
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 626,018,023 shares issued and
outstanding).............................................. $ 6,260,180
Paid in Surplus............................................. 6,264,390,819
Accumulated Undistributed Net Investment Income............. 5,369,829
Accumulated Net Realized Loss............................... (7,592,891)
Net Unrealized Depreciation................................. (31,460,156)
--------------
NET ASSETS.................................................. $6,236,967,781
==============
NET ASSET VALUE PER COMMON SHARE
($6,236,967,781 divided by 626,018,023 shares
outstanding).............................................. $ 9.96
==============
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 92

STATEMENT OF OPERATIONS

For the Year Ended July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $440,296,258
Fees........................................................ 29,366,231
Other....................................................... 2,254,872
------------
Total Income............................................ 471,917,361
------------
EXPENSES:
Investment Advisory Fee..................................... 52,313,966
Administrative Fee.......................................... 13,976,102
Shareholder Services........................................ 6,310,415
Legal....................................................... 1,645,000
Custody..................................................... 1,389,184
Trustee Fees and Expenses................................... 30,202
Other....................................................... 3,584,745
------------
Total Expenses.......................................... 79,249,614
------------
NET INVESTMENT INCOME....................................... $392,667,747
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 442,960
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (6,312,913)
End of the Period......................................... (31,460,156)
------------
Net Unrealized Depreciation During the Period............... (25,147,243)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(24,704,283)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $367,963,464
============
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 93

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended July 31, 1997 and 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1997 July 31, 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income....................................... $ 392,667,747 $ 281,969,603
Net Realized Gain........................................... 442,960 541,536
Net Unrealized Depreciation During the Period............... (25,147,243) (14,949,532)
-------------- --------------
Change in Net Assets from Operations........................ 367,963,464 267,561,607
Distributions from Net Investment Income.................... (390,215,999) (283,580,704)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (22,252,535) (16,019,097)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold............................ 1,781,772,630 2,551,158,978
Value of Shares Issued Through Dividend Reinvestment........ 209,636,808 155,099,566
Cost of Shares Repurchased.................................. (597,973,300) (354,520,255)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 1,393,436,138 2,351,738,289
-------------- --------------
TOTAL INCREASE IN NET ASSETS................................ 1,371,183,603 2,335,719,192
NET ASSETS:
Beginning of the Period..................................... 4,865,784,178 2,530,064,986
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $5,369,829 and $2,874,542,
respectively)............................................. $6,236,967,781 $4,865,784,178
============== ==============
</TABLE>

See Notes to Financial Statements

B-37

<PAGE> 94

STATEMENT OF CASH FLOWS

For the Year Ended July 31, 1997
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 367,963,464
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (1,359,017,702)
Increase in Interest and Fees Receivables................. (10,866,302)
Increase in Receivable for Investments Sold............... (712,087)
Decrease in Other Assets.................................. 15,998
Decrease in Deferred Facility Fees........................ (2,607,607)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 1,395,983
Increase in Distributor and Affiliates Payable............ 588,986
Increase in Accrued Expenses.............................. 308,934
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 22,864
---------------
Total Adjustments....................................... (1,370,870,933)
---------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (1,002,907,469)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 1,775,415,681
Payments on Shares Repurchased.............................. (597,598,858)
Increase in Intra-day Credit Line........................... 4,540,411
Cash Dividends Paid......................................... (179,449,765)
---------------
Net Cash Provided by Financing Activities................. 1,002,907,469
---------------
NET INCREASE IN CASH........................................ -0-
Cash at Beginning of the Period............................. -0-
---------------
CASH AT END OF THE PERIOD................................... $ -0-
===============
</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 95

FINANCIAL HIGHLIGHTS

The following schedule presents financial highlights for one common share of
the Trust outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended July 31
--------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.002 $ 10.046 $ 10.052 $ 10.004 $ 9.998
-------- -------- -------- -------- --------
Net Investment Income..................................... .701 .735 .756 .618 .600
Net Realized and Unrealized Gain/Loss..................... (.042) (.028) (.004) .015 .008
-------- -------- -------- -------- --------
Total from Investment Operations............................ .659 .707 .752 .633 .608
-------- -------- -------- -------- --------
Less:
Distributions from Net Investment Income.................. .698 .751 .758 .585 .600
Distributions in Excess of Net Investment Income.......... -0- -0- -0- -0- .002
-------- -------- -------- -------- --------
Total Distributions......................................... .698 .751 .758 .585 .602
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $ 9.963 $ 10.002 $ 10.046 $ 10.052 $ 10.004
======== ======== ======== ======== ========
Total Return (a)............................................ 6.79% 7.22% 7.82% 6.52% 6.17%
Net Assets at End of the Period (In millions)............... $6,237.0 $4,865.8 $2,530.1 $1,229.0 $ 966.7
Ratio of Expenses to Average Net Assets..................... 1.42% 1.46% 1.49% 1.53% 1.53%
Ratio of Net Investment Income to Average Net Assets........ 7.02% 7.33% 7.71% 6.16% 5.96%
Portfolio Turnover (b)...................................... 83% 66% 71% 74% 67%
</TABLE>

(a) Total Return is based upon net asset value which does not include payment of
the contingent deferred sales charge.

(b) Calculation includes the proceeds from repayments and sales of variable rate
senior loan interests.

See Notes to Financial Statements

B-39
<PAGE> 96

NOTES TO FINANCIAL STATEMENTS

July 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Prime Rate Income Trust (the "Trust") is registered
as a non-diversified closed-end management investment company under the
Investment Company Act of 1940, as amended. The Trust's investment objective is
to provide a high level of current income, consistent with preservation of
capital. The Trust seeks to achieve its objective by investing primarily in a
portfolio of interests in floating or variable rate senior loans to United
States corporations, partnerships and other entities. The Trust commenced
investment operations on October 4, 1989.

The following is a summary of significant accounting policies
consistently followed by the Trust 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--The value of the Trust's Variable Rate Senior Loan
interests, totaling $5,308,571,057 (85.1% of net assets) is determined in the
absence of actual market values by Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") following guidelines and procedures established,
and periodically reviewed, by the Board of Trustees. The value of a Variable
Rate Senior Loan interest in the Trust's portfolio is determined with reference
to changes in market interest rates and to the creditworthiness of the
underlying obligor. In valuing Variable Rate Senior Loan interests, the Adviser
considers market quotations and transactions in instruments that the Adviser
believes may be comparable to such Variable Rate Senior Loan interests. In
determining the relationship between such instruments and the Variable Rate
Senior Loan interests, the Adviser considers such factors as the
creditworthiness of the underlying obligor, the current interest rate, the
interest rate redetermination period and maturity date. To the extent that
reliable market transactions in Variable Rate Senior Loan interests have
occurred, the Adviser also considers pricing information derived from such
secondary market transactions in valuing Variable Rate Senior Loan interests.
Because of uncertainty inherent in the valuation process, the estimated value of
a Variable Rate Senior Loan interest may differ significantly from the value
that would have been used had there been market activity for that Variable Rate
Senior Loan interest. Equity securities are valued on the basis of prices
furnished by pricing services or as determined in good faith by the Adviser.
Short-term securities with remaining maturities of 60 days or less are valued at
amortized cost.

B. SECURITY TRANSACTIONS--Investment transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.

C. INVESTMENT INCOME--Interest income is recorded on an accrual basis. Facility
fees received are recognized as income ratably over the expected life of the
loan. Market premiums and discounts are amortized over the stated life of each
applicable security.

D. FEDERAL INCOME TAXES--It is the Trust'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 Trust 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 July 31, 1997, the Trust had an accumulated capital
loss carryforward for tax purposes of $3,643,444,

B-40
<PAGE> 97

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

which will expire on July 31, 2004. 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.

At July 31, 1997, for federal income tax purposes cost of long- and
short-term investments is $6,247,342,588, the aggregate gross unrealized
appreciation is $22,381,911 and the aggregate gross unrealized depreciation is
$62,368,256 resulting in net unrealized depreciation of $39,986,345.

E. DISTRIBUTION OF INCOME AND GAINS--The Trust declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.

Permanent book and tax basis differences relating to the recognition of
certain expenses which are not deductible for tax purposes totaling $43,539 were
reclassified from accumulated undistributed net investment income to capital.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------
<S> <C>
First $4.0 billion.......................................... .950 of 1%
Next $3.5 billion........................................... .900 of 1%
Next $2.5 billion........................................... .875 of 1%
Over $10.0 billion.......................................... .850 of 1%
</TABLE>

In addition, the Trust will pay a monthly administrative fee to Van Kampen
American Capital Distributors, Inc., the Trust's Administrator, at an annual
rate of .25% of the average net assets of the Trust. The administrative services
to be provided by the Administrator include monitoring the provisions of the
loan agreements and any agreements with respect to participations and
assignments, record keeping responsibilities with respect to interests in
Variable Rate Senior Loans in the Trust's portfolio and providing certain
services to the holders of the Trust's securities.

For the year ended July 31, 1997, the Trust recognized expenses of
approximately $522,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Trust, of which a trustee of
the Trust is an affiliated person.

For the year ended July 31, 1997, the Trust recognized expenses of
approximately $65,400 representing the Administrator's or its affiliates'
(collectively "VKAC") cost of providing legal services to the Trust.

ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1997, the Trust recognized expenses of approximately $4,402,900,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.

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

The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is equal to the trustee's annual retainer
fee, which is currently $2,500.

B-41
<PAGE> 98

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

At July 31, 1997 and July 31, 1996, paid in surplus aggregated $6,264,390,819
and $4,872,393,497, respectively.
Transactions in common shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1997 JULY 31, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares........................................... 486,490,317 251,848,949
----------- -----------
Shares Sold................................................ 178,438,954 254,577,948
Shares Issued Through Dividend Reinvestment................ 20,996,830 15,483,081
Shares Repurchased......................................... (59,908,078) (35,419,661)
----------- -----------
Net Increase in Shares Outstanding......................... 139,527,706 234,641,368
----------- -----------
Ending Shares.............................................. 626,018,023 486,490,317
=========== ===========
</TABLE>

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $4,994,709,841 and
$4,028,396,415, respectively.

5. TENDER OF SHARES

The Board of Trustees currently intends, each quarter, to consider authorizing
the Trust to make tender offers for all or a portion of its then outstanding
common shares at the then net asset value of the common shares. For the year
ended July 31, 1997, 59,908,078 shares were tendered and repurchased by the
Trust.

6. EARLY WITHDRAWAL CHARGE

An early withdrawal charge to recover offering expenses will be imposed in
connection with most common shares held for less than five years which are
accepted by the Trust for repurchase pursuant to tender offers. The early
withdrawal charge will be payable to VKAC. Any early withdrawal charge which is
required to be imposed will be made in accordance with the following schedule.

<TABLE>
<CAPTION>
YEAR OF REPURCHASE WITHDRAWAL CHARGE
- -------------------------------------------------------------------------------
<S> <C>
First....................................................... 3.0%
Second...................................................... 2.5%
Third....................................................... 2.0%
Fourth...................................................... 1.5%
Fifth....................................................... 1.0%
Sixth and following......................................... 0.0%
</TABLE>

For the year ended July 31, 1997, VKAC received early withdrawal charges
of approximately $9,075,812 in connection with tendered shares of the Trust.

B-42
<PAGE> 99

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1997
- --------------------------------------------------------------------------------

7. COMMITMENTS

Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $704,948,400 as of July
31, 1997. The Trust generally will maintain with its custodian short-term
investments having an aggregate value at least equal to the amount of unfunded
loan commitments.

The Trust has entered into a revolving credit agreement with a syndicate
led by Bank of America for an aggregate of $250,000,000. The proceeds of any
borrowing by the Trust under the revolving credit agreement may only be used,
directly or indirectly, for liquidity purposes in connection with the
consummation of a tender offer by the Trust for its shares. Annual commitment
fees of .065% are charged on the unused portion of the credit line. Borrowings
under this facility will bear interest at either the LIBOR rate or the Federal
Funds rate plus .375%. There have been no borrowings under this agreement to
date.

8. SENIOR LOAN PARTICIPATION COMMITMENTS

The Trust invests primarily in participations, assignments, or acts as a party
to the primary lending syndicate of a Variable Rate Senior Loan interest to
United States corporations, partnerships, and other entities. When the Trust
purchases a participation of a Senior Loan interest, the Trust 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 Trust assumes
the credit risk of the Borrower, Selling Participant or other persons
interpositioned between the Trust and the Borrower.

At July 31, 1997, the following sets forth the selling participants with
respect to interests in Senior Loans purchased by the Trust on a participation
basis.

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
SELLING PARTICIPANT (000) (000)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Bankers Trust............................................... $153,247 $153,570
Donaldson Lufkin Jenrette................................... 50,954 51,255
NationsBank................................................. 26,958 26,987
Merrill Lynch Capital Corp.................................. 20,000 20,073
Canadian Imperial Bank of Commerce.......................... 19,924 20,037
Goldman Sachs............................................... 18,580 18,581
Chase Securities Inc........................................ 13,365 13,380
Bank of New York............................................ 8,625 8,652
ABN AMRO.................................................... 5,000 5,019
--------- --------
Total....................................................... $316,653 $317,554
========= ========
</TABLE>

B-43
<PAGE> 100

PART C--OTHER INFORMATION

ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS

(A) FINANCIAL STATEMENTS:

Included in Part A:

Financial Highlights

Included in Part B:

Independent Accountants' Report; Portfolio of Investments as of July
31, 1997; Statement of Assets and Liabilities as of July 31,
1997; Statement of Operations for the year ended July 31, 1997;
Statement of Changes in Net Assets for the fiscal years ended
July 31, 1997 and 1996; Statement of Cash Flows for the year
ended July 31, 1997; Notes to Financial Statements

(B) EXHIBITS

<TABLE>
<S> <S>
(a)(i) Amended and Restated Declaration of Trust dated September 19, 1989(3)
(a)(ii) Certificate of Amendment dated October 11, 1995(3)
(b) By-laws(3)
(d) Specimen Certificate of Common Shares of Beneficial Interest of Registrant(3)
(g) Investment Advisory Agreement+
(h(1)) Offering Agreement+
(h(2)) Form of Dealer Agreement(3)
(h(3)) Form of Broker Agreement(3)
(h(4)) Form of Bank Agreement(3)
(j(1)) Custodian Agreement+
(j(2)) Transfer Agency and Service Agreement+
(k(1)) Administration Agreement+
(k(2)) Amended and Restated Legal Services Agreement+
(l) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)(3)
(n) Consent of KPMG Peat Marwick LLP+
(p) Letter of Investment Intent(3)
(24) Power of Attorney+
(27) Financial Data Schedule+
</TABLE>

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

(1) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 33-81076, and 811-5845, filed on July 1, 1994.

(2) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 33-63349 and 811-5845, filed on October 11, 1995.

(3) Incorporated by reference to the Fund's Registration Statement on Form N-2,
File Nos. 333-14499 and 811-5845, filed on October 18, 1996.

+ Filed herewith

ITEM 25: MARKETING ARRANGEMENTS

See Exhibit h to this Registration Statement.

C-1
<PAGE> 101

ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Securities and Exchange Commission fees..................... $682,500
National Association of Securities Dealers, Inc. fees....... $ 30,500
Printing and engraving expenses*............................ $ 70,000
Legal fees*................................................. $ 40,000
Accounting expenses*........................................ $ 3,000
Miscellaneous expenses*..................................... $ 4,000
--------
Total........................................ $830,000
========
- ---------------
* Estimates.
</TABLE>

ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Not applicable

ITEM 28: NUMBER OF HOLDERS OF SECURITIES

At November 7, 1997

<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest, par value
$.01 per share................................... 225,523
</TABLE>

ITEM 29: INDEMNIFICATION

Please see Article 5.3 of the Registrant's Amended and Restated Declaration
of Trust (Exhibit (a)(i)) for indemnification of officers and trustees.
Registrant's trustees and officers are also covered by an Errors and Omissions
Policy. Section 5 of the proposed Investment Advisory Agreement between the Fund
and the Adviser provides that in the absence of willful misfeasance, bad faith
or gross negligence in connection with the obligations or duties under the
Investment Advisory Agreement or on the part of the Adviser, the Adviser shall
not be liable to the Fund or to any Common Shareholder of the Fund for any act
or omission in the course of or connected in any way with rendering services or
for any losses that may be sustained in the purchase, holding or sale of any
security. The Distribution Agreement provides that the Registrant shall
indemnify the Distributor (as defined therein) and certain persons related
thereto for any loss or liability arising from any alleged misstatement of a
material fact (or alleged omission to state a material fact) contained in, among
other things, the Registration Statement or Prospectus except to the extent the
misstated fact or omission was made in reliance upon information provided by or
on behalf of the Distributor. (See Section 7 of the Distribution Agreement.)

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and the Adviser and any underwriter pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person or the Registrant and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted
against the Registrant by such trustee, officer or controlling person or the
Distributor in connection with the Common Shares being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.

C-2
<PAGE> 102

ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and directors of the Adviser,
reference is made to the Adviser's current Form ADV (File No. 801-18161) filed
under the Investment Advisers Act of 1940, as amended, incorporated herein by
reference.

ITEM 31: LOCATION OF ACCOUNTS AND RECORDS

All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, ACCESS Investor Services, Inc., P.O. Box
418256, Kansas City, MO 02105-1713 or at the State Street Bank and Trust
Company, 1776 Heritage Drive, North Quincy, Massachusetts; (ii) by the Adviser,
will be maintained at its offices, located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181; and (iii) all such accounts, books and other documents
required to be maintained by the principal underwriter will be maintained by Van
Kampen American Capital Distributors, Inc., at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.

ITEM 32: MANAGEMENT SERVICES

Not applicable

ITEM 33: UNDERTAKINGS

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

2. Not applicable

3. Not applicable

4. (a) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the Prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.

(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(c) To remove from registration by means of post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.

5. If applicable:

(a) For purpose of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 497(h) under
the Securities Act of 1933, shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

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

C-3
<PAGE> 103

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THERETO DULY AUTHORIZED
IN THE CITY OF OAKBROOK TERRACE, AND THE STATE OF ILLINOIS, ON THE 12TH DAY OF
NOVEMBER, 1997.

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

By: /s/ RONALD A. NYBERG
Ronald A. Nyberg
Vice President and Secretary

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON NOVEMBER 12, 1997 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED:

<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ DENNIS J. McDONNELL* Chairman, President
- ----------------------------------------------------- (Chief Executive Officer) and Trustee
Dennis J. McDonnell

/s/ EDWARD C. WOOD, III* Vice President and Treasurer
- ----------------------------------------------------- (Chief Financial Officer and Accounting
Edward C. Wood, III Officer)

/s/ THEODORE A. MYERS* Trustee
- -----------------------------------------------------
Theodore A. Myers

/s/ ROD DAMMEYER* Trustee
- -----------------------------------------------------
Rod Dammeyer

/s/ DAVID C. ARCH* Trustee
- -----------------------------------------------------
David C. Arch

/s/ HUGO F. SONNENSCHEIN* Trustee
- -----------------------------------------------------
Hugo F. Sonnenschein

/s/ HOWARD J KERR* Trustee
- -----------------------------------------------------
Howard J Kerr

/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
</TABLE>

November 12, 1997

* Signed by Ronald A. Nyberg pursuant to a Power of Attorney.

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

C-4
<PAGE> 104

EXHIBIT INDEX TO FORM N-2
SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION

ON NOVEMBER 13, 1997

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
(g) Investment Advisory Agreement
(h(1)) Offering Agreement
(j(1)) Custodian Agreement
(j(2)) Transfer Agency and Service Agreement
(k(1)) Administration Agreement
(k(2)) Amended and Restated Legal Services Agreement
(n) Consent of KPMG Peat Marwick LLP
(24) Power of Attorney
(27) Financial Data Schedule
</TABLE>

<PAGE> 1
Exhibit (g)
INVESTMENT ADVISORY AGREEMENT

THIS INVESTMENT ADVISORY AGREEMENT, dated as of May 31, 1997 (the "Agreement"),
by and between VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, a
Massachusetts business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP. (the "ADVISER"), a Delaware corporation.

1. (a) RETENTION OF ADVISER BY FUND. Subject to the terms and conditions
set forth herein, the Fund hereby employs the Adviser to act as the investment
adviser for and to manage the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objectives and policies and
limitations, and to administer its affairs to the extent requested by, and
subject to the review and supervision of, the Board of Trustees of the Fund for
the period and upon the terms herein set forth. The investment of funds shall
be subject to all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as may from time to time be in force and delivered or made
available to the Adviser.

(b) ADVISER'S ACCEPTANCE OF EMPLOYMENT. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation 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, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.

(c) ESSENTIAL PERSONNEL. For a period of one year commencing on the
effective date of this Agreement, the Adviser and the Fund agree that the
retention of (i) the chief executive officer, president, chief financial
officer and secretary of the Adviser and (ii) each director, officer and
employee of the Adviser or any of its Affiliates (as defined in the Investment
Company Act of 1940, as amended (the "1940 Act")) who serves as an officer of
the Fund (each person referred to in (i) or (ii) hereinafter being referred to
as an "Essential Person"), in his or her current capacities, is in the best
interest of the Fund and the Fund's shareholders. In connection with the
Adviser's acceptance of employment hereunder, the Adviser hereby agrees and
covenants for itself and on behalf of its Affiliates that neither the Adviser
nor any of its Affiliates shall make any material or significant personnel
changes or replace or seek to replace any Essential Person or cause to be
replaced any Essential Person, in each case without first informing the Board
of Trustees of the Fund in a timely manner. In Addition, neither the Adviser
nor any Affiliate of the Adviser shall change or seek to change or cause to be
changed, in any material respect, the duties and responsibilities of any
Essential Person, in each case without first informing the Board of Trustees of
the Fund in a timely manner.

(d) INDEPENDENT CONTRACTOR. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.

(e) NON-EXCLUSIVE AGREEMENT. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.

<PAGE> 2

2. (a) FEE. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee computed based on a fee rate (expressed as a
percentage per annum) applied to the average daily net assets of the Fund as
follows:

FEE PERCENT
PER ANNUM OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS (MILLIONS) NET ASSETS
--------------------- ----------
<S> <C>
First $4.0 billion 0.950 of 1.00%
Next $3.5 billion 0.900 of 1.00%
Next $2.5 billion 0.875 of 1.00%
Over $10.0 billion 0.850 of 1.00%

</TABLE>

(b) DETERMINATION OF NET ASSET VALUE. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on the last
day the Exchange is open for trading or such other time or times as the
trustees may determine in accordance with the provisions of applicable law and
the Declaration of Trust and By-Laws of the Trust, and resolutions of the Board
of Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset value of such share as of the close of
business of the last day on which such calculation was made.

(c) PRORATION. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.

3. EXPENSES. In addition to the fee of the Adviser, the Fund shall
assume and pay any expenses for services rendered by a custodian for the
safekeeping of the Fund's securities or other property, for keeping its books
of account, for any other changes of the custodian and for calculating the net
asset value of the Fund as provided above. The adviser shall not be required
to pay, and the Fund shall assume and pay, the charges and expenses of its
operations, including compensation of the trustees (other than those who are
interested persons of the Adviser and other than those who are interested
persons of the distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and expenses of
independent accountants, of legal counsel and of any transfer or dividend
disbursing agent, costs of acquiring and disposing of portfolio securities,
cost of listing shares on the New York Stock Exchange or other exchange,
interest (if any) on obligations incurred by the Fund, costs of shares
certificates, membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to shareholders, cost of
registering shares of the Fund under the federal securities laws, miscellaneous
expenses and all taxes and fees to federal, state or other governmental
agencies on account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not pay or incur
any obligation for any management or administrative expenses for which the Fund
intends to seek reimbursement from the Adviser without first obtaining the
written approval of the Adviser. The Adviser shall arrange, if desired by the
Fund, for officers or employees of the Adviser to serve, without compensation
from the Fund, as trustees, officers or agents of the Fund if duly elected or
appointed to such positions and subject to their individual consent and to any
limitations imposed by the law.

<PAGE> 3

4. INTERESTED PERSONS. Subject to applicable statutes and regulations,
it is understood that trustees, officers, shareholders and agents of the Fund
are or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interested in the Fund as trustees, officers,
shareholders, agents or otherwise.

5. LIABILITY. 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 this 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 this Agreement.

6. (a) TERM. This Agreement shall become effective on the date hereof
and shall remain in full force until May 31, 1999 unless sooner terminated as
hereinafter provided. This Agreement shall continue in force from year to year
thereafter, but only for so long as such continuance is specifically approved
as least annually, in the manner required by the 1940 Act.

(b) TERMINATION. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.

(c) PAYMENT UPON TERMINATION. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.

7. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statue, rule or otherwise, the remainder
shall not thereby be affected.

8. NOTICES. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.

9. DISCLAIMER. The Adviser acknowledges and agrees that, as provided by
Section 5.5 of the Declaration of Trust of the Trust, the shareholders,
trustees, officers, employees and other agents of the Trust and the Fund shall
not personally be bound by or liable hereunder, nor shall resort be had to
their private property for the satisfaction of any obligation or claim
hereunder.

10. GOVERNING LAW. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.

11. NAME. In connection with its employment hereunder, the Adviser
hereby agrees and covenants not to change its name without the prior consent of
the Board of Trustees of the Fund.

<PAGE> 4

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.

VAN KAMPEN AMERICAN VAN KAMPEN AMERICAN
CAPITAL INVESTMENT ADVISORY CAPITAL PRIME RATE INCOME TRUST,
CORP.

By: /s/ Dennis J. McDonnell By: /s/ Ronald A. Nyberg
------------------------------ ---------------------------------
Name: Dennis J. McDonnell Name: Ronald A. Nyberg
Title: President Title: Vice President

<PAGE> 1
Exhibit (h(1))
OFFERING AGREEMENT

THIS OFFERING AGREEMENT, dated as of May 31, 1997 (the "Agreement"), by
and between VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST (the "Fund"), a
Massachusetts business trust, and VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS,
INC., a Delaware corporation (the "Principal Underwriter").

1. (a) Appointment of Principal Underwriter. The Fund appoints the
Principal Underwriter as a principal underwriter and exclusive distributor of
shares of the Fund (the "Shares") effective as of the date upon which the
continuous public offering of the Fund's Shares, as described in the Fund's
then current Prospectus, shall commence. The Fund reserves the right, however,
to refuse at any time or times to sell Shares hereunder for any reason at any
time or times to sell Shares hereunder for any reason deemed adequate by the
Board of Trustees of the Fund.

(b) Best Efforts. The Principal Underwriter shall use its best efforts to
sell through its organization and through other dealers and agents the Shares
which the Principal Underwriter has the right to purchase under Section 2
hereof, but the Principal Underwriter does not undertake to sell any specific
number of Shares. Without the prior approval of the Board of Trustees, the
Principal Underwriter shall not, directly or indirectly, distribute, sell or
market, through its organization or other brokers, dealers or agents, shares of
any investment companies unless the Board of Trustees of the Fund determines
that such companies do not compete, or potentially compete, with the Fund.

(c) Positions in the Shares. The Principal Underwriter agrees that it
will not take any long or short positions in the Shares, except for long
positions in those Shares purchased by the Principal Underwriter in accordance
with any systematic sales plan described in the then current Prospectus of the
Fund and except as permitted by Section 2 hereof, and that so far as it can
control the situation, it will prevent any of its trustees, officers or
shareholders from taking any long or short positions in the Shares, except for
legitimate investment purposes.

(d) Essential Personnel. The Principal Underwriter and the Fund agree
that the retention of (i) the chief executive officer, president, treasurer and
secretary of the Principal Underwriter, and (ii) each director, officer and
employee of the Principal Underwriter or any of its Affiliates (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")) who serves as
an officer of the Fund (each person referred to in (i) or (ii) hereinafter
being referred to as an "Essential Person"), in his or her current capacities,
is in the best interest of the Fund and the Fund's shareholders. In connection
with the Principal Underwriter's acceptance of employment hereunder, the
Principal Underwriter hereby agrees and covenants for itself and on behalf of
its Affiliates that neither the Principal Underwriter nor any of its Affiliates
shall replace or seek to replace any Essential Person or cause to be replaced
any Essential Person, in each case without first consulting with the Board of
Trustees of the Fund in a timely manner. In addition, neither the Principal
Underwriter nor any Affiliate of the Principal Underwriter, shall change or
seek to change or cause to be changed, in any material respect, the duties and
responsibilities of any Essential Person, in each case without first consulting
with the Board of Trustees of the Fund in a timely manner.

2. Sale of Shares to Principal Underwriter; Early Withdrawal Charge.
The Fund hereby grants to the Principal Underwriter the exclusive right, except
as herein otherwise provided, to purchase Shares upon the terms herein set
forth. Such exclusive right hereby granted shall not apply to Shares issued or
transferred or sold at net asset value: (a) in connection with the merger or
consolidation of the Fund with any other investment company or the acquisition
by the Fund of all or substantially all of the assets of or the outstanding
Shares of any investment company; (b) in connection with a pro rata
distribution directly to the holders of Shares in the nature of a stock
dividend or stock split or in connection with any other recapitalization
approved by the Board of Trustees; (c) upon the exercise of purchase or
subscription rights granted to the holders of Shares on a pro rata basis; or
(d) in connection with the automatic reinvestment of dividends and
distributions from the Fund.

<PAGE> 2

The Principal Underwriter shall have the right to buy from the Fund the
Shares needed, but not more than the Shares needed (except for reasonable
allowances for clerical errors, delays and errors of transmission and
cancellation of orders) to fill unconditional orders for Shares received by the
Principal Underwriter from dealers, agents and investors during each period
when a particular net asset value and public offering price are in effect as
provided in Section 3 hereof; and the price which the Principal Underwriter
shall pay for the Shares so purchased shall be the net asset value used in
determining the public offering price on which such orders were based. The
Principal Underwriter shall notify the Fund at the end of each such period, or
as soon thereafter on that business day as the orders received in such period
have been compiled, of the number of Shares which the Principal Underwriter
elects to purchase hereunder.

The Fund shall impose an early withdrawal charge, payable to the Principal
Underwriter, on most shares accepted for tender by the Fund which have been
held for less than five years, as set forth in the current Fund Prospectus.

3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share.
The net asset value per Share shall be determined in the manner provided in the
Declaration of Trust and By-laws of the Fund as then amended and in accordance
with the then current Prospectus of the Fund. The Fund will cause immediate
notice to be given to the Principal Underwriter of each change in net asset
value as soon as it is determined. Compensation from the Principal Underwriter
to dealers purchasing Shares from the Principal Underwriter for resale and to
brokers and other eligible agents making sales to investors shall be sent the
forms of agreement between the Principal Underwriter and such dealers or
agents, respectively, as from time to time amended, and, if such compensation
from the Principal Underwriter is described in the then current Prospectus for
the Fund, shall be as so set forth. In connection with the Principal
Underwriter's employment hereunder, the Principal Underwriter hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.

4. Compliance with NASD Rules, etc. In selling Fund Shares, the
Principal Underwriter will in all respects duly comply with all state and
Federal laws relating to the sale of such securities and with all applicable
rules and regulations of all regulatory bodies, including, without limitation,
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and all applicable rules and regulations of the Securities and Exchange
Commission under the 1940 Act, and will indemnify and save the Fund harmless
from any damage or expense on account of any unlawful act by the Principal
Underwriter or its agents or employees. The Principal Underwriter is not,
however, to be responsible for the acts of other dealers or agents except as
and to the extent that they shall be acting for the Principal Underwriter or
under its direction or authority. None of the Principal Underwriter, any
dealer, any agent or any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus heretofore or hereafter filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "1933 Act") (as any such Registration Statement and Prospectus may have
been or may be amended from time to time), covering the Shares and in any
supplemental information to any such Prospectus approved by the Fund in
connection with the offer of sale of Shares. None of the Principal
Underwriter, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Principal Underwriter
as principal for its own account.

<PAGE> 3

5. Expenses.

(a) The Fund will pay or cause to be paid:

(i) all expenses in connection with the registration of Shares
under the Federal securities laws, and the Fund will exercise its best
efforts to obtain said registration and qualification;

(ii) all expenses in connection with the printing of any notices
of shareholders' meetings, proxy and proxy statements and enclosures
therewith, as well as any other notice or communication sent to
shareholders in connection with any meeting of the shareholders or
otherwise, any annual, semi-annual or other reports or communications
sent to the shareholders, and the expense of sending prospectuses
relating to the Shares to existing shareholders;

(iii) all expenses of any Federal or state original issue tax or
transfer tax payable upon the issuance, transfer or delivery of Shares
from the Fund to the Principal Underwriter; and

(iv) the costs of preparing and issuing any Share certificates
which may be issued to represent Shares.

(b) The Principal Underwriter will pay the costs and expenses of
qualifying and maintaining qualification of the Shares for sale under the
securities laws of the various states. The Principal Underwriter will also
permit its officers and employees to serve without compensation as trustees and
officers of the Fund if duly elected to such positions.

6. No Secondary Market Activity. It is understood that Shares of the
Fund will not be repurchased by either the Fund or the Principal Underwriter,
and that no secondary market for the Fund shares exists currently, or is
expected to develop. While the Board of Trustees of the Fund intends to
consider tendering for all or a portion of the Fund's shares on a quarterly
basis, there is no assurance that the Fund will tender for shares at any time
or, following such a tender offer, that shares so tendered will be repurchased
by the Fund. Accordingly investment in the Fund's shares would be considered
illiquid. ANY REPRESENTATION AS TO A TENDER OFFER BY THE FUND, OTHER THAN THAT
WHICH IS SET FORTH IN THE FUND'S THEN CURRENT PROSPECTUS, IS EXPRESSLY
PROHIBITED.

The Principal Underwriter hereby covenants that it (i) will not make a
secondary market in any shares of the Fund, (ii) will not purchase or hold such
shares in inventory for the purpose of resale in the open market, (iii) will
not repurchase shares in the open market, and (iv) will require every bank,
broker or dealer participating in the continuous offering of the shares to make
the covenants contained in clauses (i), (ii) and (iii) of this Section 6 as a
condition precedent to their participation in such offering.

7. Indemnification. The Fund agrees to indemnify and hold harmless the
Principal Underwriter and each of its trustees and officers and each person, if
any, who controls the Principal Underwriter within the meaning of Section 15 of
the 1933 Act against any loss, liability, claim, damages, or expenses
(including the reasonable cost of investigating or defending any alleged loss,
liability, claim, damages, or expenses and reasonable counsel fees incurred in
connection therewith), arising by reason of any person acquiring any Shares,
based upon the grounds that the registration statement, Prospectus, shareholder
reports or other information filed or made public by the Fund (as from time to
time amended), included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the
statements not misleading under the 1933 Act or any other statute or the common
law. However, the Fund does not agree to indemnify the Principal Underwriter
or hold it harmless to the extent that the statement or omission was made in
reliance upon, and in conformity with, information furnished to the Fund by or
on behalf of the Principal Underwriter. In no case (i) is the indemnity of the
Fund in favor of the Principal Underwriter or any person indemnified to be
deemed to protect the Principal Underwriter or any person against any liability
to the Fund or its security

<PAGE> 4

holders to which the Principal Underwriter or such person would
otherwise by subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement, or (ii) is the
Fund to be liable under its indemnity agreement contained in this Section with
respect to any claim made against the Principal Underwriter or any other person
unless the Principal Underwriter or such other person shall have notified the
Fund in writing of the claim within a reasonable time after the summons or
other first written notification giving information of the nature of the claim
shall have been served upon the Principal Underwriter or any such person (or
after the Principal Underwriter or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Principal Underwriter or any person against whom such action is brought
otherwise than on account of its indemnity agreement contained in this
paragraph. The Fund shall be entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of any such action brought
to enforce any claims, but if the Fund elects to assume the defense, the
defense shall be conducted by counsel chosen by it and satisfactory to the
Principal Underwriter or officers or trustees or controlling person or persons
or defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Principal Underwriter, officers
or trustees or controlling person or persons or defendant or defendants in the
suit shall bear the fees and expenses of any additional counsel retained by
them. If the Fund does not elect to assume the defense of any suit, it will
reimburse the Principal Underwriter, officers or trustees or controlling person
or persons or defendant or defendants in the suit for the reasonable fees and
expenses of any counsel retained by them. The Fund agrees to notify the
Principal Underwriter promptly of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issuance or sale of any of the Shares.

The Principal Underwriter also covenants and agrees that it will
indemnify and hold harmless the Fund and each of its trustees and officers and
each person, if any, who controls the Fund within the meaning of Section 15 of
the 1933 Act, against any loss, liability, damages, claim or expense (including
the reasonable cost of investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees incurred in connection
therewith) arising by reason of any person acquiring any Shares, based upon the
1933 Act or any other statute or common law, alleging any wrongful act of the
Principal Underwriter or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended), included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with
information furnished to the Fund by or on behalf of the Principal Underwriter.
In no case (i) is the indemnity of the Principal Underwriter in favor of the
Fund or any person indemnified to be deemed to protect the Fund or any such
person against any liability to which the Fund or such person would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties or by reason of its reckless disregard of its
obligations and duties under this Agreement, or (ii) is the Principal
Underwriter to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or person, as the case may be, shall have notified
the Principal Underwriter in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Fund or person (or after
the Fund or such person shall have received notice of service on any designated
agent). However, failure to notify the Principal Underwriter of any claim
shall not relieve the Principal Underwriter from any liability which it may
have to the Fund or any person against whom the action is brought otherwise
than on account of its indemnity agreement contained in this paragraph. In the
case of any notice to the Principal Underwriter, it shall be entitled to
participate, at its own expense, in the defense or, if it so elects, to assume
the defense of any suit brought to enforce the claim, but if the Principal
Underwriter elects to assume the defense the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Principal Underwriter elects to assume the defense of any
suit and retain counsel, the Fund or controlling persons or defendants in the
suit shall bear the fees and expenses of any additional counsel retained by
them. If the Principal Underwriter does not elect to assume the defense of any
suit, it will reimburse the Fund, officers and trustees or controlling

<PAGE> 5

person or persons or defendant or defendants in the suit for the
reasonable fees and expenses of any counsel retained by them. The Principal
Underwriter agrees to notify the Fund promptly of the commencement of any
litigation or proceedings against it in connection with the issue and sale of
any of the Shares.

8. Continuation, Amendment or Termination of the Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect from year to year so long as such continuance
is approved at least annually (i) by the Board of Trustees of the Fund or by a
vote of a majority of the outstanding voting securities of the Fund, and (ii)
by vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Disinterested Trustees") cast in
person at a meeting called for the purpose of voting on such approval,
provided, however, that (a) this Agreement may at any time be terminated
without the payment of any penalty either by vote of a majority of the
Disinterested Trustees, or by vote of a majority of the outstanding voting
securities of the Fund, on written notice to the Principal Underwriter; (b)
this Agreement shall immediately terminate in the event of its assignment; and
(c) this Agreement may be terminated by the Principal Underwriter on ninety
(90) days' written notice to the Fund. Upon termination of this Agreement, the
obligations of the parties hereunder shall cease and terminate as of the date
of such termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination and except with respect to any
rights and obligations of indemnification arising out of any action or inaction
occurring prior to such termination.

This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of the Fund shall have been
approved (i) by the Board of Trustees of the Fund, or by a vote of the majority
of the outstanding voting securities of the Fund and (ii) by vote of a majority
of the Disinterested Trustees cast in person at a meeting called for the
purpose of voting on such amendment.

For purposes of this section, the terms "vote of a majority of the
outstanding voting securities," "interested person" and "assignment" shall have
the meanings defined in the 1940 Act, as amended.

9. Disclaimer Liability. Notwithstanding anything to the contrary
contained in this Agreement, you acknowledge and agree that, as provided by
Section 5.5 of the Declaration of Trust of the Fund, the shareholders,
trustees, officers, employees and other agents of the Fund shall not personally
be bound by or liable hereunder, nor shall any resort to their personal
property being had for the satisfaction of any obligation or claim hereunder.

10. Notice. Any notice given under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at any
office of such party or at such other address as such party shall have
designated in writing.

11. Name. In connection with its employment hereunder, the Principal
Underwriter hereby agrees and covenants not to change its name without the
prior consent of the Board of Trustees.

<PAGE> 6

IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
executed on their behalf on the day and year first above written.

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

By: /s/ Dennis J. McDonnell
-------------------------------
Name: Dennis J. McDonnell
Title: President

VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS INC.

By: /s/ William R. Molinari
-------------------------------
Name: William R. Molinari
Title: President

<PAGE> 1
EXHIBIT(j(1))

CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES LISTED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held By
It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States . . . . . . 2

2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . 2
2.3 Registration of Securities . . . . . . . . . . . . . . . . 4
2.4 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Availability of Federal Funds . . . . . . . . . . . . . . 5
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . 5
2.7 Payment of Fund Moneys . . . . . . . . . . . . . . . . . . 6
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased . . . . . . . . . . . . . 7
2.9 Appointment of Agents . . . . . . . . . . . . . . . . . . 7
2.10 Deposit of Fund Assets in Securities System . . . . . . . 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System . . . . . . . . . . . . . . . . . . . . . . . 9
2.12 Segregated Account . . . . . . . . . . . . . . . . . . . . 10
2.13 Ownership Certificates for Tax Purposes . . . . . . . . . 10
2.14 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.15 Communications Relating to Fund Securities . . . . . . . . 11

3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States . . . . . . . . . . . . 11

3.1 Appointment of Foreign Sub-Custodians . . . . . . . . . . 11
3.2 Assets to be Held . . . . . . . . . . . . . . . . . . . . 11
3.3 Foreign Securities Systems . . . . . . . . . . . . . . . . 12
3.4 Agreements with Foreign Banking Institutions . . . . . . . 12
3.5 Access of Independent Accountants of the Fund . . . . . . 12
3.6 Reports by Custodian . . . . . . . . . . . . . . . . . . . 12
3.7 Transactions in Foreign Custody Account . . . . . . . . . 13
3.8 Liability of Foreign Sub-Custodians . . . . . . . . . . . 13
3.9 Liability of Custodian . . . . . . . . . . . . . . . . . . 13
3.10 Reimbursement for Advances . . . . . . . . . . . . . . . . 14
3.11 Monitoring Responsibilities . . . . . . . . . . . . . . . 14
3.12 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
3.13 Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . 15

4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund . . . . . . . . . . . . . . . . . . . . . . 15

5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . 16

6. Actions Permitted Without Express Authority . . . . . . . . . . . 16

7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . 17

8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 17

9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

10. Opinion of Fund's Independent Accountants . . . . . . . . . . . . 18

11. Reports to Fund by Independent Public Accountants . . . . . . . . 18

12. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . 18

13. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . 18

14. Effective Period, Termination and Amendment . . . . . . . . . . . 19

15. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . 20

16. Interpretive and Additional Provisions . . . . . . . . . . . . . . 21

17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . 21

18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . 22

19. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 22

20. Shareholder Communications . . . . . . . . . . . . . . . . . . . . 22

21. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT

This Contract between each fund or series of a fund listed on
Appendix A which evidences its agreement to be bound hereby by executing a copy
of this Contract (each such fund is individually hereafter referred to as
the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",

WITNESSETH:

WITNESSETH THAT, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:

1. Employment of Custodian and Property to be Held by It

The Fund hereby employs the Custodian as the custodian of the assets
of the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to
be held outside the United States ("foreign securities") pursuant to the
provisions of the Fund's governing documents. The Fund agrees to deliver to
the Custodian all securities and cash of the Fund, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, beneficial
interest or partnership interest, as applicable, of the Fund, ("Shares") as
may be issued or sold from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by the Fund and not
delivered to the Custodian.

Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Fund(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund, and
provided that the Custodian shall have no more or less responsibility or
liability to the Fund on account of any actions or omissions of any
sub-custodian so employed than any such sub-custodian has to the Custodian. The
Custodian may employ as sub-custodian for the Fund's foreign securities the
foreign banking institutions and foreign securities depositories designated in
Schedule A hereto but only in accordance with the provisions of Article 3.

1
<PAGE> 5
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States

2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property to be held by it in
the United States including all domestic securities owned by such Fund
other than (a) securities which are maintained pursuant to Section 2.10
in a clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury
(and certain federal agencies collectively referred to herein as
"Securities System") and (b) commercial paper of an issuer for
which State Street Bank and Trust Company acts as issuing and paying
agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian (the "Direct Paper System")
pursuant to Section 2.11.

2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Fund held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System Account")
only upon receipt of Proper Instructions from the Fund, which may be
continuing instructions when deemed appropriate by the parties, and
only in the following cases:

1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;

2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;

3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;

4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;

5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;

6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee

2
<PAGE> 6
name of any agent appointed pursuant to Section 2.9 or into
the name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;

7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;

8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;

9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;

10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;

11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;

3
<PAGE> 7
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;

13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;

14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase
or redemption;

15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Trustees,
specifying the securities of the Fund to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such
securities shall be made; and

16) Upon termination of the Contract.

2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of
the Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee
name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to

4
<PAGE> 8
Article 1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Contract shall be in "street name" or
other good delivery form. If, however, the Fund directs the Custodian
to maintain securities in "street name", the Custodian shall utilize
its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.

2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Fund ,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds held by the Custodian for a
Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies
as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Fund be
approved by vote of a majority of the Board of Trustees of the Fund.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.

2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund, make federal funds available to such Fund
as of specified times agreed upon from time to time by the Fund and
the Custodian in the amount of checks received in payment for Shares
of such Fund which are deposited into the Fund's account.

2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder
to which each Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall credit such
income, as collected, to such Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when

5
<PAGE> 9
due on securities held hereunder. Income due each Fund on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund
in arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.

2.7 Payment of Fund Moneys. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out moneys of a Fund in the
following cases only:

1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee
of the Custodian referred to in Section 2.3 hereof or in proper
form for transfer; (b) in the case of a purchase effected
through a U.S. Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case of
a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.11; (d) in the case
of repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian along
with written evidence of the agreement by the Custodian to
repurchase such securities from the Fund or (e) for transfer to
a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to
receipt of a confirmation from a broker and/or the applicable
bank pursuant to Proper Instructions from the Fund as defined
in Article 5;

2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;

6
<PAGE> 10
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;

4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;

5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;

6) For payment of the amount of dividends received in respect of
securities sold short;

7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified copy
of a resolution of the Board of Trustees, specifying the amount
of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
purpose, and naming the person or persons to whom such payment
is to be made; and

8) Upon termination of this Contract.

2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.

2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.

7
<PAGE> 11
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Fund in a clearing agency
registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively
referred to herein as "U.S. Securities System" in accordance with
applicable Federal Reserve Board and Securities and Exchange Commission
rules and regulations, if any, and subject to the following provisions:

1) The Custodian may keep securities of the Fund in a U.S.
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the U.S.
Securities System which shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;

2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;

3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such payment and
transfer for the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon (i)
receipt of advice from the U.S. Securities System that payment
for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies of all advices from the U.S. Securities System of
transfers of securities for the account of the Fund shall
identify the Fund, be maintained for the Fund by the Custodian
and be provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund.

4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;

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<PAGE> 12
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;

6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to
the Fund resulting from use of the U.S. Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with
respect to any claim against the U.S. Securities System or any
other person which the Custodian may have as a consequence of
any such loss or damage if and to the extent that the Fund has
not been made whole for any such loss or damage.

2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Fund in
the Direct Paper System of the Custodian subject to the following
provisions:

1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund ;

2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held
as a fiduciary, custodian or otherwise for customers;

3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;

4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;

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<PAGE> 13
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the U.S. Securities System for the account of
the Fund;

6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.

2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of each such Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund , the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities
in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by
the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or
any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund , a certified copy of a
resolution of the Board of Trustees setting forth the purpose or
purposes of such segregated account and declaring such purposes
to be proper corporate purposes.

2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Fund held by it
and in connection with transfers of securities.

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<PAGE> 14
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.

2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased
or sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is
to take such action.

3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States

3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Trustees, the Custodian and the Fund may agree to amend Schedule A
hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.

3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in

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<PAGE> 15
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions. The Custodian
shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.

3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Funds shall be
maintained in a clearing agency which acts as a securities depository
or in a book-entry system for the central handling of securities
located outside of the United States (each a "Foreign Securities
System") only through arrangements implemented by the foreign banking
institutions serving as sub-custodians pursuant to the terms hereof
(Foreign Securities Systems and U.S. Securities Systems are
collectively referred to herein as the "Securities Systems"). Where
possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.

3.4 Holding Securities. The Custodian may hold cash, securities and other
non-cash property for all of its customers, including the Fund, with a
foreign sub-custodian in a single account that is identified as
belonging to the Custodian for the benefit of its customers, provided
however, that (1) the records of the Custodian with respect to cash,
securities and other non-cash property of the Fund which are
maintained in such account shall identify by book-entry the cash,
securities and other non-cash property belonging to the Fund and (ii)
the Custodian shall require that cash, securities and other non-cash
property so held by the foreign sub-custodian be held separately from
any assets of the Custodian, the foreign sub-custodian or of others.

3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that: (a) the assets of
each Fund will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
each Fund will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to each
applicable Fund; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund(s) held by the foreign
sub-custodian will be subject only to the instructions of the
Custodian or its agents.

3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.

3.7 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund(s) held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Fund(s) securities and other assets
and advices or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking

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<PAGE> 16
institution for the Custodian on behalf of each applicable Fund
indicating, as to securities acquired for a Fund, the identity of the
entity having physical possession of such securities.

3.8 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.8, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of each applicable Fund and delivery of
securities maintained for the account of each applicable Fund may be
effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer)
against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer. In addition, and
whether or not such practice is a customary established trading
practice in the relevany jurisdictions, the Custodian will, upon
Proper Instructions from the Fund, deliver cash to securities brokers
in foreign jurisdictions who will effect securities trades for the
Fund and cause the securities purchased to be delivered to the
applicable foreign sub-custodian at some later date. (c) Securities
maintained in the custody of a foreign sub-custodian may be maintained
in the name of such entity's nominee to the same extent as set forth
in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.

3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and each Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.

3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.13 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this

13
<PAGE> 17
paragraph 3.10, in delegating custody duties to State Street London
Ltd., the Custodian shall not be relieved of any responsibility to the
Fund for any loss due to such delegation, except such loss as may
result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.

3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Fund's assets to the extent necessary to obtain
reimbursement.

3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the
subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted
U.S. accounting principles).

3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund's assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of

14
<PAGE> 18
said Act. The appointment of any such branch as a sub-custodian shall
be governed by paragraph 1 of this Contract. (b) Cash held for each
Fund in the United Kingdom shall be maintained in an interest bearing
account established for the Fund with the Custodian's London branch,
which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.

3.14 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of
America or any state or political subdivision thereof. It shall be
the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.

4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund

The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Fund such payments as are received for Shares of that Fund issued
or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Fund and the Transfer Agent of
any receipt by it of payments for Shares of such Fund.

From such funds as may be available for the purpose but subject to the
limitations of the applicable Fund's governing documents and any applicable
votes of the Board of Trustees of the Fund pursuant thereto, the Custodian
shall, upon receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the Transfer
Agent a request for redemption or repurchase of their Shares. In connection
with the redemption or repurchase of Shares of a Fund, the Custodian is
authorized upon receipt of instructions from the Transfer Agent to wire funds
to or through a commercial bank designated by the redeeming shareholders. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares,
which checks have been furnished by the Fund to the holder of Shares, when
presented to the Custodian in accordance with such procedures and controls as
are mutually agreed upon from time to time between the Fund and the Custodian.

15
<PAGE> 19
5. Proper Instructions

Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of
Trustees of the Fund accompanied by a detailed description of procedures
approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian are satisfied
that such procedures afford adequate safeguards for the Funds' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three-party agreement which requires
a segregated asset account in accordance with Section 2.12.

6. Actions Permitted without Express Authority

The Custodian may in its discretion, without express authority from
the Fund:

1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund ;

2) surrender securities in temporary form for securities in
definitive form;

3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and

4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees of the Fund.

16
<PAGE> 20
7. Evidence of Authority

The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or
of any action by the Board of Trustees pursuant to the governing documents of
the Fund as described in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.

8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income

The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees of the Fund to keep
the books of account of each Fund and/or compute the net asset value per share
of the outstanding shares of each Fund or, if the Custodian and the Fund
execute the applicable Price Source Authorization (the "Authorization"), the
Custodian shall keep such books of account and/or compute such net asset value
per share pursuant to the terms of the Authorization and the attachments
thereto. If so directed, the Custodian shall also calculate daily the net
income of the Fund as described in the Fund's currently effective Prospectus
and shall advise the Fund and the Transfer Agent daily of the total amounts of
such net income and, if instructed in writing by an officer of the Fund to do
so, shall advise the Transfer Agent periodically of the division of such net
income among its various components. The calculations of the net asset value
per share and the daily income of each Fund shall be made at the time or times
described from time to time in the Fund's currently effective Prospectus
related to such Fund.

9. Records

The Custodian shall with respect to each Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder. All such records shall be the property of the Fund and
shall at all times during the regular business hours of the Custodian be open
for inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Fund and held by the Custodian and shall, when requested to

17
<PAGE> 21
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.

10. Opinion of Fund's Independent Accountant

The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.

11. Reports to Fund by Independent Public Accountants

The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would
be disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.

12. Compensation of Custodian

The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.

13. Responsibility of Custodian

So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in

18
<PAGE> 22
good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.

Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by: (i) events or circumstances
beyond the reasonable control of the Custodian or any sub-custodian or
Securities System or any agent or nominee of any of the foregoing, including,
without limitation, nationalization or expropriation, imposition of currency
controls or restrictions, the interruption, suspension or restriction of trading
on or the closure of any securities market, power or other mechanical or
technological failures or interruptions, computer viruses or communications
disruptions, acts of war or terrorism, riots, revolutions, work stoppages,
natural disasters or other similar events or acts; (ii) errors by the Fund or
its investment adviser in their instructions to the Custodian provided such
instructions have been in accordance with this Contract; (iii) the insolvency of
or acts or omissions by a Securities System; (iv) any delay or failure of any
broker, agent or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge of registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.

The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to
sub-custodians generally in this Contract.

If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.

If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the applicable Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of such Fund's assets to the extent necessary to obtain reimbursement.

14. Effective Period, Termination and Amendment

This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30)

19
<PAGE> 23
days after the date of such delivery or mailing; provided, however that the
Custodian shall not with respect to a Fund act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of the Fund has approved the initial use of a
particular Securities System by such Fund and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of the
Fund has reviewed any subsequent change regarding the use by such Fund of such
Securities System, as required in each case by Rule 17f-4 under the Investment
Company Act of 1940, as amended and that the Custodian shall not with respect to
a Fund act under Section 2.11 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board has
approved the initial use of the Direct Paper System by such Fund and the receipt
of an annual certificate of the Secretary or an Assistant Secretary that the
Board of the Fund has reviewed the use by such Fund of the Direct Paper System;
provided further, however, that the Fund shall not amend or terminate this
Contract in contravention of any applicable federal or state regulations, or any
provision of the Fund's governing documents, and further provided, that the Fund
on behalf of one or more of the Funds may at any time by action of its Board (i)
substitute another bank or trust company for the Custodian by giving notice as
described above to the Custodian, or (ii) immediately terminate this Contract in
the event of the appointment of a conservator or receiver for the Custodian by
the Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.

Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.

15. Successor Custodian

If a successor custodian for a Fund shall be appointed by the Board
of Trustees of such Fund, the Custodian shall, upon termination, deliver to
such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities, Funds and other properties of each
applicable Fund then held by it hereunder and shall transfer to an account of
the successor custodian all of the securities of each Fund held in a Securities
System.

If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of Trustees of the Fund, deliver at the office of the Custodian and transfer
such securities, funds and other properties in accordance with such vote.

In the event that no written order designating a successor custodian
or certified copy of a vote of the Board of Trustees shall have been delivered
to the Custodian on or before the date when such

20
<PAGE> 24
termination shall become effective, then the Custodian shall have the right to
deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act of 1940, doing business in Boston, Massachusetts, of its
own selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Fund and all instruments held by the Custodian relative thereto and
all other property held by it under this Contract on behalf of each applicable
Fund and to transfer to an account of such successor custodian all of the
securities of each such Fund held in any Securities System. Thereafter, such
bank or trust company shall be the successor of the Custodian under this
Contract.

In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.

16. Interpretive and Additional Provisions

In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the governing documents of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.

17. Additional Funds

In the event that Van Kampen American Capital Distributors , Inc.
establishes any funds in addition to the Funds listed on Appendix A with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such fund shall become a
Fund hereunder, subject to the delivery by the new Fund of resolutions
authorizing the appointment of the Custodian and such other supporting or
related documentation as the Custodian may request. All references herein to
the "Fund" are to each of the Funds listed on Appendix A individually, as if

21
<PAGE> 25
this Contract were between each such individual Fund and the Custodian. With
respect to any Fund which issues shares in separate classes or series, each
class or series of such Fund shall be treated as a separate Fund hereunder.

18. Massachusetts Law to Apply

This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.

19. Prior Contracts

This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Funds and the Custodian relating to the custody of
the Fund's assets.

20. Reproduction of Documents

This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties
hereto all/each agree that any such reproduction shall be admissible in evidence
as the original itself in any judicial or administrative proceeding, whether or
not the original is in existence and whether or not such reproduction was made
by a party in the regular course of business, and that any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.

21. Shareholder Communications

Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Fund as
consenting to disclosure of this information for all securities owned by the
Fund or any funds or accounts established by the Fund. For the Fund's
protection, the Rule prohibits the requesting company from using the Fund's name
and address for any purpose other than corporate communications. Please
indicate below whether the Fund consent or object by checking one of the
alternatives below.

YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions of each Fund listed on
Exhibit A.

NO [X] The Custodian is not authorized to release the Fund's
name, address, and share positions of each Fund listed
on Exhibit A.

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<PAGE> 26
22. Limitation of Liability.

The execution of this Contract has been authorized by each Fund's
Board of Trustees. This Contract is executed on behalf of each Fund or the
trustees of such Fund as trustees and not individually and the obligations of
the Fund under this Contract are not binding upon any of the Fund's trustees,
officers or shareholders individually but are binding only upon the assets and
property of the Fund.

IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 1st day of August, 1997.

ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A

/s/ Nicholas Dalmaso By: /s/ Ronald A. Nyberg
- ------------------------ -----------------------------------
Ronald A. Nyberg, Vice President
and Secretary

ATTEST STATE STREET BANK AND TRUST COMPANY

/s/ Francine Hayes By: [ILLEGIBLE]
- ------------------------ -----------------------------------
Executive Vice President

23
<PAGE> 27
APPENDIX A
FUND NAMES

VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE FUND
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
VAN KAMPEN AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME FUND
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Asset Allocation Portfolio
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Global Equity Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Morgan Stanley Real Estate Securities Portfolio
VAN KAMPEN AMERICAN CAPITAL LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN AMERICAN CAPITAL PACE FUND
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
VAN KAMPEN AMERICAN CAPITAL SMALL CAPITALIZATION FUND
VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
Van Kampen American Capital High Yield Municipal Fund
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
Van Kampen American Capital U.S. Government Fund
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Van Kampen American Capital Insured Tax Free Income Fund
Van Kampen American Capital Tax Free High Income Fund
Van Kampen American Capital California Insured Tax Free Fund
Van Kampen American Capital Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal
Income Fund
Van Kampen American Capital Florida Insured Tax Free
Income Fund
Van Kampen American Capital New Jersey Tax Free Income Fund
Van Kampen American Capital New York Tax Free Income Fund
VAN KAMPEN AMERICAN CAPITAL TRUST
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
Van Kampen American Capital Utility Fund
Van Kampen American Capital Value Fund
Van Kampen American Capital Great American Companies Fund
Van Kampen American Capital Growth Fund
Van Kampen American Capital Prospector Fund
Van Kampen American Capital Aggressive Growth Fund
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND

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<PAGE> 28
THE EXPLORER INSTITUTIONAL TRUST
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund
VAN KAMPEN AMERICAN CAPITAL NAVIGATOR FUNDS
Emerging Markets Equity Portfolio
Emerging Markets Fixed Income Portfolio
U.S. QUALITY FUNDS
VAN KAMPEN AMERICAN CAPITAL EXCHANGE FUND
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II
VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL TRUST FOR PENNSYLVANIA MUNICIPALS
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST
VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II
VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST
VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II
VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST
VAN KAMPEN AMERICAN CAPITAL BOND FUND
VAN KAMPEN AMERICAN CAPITAL CONVERTIBLE SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL INCOME TRUST

<PAGE> 1
EXHIBIT (j(2))

TRANSFER AGENCY AND SERVICE AGREEMENT

AGREEMENT made as of the 1st day of February, 1997 by and between VAN
KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST, a Massachusetts business,
having its principal office and place of business at Oakbrook Terrace, Illinois
(the "Fund"), and ACCESS INVESTOR SERVICES, INC., a Delaware corporation,
having its principal office at Houston, Texas, and its principal place of
business at Kansas City, Missouri ("ACCESS").

R E C I T A L:

WHEREAS, the Fund desires to appoint ACCESS as its transfer agent,
dividend disbursing agent and shareholder service agent and ACCESS desires to
accept such appointments;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows: ARTICLE 1. TERMS OF
APPOINTMENT; DUTIES OF ACCESS.

ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF ACCESS.

1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints ACCESS as its transfer agent, dividend
disbursing agent and shareholder service agent.
1.02 ACCESS hereby accepts such employment and appointments and agrees
that on and after the effective date of this Agreement it will act as the
transfer agent, dividend disbursing agent and shareholder service agent for the
Fund on the terms and conditions set forth herein.
1.03 ACCESS agrees that its duties and obligations hereunder will be
performed in a competent, efficient and workmanlike manner with due diligence
in accordance with reasonable industry practice, and that the necessary
facilities, equipment and personnel for such performance will be provided.
1.04 ACCESS agrees to provide and maintain quantitative performance
objectives, including maximum target turn-around times and maximum target error
rates, for the various services provided hereunder. ACCESS also agrees to
provide a reporting system designed to provide the Board of Trustees of the
Fund (the "Board") on a quarterly basis with quantitative data comparing actual
performance for the period with the performance objectives. The foregoing
procedures are designed to provide a basis for continuing monitoring by the
Board of the quality of services rendered hereunder.

ARTICLE 2. FEES AND EXPENSES.

<PAGE> 2

2.01 For the services to be performed by ACCESS pursuant to this
Agreement, the Fund agrees to pay ACCESS the fee provided in the fee schedules
agreed upon from time to time by the Fund and ACCESS.

2.02 In addition to the amounts paid under section 2.01 above, the Fund
agrees to reimburse ACCESS promptly for its reasonable out-of-pocket expenses
or advances paid on its behalf by ACCESS in connection with its performance
under this Agreement for postage, freight, envelopes, checks, drafts,
continuous forms, reports and statements, telephone, telegraph, costs of
outside mailing firms, necessary outside record storage costs, media for
storage of records (e.g., microfilm, microfiche and computer tapes) and
printing costs incurred due to special requirements of the Fund. In addition,
any other special out-of-pocket expenses paid by ACCESS at the specific request
of the Fund will be promptly reimbursed by the Fund. Postage for mailings of
dividends, proxies, Fund reports and other mailings to all shareholder accounts
shall be advanced to ACCESS by the Fund three business days prior to the
mailing date of such materials. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF
ACCESS.

ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ACCESS.

ACCESS represents and warrants to the Fund that: 3.01 It is a
corporation duly organized and existing and in good standing under the laws of
the State of Delaware.
3.02 It is duly qualified to carry on its business in the states of
Texas and Missouri.
3.03 It is empowered under applicable laws and by its charter and
bylaws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to perform its
duties and obligations hereunder.
3.06 It will maintain a system regarding "as of" transactions as
follows: (a) Each "as of" transaction effected at a price other than that in
effect on the day of processing for which an estimate has not been given to the
Fund and which is necessitated by ACCESS' error, or delay for which ACCESS is
responsible or which could have been avoided through the exercise of reasonable
care, will be identified, and the net effect of such transactions determined,
on a daily basis for the Fund.

<PAGE> 3

(b) The cumulative net effect of the transactions included in
paragraph (a) above will be determined each day throughout each month.
If, on any day during the month, the cumulative net effect upon the Fund
is negative and exceeds an amount equivalent to 1/2 of 1 cent per share
of the Fund, ACCESS shall promptly make a payment to the Fund (in cash or
through use of a credit as described in paragraph (c) below) in such
amount as necessary to reduce the negative cumulative net effect to less
than 1/2 of 1 cent per share of the Fund. If on the last business day of
the month the cumulative net effect (adjusted by the amount of any
payments pursuant to the preceding sentence) upon the Fund is negative,
the Fund shall be entitled to a reduction in the monthly transfer agency
fee next payable by an equivalent amount, except as provided in paragraph
(c) below. If on the last business day of the month the cumulative net
effect (similarly adjusted) upon the Fund is positive, ACCESS shall be
entitled to recover certain past payments and reductions in fees, and to
a credit against all future payments and fee reductions made under this
paragraph to the Fund, as described in paragraph (c) below.
(c) At the end of each month, any positive cumulative net effect
upon the Fund shall be deemed to be a credit to ACCESS which shall first
be applied to recover any payments and fee reductions made by ACCESS to
the Fund under paragraph (b) above during the calendar year by increasing
the amount of the monthly transfer agency fee next payable in an amount
equal to prior payments and fee reductions made during such year, but not
exceeding the sum of that month's credit and credits arising in prior
months during such year to the extent such prior credits have not
previously been utilized as contemplated by this paragraph (c). Any
portion of a credit to ACCESS not so used shall remain as a credit to be
used as payment against the amount of any future negative cumulative net
effects that would otherwise require a payment or fee reduction to the
Fund pursuant to paragraph (b) above.

ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE FUND.

The Fund hereby represents and warrants that:
4.01 It is duly organized and existing and in good standing under the laws
of the commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and regulations and by its
Declaration of Trust and by-laws to enter into and perform this Agreement.

<PAGE> 4

4.03 All requisite proceedings have been taken by its Board to authorize
it to enter into and perform this Agreement.
4.04 It is an closed-end, management investment company registered under
the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.

ARTICLE 5. INDEMNIFICATION.

5.01 ACCESS shall not be responsible for and the Fund shall indemnify and
hold ACCESS harmless from and against any and all losses, damages, costs,
charges, reasonable counsel fees, payments, expenses and liabilities arising
out of or attributable to:
(a) All actions of ACCESS required to be taken by ACCESS for the
benefit of the Fund pursuant to this Agreement, provided ACCESS has acted
in good faith with due diligence and without negligence or willful
misconduct.
(b) The reasonable reliance by ACCESS on, or reasonable use by
ACCESS of, information, records and documents which have been prepared or
maintained by or on behalf of the Fund or have been furnished to ACCESS
by or on behalf of the Fund.
(c) The reasonable reliance by ACCESS on, or the carrying out by
ACCESS of, any instructions or requests of the Fund.
(d) The offer or sale of the Fund's shares in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state or in violation of any stop
order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such shares in such state unless
such violation results from any failure by ACCESS to comply with written
instructions of the Fund that no offers or sales of the Fund's shares be
made in general or to the residents of a particular state.
(e) The Fund's refusal or failure to comply with the terms of this
Agreement, or the Fund's lack of good faith, negligence or willful
misconduct or the breach of any representation or warranty of the Fund
hereunder.

<PAGE> 5

5.02 ACCESS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, reasonable counsel fees, payments,
expenses and liability arising out of or attributable to ACCESS' refusal or
failure to comply with the terms of this Agreement, or ACCESS' lack of good
faith, negligence or willful misconduct, or the breach of any representation or
warranty of ACCESS hereunder.
5.03 At any time ACCESS may apply to any authorized officer of the Fund
for instructions, and may consult with the Fund's legal counsel, at the expense
of the Fund, with respect to any matter arising in connection with the services
to be performed by ACCESS under this Agreement, and ACCESS shall not be liable
and shall be indemnified by the Fund for any action taken or omitted by it in
good faith in reasonable reliance upon such instructions or upon the opinion of
such counsel. ACCESS shall be protected and indemnified in acting upon any
paper or document reasonably believed by ACCESS to be genuine and to have been
signed by the proper person or persons and shall not be held to have notice of
any change of authority of any person, until receipt of written notice thereof
from the Fund. ACCESS shall also be protected and indemnified in recognizing
stock certificates which ACCESS reasonably believes to bear the proper manual
or facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5.04 In the event any party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
5.05 In no event and under no circumstances shall any party to this
Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which one party may be
required to indemnify another, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim. The party who
may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in
any case in which the other party may be required to indemnify it except with
the other party's prior written consent.

<PAGE> 6

ARTICLE 6. COVENANTS OF THE FUND AND ACCESS.

6.01 The Fund shall promptly furnish to ACCESS the following:
(a) Certified copies of the resolution of its Board authorizing the
appointment of ACCESS and the execution and delivery of this Agreement.
(b) Certified copies of its Declaration of Trust and by-laws and all
amendments thereto.
6.02 ACCESS hereby agrees to maintain facilities and procedures reasonably
acceptable to the Fund for safekeeping of share certificates, check forms and
facsimile signature imprinting devices, if any; and for the preparation or use,
and for keeping account of, such certificates, forms and devices.
6.03 ACCESS shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable; provided, however,
that all accounts, books and other records of the Fund (hereinafter referred to
as "Fund Records") prepared or maintained by ACCESS hereunder shall be
maintained and kept current in compliance with Section 31 of the Investment
Company Act of 1940 and the Rules thereunder (such Section and Rules being
hereinafter referred to as the "1940 Act Requirements"). To the extent
required by the 1940 Act Requirements, ACCESS agrees that all Fund Records
prepared or maintained by ACCESS hereunder are the property of the Fund and
shall be preserved and made available in accordance with the 1940 Act
Requirements, and shall be surrendered promptly to the Fund on its request.
ACCESS agrees at such reasonable times as may be requested by the Board and at
least quarterly to provide (i) written confirmation to the Board that all Fund
Records are maintained and kept current in accordance with the 1940 Act
Requirements, and (ii) such other reports regarding its performance hereunder
as may be reasonably requested by the Board.
6.04 ACCESS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential, and shall not be voluntarily disclosed to any other
person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of any of the
Fund Records, ACCESS will endeavor to notify the Fund and to secure
instructions from an authorized officer of the Fund as to such inspection.
ACCESS reserves the right, however, to exhibit such Fund Records to any person
whenever it is advised by its counsel that it may be held liable for the
failure to exhibit the Fund records to such person.

ARTICLE 7. TERM AND TERMINATION OF AGREEMENT.

<PAGE> 7

7.01 The initial term of this Agreement shall expire June 30, 1998, and
thereafter this Agreement shall automatically be renewed for successive one
year periods to begin on July 1 of each year unless either party provides
notice to the other party at least 30 days in advance of that date that this
Agreement is not to be renewed.
7.02 Notwithstanding the foregoing, either party may terminate this
Agreement for good and reasonable cause at any time by giving written notice to
the other party at least 120 days prior to the date on which such termination
is to be effective.
7.03 Any unpaid fees or reimbursable expenses payable to ACCESS at the
termination date of this Agreement shall be due on that termination date.
ACCESS agrees to use its best efforts to cooperate with the Fund and the
successor transfer agent or agents in accomplishing an orderly transition.

ARTICLE 8. MISCELLANEOUS.

8.01 Except as provided in section 8.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by any party without the
written consent of ACCESS or the Fund, as the case may be; provided, however,
that no consent shall be required for any merger of the Fund with, or any sale
of all or substantially all the assets of the Fund to, another investment
company.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
8.03 ACCESS may, without further consent on the part of the Fund,
subcontract with DST, Inc., a Missouri corporation, or any other qualified
servicer, for the performance of data processing activities; provided, however,
that ACCESS shall be as fully responsible to the Fund for the acts and
omissions of DST, Inc. or other qualified servicer as it is for its own acts
and omissions.
8.04 ACCESS may, without further consent on the part of the Fund, provide
services to its affiliated companies. Such services may be provided at cost.
8.05 This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof, and supersedes any prior
agreement with respect thereto, whether oral or written, and this Agreement may
not be modified except by written instrument executed by the affected parties.

<PAGE> 8

8.06 The execution of this Agreement has been authorized by the Fund's
Trustees. This Plan is executed+ on behalf of the Fund or the Trustees of the
Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon any of the Trustees, officers or shareholders of
the Fund individually but are binding only upon the assets and property of the
Fund. A Certificate of Trust in respect of the Fund is on file with
Massachusetts' Secretary of State's Office.
8.07 In the event of a change in the business or regulatory environment
affecting all or any portion of this Agreement, the parties hereto agree to
renegotiate such affected portions in good faith.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf and through their duly authorized
officers, as of the date first above written.

VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

BY: /s/ Scott Martin
--------------------------
Assistant Secretary

ATTEST:

/s/ Huey Falgout
- -------------------------------
Assistant Secretary

ACCESS INVESTOR SERVICES, INC.

BY: /s/ Paul Wolkenberg
------------------------------
President and Chief Executive
Officer
ATTEST:

/s/ Huey Falgout
- ------------------------------
Assistant Secretary

<PAGE> 9

SCHEDULE "A"

PRICING SCHEDULE

PRICE PER ACCOUNT PLUS OUT OF POCKETS

$21.34

<PAGE> 1

EXHIBIT (k)(1))

ADMINISTRATION AGREEMENT

Agreement made as of May 31, 1997 , between VAN KAMPEN AMERICAN
CAPITAL PRIME RATE INCOME TRUST, a Massachusetts business trust (the "Fund"),
and VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Administrator").

WHEREAS, the Fund intends to operate as a closed-end management investment
company, and is so registered under the Investment Company act of 1940, as
amended ( "1940 Act"); and

WHEREAS, the Fund wishes to retain the Administrator to provide certain
administrative services to the Fund, under the terms and conditions stated
below, and the Administrator is willing to provide such services for the
compensation set forth below;

NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:

1. Appointment. The Fund hereby appoints the Administrator to administer
the Fund, and the Administrator accepts such appointment and agrees that it
will furnish the services set forth in paragraph 2 below.

2. Services and Duties of the Administrator. Subject to the supervision
of the Fund's Board of Trustees (the "Board"), the Administrator will:

(a) Monitor the provisions of the loan agreements and
any agreements with respect to participations and assignments
and be responsible for recordkeeping with respect to senior
loans in the Fund's portfolio;

(b) Prepare all reports required to be sent to Fund
shareholders, and arrange for the printing and dissemination
of such reports to shareholders;

(c) Arrange for the dissemination to shareholders of
the Fund's proxy materials and oversee the tabulation of
proxies by the Fund's transfer agent;

(d) Negotiate the terms and conditions under which
custodian services will be provided to the Fund and the fees
to be paid by the Fund to its custodian (which may or may not
be an affiliate of the Fund's investment adviser), in
connection therewith;

(e) Negotiate the terms and conditions under which
dividend disbursing services will be provided to the Fund, and
the fees to be paid by the Fund in connection therewith;
review the provision of dividend disbursing services to the
Fund;

(f) Determine the amounts available for distribution
as dividends and distributions to be paid by the Fund to its
Shareholders; prepare and arrange for the printing of dividend
notices to Shareholders; and provide the Fund's dividend
disbursing agent and custodian with such information as is
required for such parties to effect the payment of dividends
and distributions and to implement the Fund's dividend
reinvestment plan;

(g) Make such reports and recommendations to the
Board as the Board reasonably requests or deems appropriate;
and

(h) Provide shareholder services to holders or
potential holders of the Fund's securities including but not
limited to responding to shareholder requests for information.

<PAGE> 2

3. Public Inquiries. The Fund and the Administrator agree that the
Administrator will not be responsible for replying to questions or requests for
information concerning the Fund from shareholders, brokers or the public. The
Fund will inform the Administrator of the party or parties to whom any such
questions or requests should be directed, and the Administrator will refer such
questions and requests to such party or parties.

4. Compliance with the Fund's Governing Documents and Applicable Law. In
all matters relating to the performance of this Agreement, the Administrator
will act in conformity with the Declaration of Trust, By-Laws and registration
statement of the Fund and with the directions of the Board and Fund executive
officers and will conform to and comply with the requirements of the 1940 Act
and all other applicable federal or state laws and regulations.

5. Services Not Exclusive. The Administrator's services hereunder are not
deemed to be exclusive, and the Administrator is free to render administrative
or other services to other funds or clients so long as the Administrator's
services under this Agreement are not impaired thereby.

6. Compensation. For the services provided and expenses assumed by the
Administrator under this Agreement, the Fund will pay the Administrator a fee,
accrued daily and paid monthly, at the annualized rate of .25% of the Fund's
average daily net assets.

7. Limitation of Liability of the Administrator. The Administrator will
not be liable for any error of judgement or mistake of law or for any loss
suffered by the Fund or its shareholders in connection with the performance of
its duties under this Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or from reckless disregard by it of its duties under this Agreement.

8. Limitation of Liability of the Trustees and Shareholders of the Fund.
Pursuant to the provisions of Article V, Section 5.5 of the Declaration of
Trust as amended or restated as of the date hereof, this Agreement is entered
into by the Board not individually, but as trustees under such Declaration of
Trust and the obligations of the Fund hereunder are not binding upon any such
trustees or Shareholders of the Fund, but bind only the trust estate.

9. Duration and Termination. This Agreement will become effective upon
the date hereabove written and shall continue in effect thereafter until
terminated without penalty by the Administrator or the Fund upon 30 days'
written notice to the other and shall automatically terminate in the event of
its assignment as that term is defined in the 1940 Act.

10. Amendment of this Agreement. No provision of this Agreement may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.

11. Governing Law. This Agreement shall be construed in accordance with
the laws of the Commonwealth of Massachusetts and the 1940 Act. To the extent
that the applicable laws of the Commonwealth of Massachusetts conflict with the
applicable provisions of the 1940 Act, the latter shall control.

12. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.

2
<PAGE> 3

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.

Attest: VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST

/s/ Weston B. Wetherell By: /s/ Edward C. Wood, III
- ------------------------------ ------------------------------------------
Weston B. Wetherell Edward C. Wood, III, Vice President and
Assistant Secretary Chief Financial Officer

Attest: VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.

/s/ Weston B. Wetherell By: /s/ William R. Molinari
- ------------------------------ ------------------------------------------
Weston B. Wetherell William R. Molinari, President
Assistant Secretary

<PAGE> 1
EXHIBIT (k)(2))

AMENDED AND RESTATED
LEGAL SERVICES AGREEMENT

THIS AGREEMENT, dated as of May 31, 1997, by and between the parties
as set forth in Schedule 1, attached hereto and incorporated by reference
(designated collectively hereafter as the "Funds"), and VAN KAMPEN AMERICAN
CAPITAL, INC., a Delaware corporation ("Van Kampen").

W I T N E S S E T H:

WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and

WHEREAS, Van Kampen has the capability of providing certain legal
services to the Funds; and

WHEREAS, each Fund desires to utilize Van Kampen in the provision of
such legal services; and

WHEREAS, Van Kampen intends to increase its staff in order to
accommodate the provision of all such services.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties hereto as
follows:

1. Appointment of Van Kampen. As agent, Van Kampen shall provide each of
the Funds the legal services (the "Legal Services") as set forth in Paragraph 2
of this Agreement. Van Kampen accepts such appointments and agrees to furnish
the Legal Services in return for the compensation provided in Paragraph 3 of
this Agreement.

2. Legal Services to be Provided. Van Kampen will provide to the Funds
the following legal services, including without limitation: accurate
maintenance of the Funds' Corporate Minute books and records, preparation and
oversight of each 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. Van Kampen shall hire persons (collectively the "Legal Services Group")
as needed to provide such Legal Services and in such numbers as may be agreed
from time to time.

3. Expenses and Reimbursement. The Legal Services expenses (the "Legal
Services Expenses") for which Van Kampen may be reimbursed are salary and
salary related benefits, including but not limited to bonuses, group insurance
and other regular

<PAGE> 2

wages paid to the personnel of the Legal Services Group, as well as overhead
and expenses related to office space and necessary equipment. The Legal
Services Expenses will be paid by Van Kampen and reimbursed by the Funds. Van
Kampen will tender to each Fund a monthly invoice as of the last business day
of each month which shall certify the total Legal Service Expenses expended.
Except as provided herein, Van Kampen will receive no other compensation in
connection with Legal Services rendered in accordance with this Agreement, and
Van Kampen will be responsible for all other expenses relating to the providing
of Legal Services.

4. Payment for Legal Services Expense Among the Funds. One half (50%) of
the Legal Services Expenses incurred under the Agreement shall be attributable
equally to each respective Fund and all other funds to whom Van Kampen provides
Legal Services, including all other Funds for which Van Kampen serves as
investment adviser and distributor and the Govett Funds (the Non-Participating
Funds"). Van Kampen shall assume the costs of Legal Services for the
Non-Participating Funds for which reimbursement is not received. The remaining
one half (50%) of the Legal Services Expenses shall be in allocated (a) in the
event services are attributable to specific funds (including the
Non-Participating Funds) based on such specific time allocations; and (b) in
the event services are attributable only to types of funds (i.e. closed-end and
open-end funds), the relative amount of time spent on each type of fund and
then further allocated between funds of that type on the basis of relative net
assets at the end of the period.

5. Maintenance of Records. All records maintained by Van Kampen in
connection with the performance of its duties under this Agreement will remain
the property of each respective Fund and will be preserved by Van Kampen for
the periods prescribed in Section 31 of the 1940 Act and the rules thereunder
or such other applicable rules that may be adopted from time to time under the
Act. In the event of termination of the Agreement, such records will be
promptly delivered to the respective Funds. Such records may be inspected by
the respective Funds at reasonable times.

6. Liability of Van Kampen. Van Kampen shall not be liable to any Fund
for any action taken or thing done by it or its agents or contractors on behalf
of the Fund in carrying out the terms and provisions of the Agreement if done
in good faith and without negligence or misconduct on the part of Van Kampen,
its agents or contractors.

7. Indemnification By Funds. Each Fund will indemnify and hold Van Kampen
harmless from all loss, cost, damage and expense, including reasonable expenses
for legal counsel, incurred by Van Kampen resulting from (a) any claim, demand,
action or suit in connection with Van Kampen's acceptance of this Agreement;
(b) an action or omission by Van Kampen in the performance of its duties
hereunder; (c) Van Kampen's acting upon instructions believed by it to have
been executed by a duly authorized officer of the Fund; or (d) Van Kampen's
acting upon information provided by the Fund in form and under policies agreed
to by Van Kampen and the Fund. Van Kampen shall not be entitled to such
indemnification in respect of action or

<PAGE> 3

omissions constituting negligence or willful misconduct of Van Kampen or its
agents or contractors. Prior to admitting any claim against it which may be
subject to this indemnification, Van Kampen shall give the Fund reasonable
opportunity to defend against said claim on its own name or in the name of Van
Kampen.

8. Indemnification By Van Kampen. Van Kampen will indemnify and hold
harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Van Kampen's failure to comply
with the terms of this Agreement or which arises out of the negligence or
willful misconduct of Van Kampen or its agents or contractors; provided, that
such negligence or misconduct is not attributable to the Funds, their agents or
contractors. Prior to admitting any claim against it which may be subject to
this indemnification, the Fund shall give Van Kampen reasonable opportunity to
defend against said claim in its own name or in the name of such Fund.

9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as necessary to effectuate the purposes hereof.

10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers, or shareholders of both the Funds and Van Kampen
(including Van Kampen's affiliates), and that the existence of any such dual
interest shall not affect the validity hereof or of any transactions hereunder
except as otherwise provided by a specific provision of applicable law.

11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May 31, 1997,
and thereafter from year to year if such continuation is specifically approved
at least annually by the Board of Trustees of each Fund, including a majority
of the independent Trustees of each Fund. The Agreement may be modified or
amended from time to time by mutual agreement between the and shall likewise
reimburse Van Kampen for its costs, expenses and disbursements payable under
this Agreement to such date. This Agreement may be amended in the future to
include as additional parties to the Agreement other investment companies for
which Van Kampen, any subsidiary or affiliate serves as investment advisor or
distributor.

12. Assignment. Any interest of Van Kampen under this Agreement shall not
be assigned or transferred, either voluntarily or involuntarily, by operation
of law or otherwise, without the prior written consent of the Fund. This
Agreement shall automatically and immediately terminate in the event of its
assignment without the prior written consent of the Fund.

13. Notice. Any notice under this agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until

<PAGE> 4

further notice to the other parties, it is agreed that for this purpose the
address of each Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attention: President and the address of Van Kampen. for this purpose is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel.

14. Personal Liability. As provided for in the Declaration of Trust of the
various Funds, under which the Funds are organized as unincorporated trusts
under the laws of the State of Delaware or Pennsylvania, as the case may be,
the shareholders, trustees, officers, employees and other agents of the Fund
shall not personally be bound by or liable for the matters set forth hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.

15. Interpretative Provisions. In connection with the operation of this
agreement, Van Kampen and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their opinion be consistent with the general tenor of this Agreement.

16. State Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Illinois.

17. Captions. The captions in the Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction effect.

<PAGE> 5

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.

ALL OF THE PARTIES SET FORTH IN SCHEDULE 1
ATTACHED HERETO

By: /s/ Ronald A. Nyberg
-----------------------------------
Ronald A. Nyberg
Vice President & Secretary

VAN KAMPEN AMERICAN CAPITAL, INC.

By: /s/ Dennis J. McDonnell
-----------------------------------
Dennis J. McDonnell
Executive Vice President

<PAGE> 6

SCHEDULE 1

1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST, on behalf of its
series, Van Kampen American Capital U.S. Government Fund

2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, on behalf of its series,
Van Kampen American Capital Insured Tax Free Income Fund, Van Kampen
American Capital Tax Free High Income Fund, Van Kampen American
Capital California Insured Tax Free Fund, Van Kampen American Capital
Municipal Income Fund, Van Kampen American Capital Intermediate Term
Municipal Income Fund, Van Kampen American Capital New York Tax Free
Income Fund, Van Kampen American Capital New Jersey Tax Free Income
Fund, Van Kampen American Capital Florida Insured Tax Free Income
Fund, Van Kampen American Capital California Tax Free Income Fund, Van
Kampen American Capital Michigan Tax Free Income Fund, Van Kampen
American Capital Missouri Tax Free Income Fund and Van Kampen American
Capital Ohio Tax Free Income Fund

3. VAN KAMPEN AMERICAN CAPITAL TRUST, on behalf of its series, Van Kampen
American Capital High Yield Fund, Van Kampen American Capital
Short-Term Global Income Fund and Van Kampen American Capital
Strategic Income Fund

4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, on behalf of its series, Van
Kampen American Capital Utility Fund, Van Kampen American Capital
Value Fund, Van Kampen American Capital Growth Fund, Van Kampen
American Capital Great American Companies Fund, Van Kampen American
Capital Prospector Fund and Van Kampen American Capital Aggressive
Growth Fund

5. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND

6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND

7. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND

8. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME TRUST

9. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA MUNICIPAL TRUST

10. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST

11. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME TRUST II

12. VAN KAMPEN AMERICAN CAPITAL PRIME RATE INCOME TRUST

13. VAN KAMPEN AMERICAN CAPITAL INVESTMENT GRADE MUNICIPAL TRUST

14. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL TRUST

15. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA QUALITY MUNICIPAL TRUST

16. VAN KAMPEN AMERICAN CAPITAL FLORIDA QUALITY MUNICIPAL TRUST

17. VAN KAMPEN AMERICAN CAPITAL NEW YORK QUALITY MUNICIPAL TRUST

18. VAN KAMPEN AMERICAN CAPITAL OHIO QUALITY MUNICIPAL TRUST

19. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA QUALITY MUNICIPAL TRUST

<PAGE> 7

20. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INSURED MUNICIPALS

21. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE MUNICIPALS

22. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE CALIFORNIA
MUNICIPALS

23. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE FLORIDA
MUNICIPALS

24. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW JERSEY
MUNICIPALS

25. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE NEW YORK
MUNICIPALS

26. VAN KAMPEN AMERICAN CAPITAL TRUST FOR INVESTMENT GRADE PENNSYLVANIA
MUNICIPALS

27. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST

28. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST

29. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME
TRUST

30. VAN KAMPEN AMERICAN CAPITAL STRATEGIC SECTOR MUNICIPAL TRUST

31. VAN KAMPEN AMERICAN CAPITAL VALUE MUNICIPAL INCOME TRUST

32. VAN KAMPEN AMERICAN CAPITAL CALIFORNIA VALUE MUNICIPAL INCOME TRUST

33. VAN KAMPEN AMERICAN CAPITAL MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST

34. VAN KAMPEN AMERICAN CAPITAL NEW JERSEY VALUE MUNICIPAL INCOME TRUST

35. VAN KAMPEN AMERICAN CAPITAL NEW YORK VALUE MUNICIPAL INCOME TRUST

36. VAN KAMPEN AMERICAN CAPITAL OHIO VALUE MUNICIPAL INCOME TRUST

37. VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST

38. VAN KAMPEN AMERICAN CAPITAL MUNICIPAL OPPORTUNITY TRUST II

39. VAN KAMPEN AMERICAN CAPITAL FLORIDA MUNICIPAL OPPORTUNITY TRUST

40. VAN KAMPEN AMERICAN CAPITAL ADVANTAGE MUNICIPAL INCOME TRUST II

41. VAN KAMPEN AMERICAN CAPITAL SELECT SECTOR MUNICIPAL TRUST

42. THE EXPLORER INSTITUTIONAL TRUST, on behalf of its sub-trusts,
Explorer Institutional Active Core Fund and Explorer Institutional
Limited Duration Fund

<PAGE> 1
EXHIBIT (n)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders
Van Kampen American Capital Prime Rate Income Trust:

We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" and "Experts"
in the Prospectus.

Chicago, Illinois

November 12, 1997 /s/ KPMG Peat Marwick LLP

<PAGE> 1
Exhibit (24)
POWER OF ATTORNEY

The undersigned, being officers and trustees of each of the Van Kampen
American Capital Closed End Trusts listed on the attached Exhibit A, each being
a Massachusetts business trust (individually a "Trust"), do hereby, in the
capacities shown below, individually appoint Ronald A. Nyberg and Dennis J.
McDonnell, of Oakbrook Terrace, Illinois, as the agents and attorneys-in-fact
with full power of substitution and resubstitution, for each of the
undersigned, to execute and deliver, for and on behalf of the undersigned, a
Certificate of Trustees and any corresponding documents with regard to the name
changes of each respective Trust and all amendments thereto, upon the advice of
counsel, filed by each Trust with the Commonwealth of Massachusetts and any
other regulating entity pursuant to the provisions of the Securities Act of
1933 and the Investment Company Act of 1940.

This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute
one instrument.

Dated: May 23, 1997

Signature Title
--------- -----

/s/ Dennis J. McDonnell Chairman and Trustee
--------------------------------
Dennis J. McDonnell

/s/ David C. Arch Trustee
--------------------------------
David C. Arch

/s/ Rod Dammeyer Trustee
--------------------------------
Rod Dammeyer

/s/ Theodore A. Myers Trustee
--------------------------------
Theodore A. Myers

/s/ Hugo F. Sonnenschein Trustee
--------------------------------
Hugo F. Sonnenschein

/s/ Howard J Kerr Trustee
--------------------------------
Howard J Kerr

/s/ Wayne W. Whalen Trustee
--------------------------------
Wayne W. Whalen

/s/ Edward C. Wood III Senior Vice President and
------------------------------------------ Chief Financial Officer
Edward C. Wood III

<PAGE> 2

EXHIBIT A

Van Kampen American Capital Municipal Income Trust
Van Kampen American Capital California Municipal Trust
Van Kampen American Capital Intermediate Term High Income Trust
Van Kampen American Capital Limited Term High Income Trust
Van Kampen American Capital Investment Grade Municipal Trust
Van Kampen American Capital Municipal Trust
Van Kampen American Capital California Quality Municipal Trust
Van Kampen American Capital Florida Quality Municipal Trust
Van Kampen American Capital New York Quality Municipal Trust
Van Kampen American Capital Ohio Quality Municipal Trust
Van Kampen American Capital Pennsylvania Quality Municipal Trust
Van Kampen American Capital Trust For Insured Municipals
Van Kampen American Capital Trust For Investment Grade Municipals
Van Kampen American Capital Trust For Investment Grade California Municipals
Van Kampen American Capital Trust For Investment Grade Florida Municipals
Van Kampen American Capital Trust For Investment Grade New Jersey Municipals
Van Kampen American Capital Trust For Investment Grade New York Municipals
Van Kampen American Capital Trust For Investment Grade Pennsylvania Municipals
Van Kampen American Capital Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust
Van Kampen American Capital Advantage Pennsylvania Municipal Income Trust
Van Kampen American Capital Strategic Sector Municipal Trust
Van Kampen American Capital Value Municipal Income Trust
Van Kampen American Capital California Value Municipal Income Trust
Van Kampen American Capital Massachusetts Value Municipal Income Trust
Van Kampen American Capital New Jersey Value Municipal Income Trust
Van Kampen American Capital New York Value Municipal Income Trust
Van Kampen American Capital Ohio Value Municipal Income Trust
Van Kampen American Capital Pennsylvania Value Municipal Income Trust
Van Kampen American Capital Municipal Opportunity Trust II
Van Kampen American Capital Florida Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust II
Van Kampen American Capital Select Sector Municipal Trust
Van Kampen American Capital Prime Rate Income Trust

<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> PRIME RATE INCOME TRUST

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<INVESTMENTS-AT-COST> 6238816399
<INVESTMENTS-AT-VALUE> 6207356243
<RECEIVABLES> 69113472
<ASSETS-OTHER> 37212
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6276506927
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 39539146
<TOTAL-LIABILITIES> 39539146
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6270650999
<SHARES-COMMON-STOCK> 626018023
<SHARES-COMMON-PRIOR> 486490317
<ACCUMULATED-NII-CURRENT> 5369829
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7592891)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (31460156)
<NET-ASSETS> 6236967781
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 440296258
<OTHER-INCOME> 31621103
<EXPENSES-NET> (79249614)
<NET-INVESTMENT-INCOME> 392667747
<REALIZED-GAINS-CURRENT> 442960
<APPREC-INCREASE-CURRENT> (25147243)
<NET-CHANGE-FROM-OPS> 367963464
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (390215999)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 178438954
<NUMBER-OF-SHARES-REDEEMED> (59908078)
<SHARES-REINVESTED> 20996830
<NET-CHANGE-IN-ASSETS> 1370183603
<ACCUMULATED-NII-PRIOR> 2874542
<ACCUMULATED-GAINS-PRIOR> (8035851)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 52313966
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 79249614
<AVERAGE-NET-ASSETS> 5591692301
<PER-SHARE-NAV-BEGIN> 10.002
<PER-SHARE-NII> 0.701
<PER-SHARE-GAIN-APPREC> (0.042)
<PER-SHARE-DIVIDEND> (0.698)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.963
<EXPENSE-RATIO> 1.42
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>