VAN KAMPEN PRIME RATE INCOME TRUST, POS 8C, 1998-10-30

VAN KAMPEN PRIME RATE INCOME TRUST
POS 8C, 1998-10-30

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1998

FILE NOS. 333-45531
811-5845
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-2

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]

Pre-Effective Amendment No. [ ]

Post-Effective Amendment No. 1 [X]
and

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

Amendment No. 24 [X]
</TABLE>

VAN KAMPEN

PRIME RATE INCOME TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)

1 Parkview Plaza, P.O. Box 5555, 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 Prime Rate Income Trust

1 Parkview Plaza, P.O. Box 5555

Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)

Copies to:

<TABLE>
<S> <C> <C>
Wayne W. Whalen, Esq. Thomas A. DeCapo, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Skadden, Arps, Slate, Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom LLP General Counsel and Director
Meagher & Flom (Illinois) One Beacon Street Van Kampen
333 W. Wacker Drive Boston, MA 02108 Investment Advisory Corp.
Chicago, Illinois 60606 (617) 573-4800 1 Parkview Plaza, P.O. Box 5555
(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>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
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*+
- ----------------------------------------------------------------------------------------------------------------
Common Shares of Beneficial
Interest............................ 230,000,000 $9.97 $2,293,100 $676,464.50
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</TABLE>

* Estimated solely for the purpose of calculating the registration fee;
previously paid.

+ Previously paid.

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<PAGE> 2

VAN KAMPEN 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................................... Purchasing Shares of the Fund;
Management of the Fund
6. Selling Shareholders................................... Not Applicable
7. Use of Proceeds........................................ The Fund; Investment Objective and
Policies; Special Risk Considerations
8. General Description of the Registrant.................. The Fund; Investment Objective and
Policies; Special Risk Considerations;
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, 1998; 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

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE
SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS
STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS NOR SHALL
IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THESE
SECURITIES.

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VAN KAMPEN PRIME RATE INCOME TRUST
- --------------------------------------------------------------------------------

The Van Kampen Prime Rate Income Trust's objective is to provide a high
level of current income, consistent with preservation of capital. The Fund
invests primarily in adjustable rate Senior Loans. Senior Loans are business
loans that have a senior right to payment. They are made to corporations and
other Borrowers and are often secured by specific assets of the Borrower. The
Fund believes that investing in adjustable rate Senior Loans should limit
fluctuations in net asset value caused by changes in interest rates. You should,
however, expect the Fund's net asset value to fluctuate as a result of changes
in Borrower credit quality and other factors.

There is no assurance that the Fund will achieve its investment objective. You
should carefully consider the risks of investing in the Fund. See "Special Risk
Considerations."

The Fund offers common shares of beneficial interest. The Fund's Shares have
no trading market and no market is expected to develop. You should consider your
investment in the Fund to be illiquid. In order to provide Shareholders an
opportunity to sell their Shares, the Fund currently intends to offer to
repurchase at net asset value a portion of its outstanding Shares each quarter.
There is no guarantee that you will be able to sell your Shares at any given
time. If you hold your Shares for less than five years, you will likely be
charged an early withdrawal charge at the time the Fund repurchases your Shares.

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

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE REGULATOR HAS
APPROVED OR DISAPPROVED OF THE SHARES OR PASSED ON THE ADEQUACY OF THIS
PROSPECTUS. A REPRESENTATION TO THE CONTRARY IS A CRIME.

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

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

The Fund continuously offers its Shares through Van Kampen Funds Inc., as
principal underwriter, and through selected broker-dealers and financial
services firms, at a price per Share equal to net asset value. There is no
initial sales charge or underwriting discount on purchases of Shares. Van Kampen
Funds Inc. will pay 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. The Fund has registered 230,000,000 Shares for current sale. The Fund has
incurred approximately $799,000 in expenses in connection with the offering of
such Shares. These expenses have been charged as operating expenses.

The Fund's investment adviser is Van Kampen Investment Advisory Corp. This
prospectus sets forth the information about the Fund that you should know before
investing. You should keep it for future reference. More information about the
Fund, including a Statement of Additional Information dated ,
1998, has been filed with the Securities and Exchange Commission. This
information is available upon written or oral request without charge. The Fund's
Statement of Additional Information is incorporated herein by reference. You may
get a copy of it by calling 1-800-341-2929. A table of contents for the
Statement of Additional Information is on page . The SEC maintains
a web site at http://www.sec.gov that contains the Statement of Additional
Information, material incorporated by reference and other information about SEC
registrants.

VAN KAMPEN FUNDS LOGO

THIS PROSPECTUS IS DATED NOVEMBER , 1998.

<PAGE> 5

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................... 3
Prospectus Summary.......................................... 4
Financial Highlights........................................ 7
The Fund.................................................... 9
Investment Objective and Policies........................... 9
Special Risk Considerations................................. 14
Investment Practices and Special Risks...................... 16
Taxation.................................................... 19
Management of the Fund...................................... 20
Distributions............................................... 21
Description of Common Shares................................ 24
Purchasing Shares of the Fund............................... 26
Communications With Shareholders............................ 27
Custodian, Dividend Disbursing and Transfer Agent........... 28
Legal Opinions.............................................. 28
Experts..................................................... 28
Additional Information...................................... 28
Table of Contents for the Statement of Additional
Information............................................... 29
Appendix A.................................................. A-1
</TABLE>

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER 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 VAN KAMPEN FUNDS INC. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE 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.

2
<PAGE> 6

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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%(1)
ANNUAL OPERATING EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO SHARES)
Investment Advisory and Administration Fees(2)............ 1.18%
Interest Payments on Borrowed Funds....................... 0.00%
Other Expenses............................................ .23%
----------
Total Annual Operating Expenses....................... 1.41%
</TABLE>

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(1) An early withdrawal charge of 3.00% will be imposed on most Shares accepted
by the Fund for repurchase within the first year after purchase and
declining thereafter to 0.00% after the fifth year. See "Repurchase of
Shares" for additional information.

(2) 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 Shares................................ $14 $45 $77 $169
Assuming tender and repurchase of Shares on last day of
period and imposition of maximum applicable early withdrawal
charge...................................................... $44 $65 $87 $169
</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. 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 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.

3
<PAGE> 7

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

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

THE FUND. Van Kampen Prime Rate Income Trust is a non-diversified, closed-end
management investment company. The Fund completed an initial public offering of
its common shares of beneficial interest in October, 1989. Since November, 1989
the Fund has continuously offered its Shares through Van Kampen Funds Inc.
("VKF") as principal underwriter. As of September 30, 1998, the Fund had
774,125,597 Shares outstanding and had net assets of $7,688,136,546.

THE OFFERING. The Fund continuously offers Shares through VKF and through
selected broker-dealers and financial services firms, at a public offering price
per Share equal to net asset value. There is no initial sales charge or
underwriting discount on purchases of Shares. VKF pays 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.

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
There is no assurance that the Fund will achieve its investment objective. You
should carefully consider the risks of investing in the Fund. See "Special Risk
Considerations."

The Fund plans to invest at least 80% of its total assets in adjustable rate
senior loans. Senior Loans are business loans made to Borrowers that may be
corporations, partnerships or other entities. These Borrowers operate in a
variety of industries and geographic regions. The interest rates on Senior Loans
adjust periodically, and the Fund's portfolio of Senior Loans will at all times
have a dollar-weighted average time until the next interest rate adjustment of
90 days or less. The Fund believes that investing in adjustable rate Senior
Loans should limit fluctuations in its net asset value caused by changes in
interest rates.

Senior Loans generally are negotiated between a Borrower and several financial
institution Lenders represented by one or more Lenders acting as agent of all
the Lenders. The Agent is responsible for negotiating the Loan Agreement that
establishes the terms and conditions of the Senior Loan and the rights of the
Borrower and the Lenders. The Fund may act as one of the group of Original
Lenders originating a Senior Loan, may purchase Assignments of portions of
Senior Loans from third parties and may invest in Participations in Senior
Loans. Senior Loans also include certain foreign senior debt that is in the form
of notes or Assignments and not Loan Agreements.

Senior Loans have the most senior position in a Borrower's capital structure
or share the senior position with other senior debt securities of the Borrower.
This capital structure position generally gives holders of Seniors Loans a
priority claim on some or all of the Borrower's assets in the event of default.
Most of the Fund's Senior Loan investments will be secured by specific assets of
the Borrower. Senior Loans also have contractual terms designed to protect
Lenders. The Fund will only acquire Senior Loans of Borrowers that, in the
Adviser's judgment, can make timely payments on their Senior Loans and that
satisfy other credit standards established by the Adviser. Because of their
protective features, the Fund and the Adviser believe that Senior Loans of
Borrowers that either are experiencing, or are more likely to experience,
financial difficulty may represent attractive investment opportunities.
Investing in Senior Loans does, however, involve investment risk, and some
Borrowers default on their Senior Loan payments. The Fund attempts to manage
these risks through portfolio diversification and careful analyses and
monitoring of Borrowers. Nevertheless, you should expect that the Fund's net
asset value will fluctuate as a result of changes in the credit quality of
Borrowers and other factors. See "Special Risk Considerations -- Borrower Credit
Risk."

Following are some of the Fund's other important investment policies: The Fund
may invest up to 20% of its assets in Senior Loans that are not secured by any
specific collateral. The Fund may invest up to 20% of its total assets in Senior
Loans made to non-U.S. Borrowers. These Senior Loans must, however, be U.S.
dollar denominated and pay principal and interest in U.S. dollars. The Fund may
invest up to 20% of its total assets in any combination of the following: (1)
warrants, equity securities and junior debt securities in each case that are
acquired in connection with the acquisition, restructuring or disposition of a
Senior Loan, and (2) high quality short-term debt securities.

SHARE REPURCHASES. The Fund currently intends, each quarter, to offer to
repurchase a portion of its outstanding Shares at their then current net asset
value. Each repurchase must be preapproved by the Fund's Board of Trustees. To
date, the

4
<PAGE> 8

Fund has repurchased Shares every quarter since it began operations. The Fund
will impose an early withdrawal charge payable to VKF on most Shares accepted
for repurchase that have been held for less than five years. The Fund does not
intend to list the Shares on any national securities exchange and there is no
secondary trading market for the Shares. You should consider an investment in
the Shares to be illiquid. There is no assurance that the Fund will in fact
offer to repurchase any of its Shares. If the Fund does offer to repurchase
Shares there is no guarantee that all or any Shares tendered will be purchased.
The Fund may borrow to finance repurchases of Shares. Borrowings entail
additional risks.

INVESTMENT ADVISER. Van Kampen Investment Advisory Corp. is the Fund's
investment adviser. The Adviser also serves as investment adviser to Van Kampen
Senior Income Trust, a closed-end investment company listed on the New York
Stock Exchange and to Van Kampen Senior Floating Rate Fund a closed-end
investment company engaged in a continuous offering. These funds also invest
primarily in Senior Loans. As of September 30, 1998, the Fund together with
these funds had over $10.8 billion in assets. See "Management of the Fund."

ADMINISTRATOR. Van Kampen Investments Inc., the Fund's administrator (the
"Administrator"). See "Management of the Fund."

FEES AND EXPENSES. The Fund will pay the Adviser a fee at an annual rate of
0.95% of the average daily net assets of the Fund. This fee is reduced on assets
in excess of $4 billion. The Fund will pay the Administrator a fee at an annual
rate of 0.25% of the average daily net assets of the Fund. See "Management of
the Fund."

DISTRIBUTIONS. The Fund plans to make monthly distributions of substantially
all net investment income. Distributions cannot be assured, and the amount of
each distribution is likely to vary. Net realized long-term capital gains, if
any, will be distributed at least annually.

DIVIDEND REINVESTMENT PLAN. You may elect to have your dividends and capital
gain distributions automatically reinvested in additional Shares purchased from
the Fund at net asset value. If you do not elect to participate in this dividend
reinvestment plan you will receive distributions in cash.

SPECIAL RISK CONSIDERATIONS

NO TRADING MARKET FOR SHARES. 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 Shares for trading on any national securities
exchange. There is no secondary trading market for Shares. An investment in the
Shares is illiquid. If the Fund's Board of Trustees does not authorize the Fund
to repurchase its Shares, you will not be able to sell your Shares. Even if the
Fund does make repurchases, there is no guarantee that you will be able to sell
all of the Shares that you desire to sell.

SENIOR LOANS. There is less readily available, reliable information about
most Senior Loans than is the case for many other types of securities. In
addition, there is no minimum rating or other independent evaluation of a
Borrower or its securities limiting the Fund's investments, and the Adviser
relies primarily on its own evaluation of Borrower credit quality rather than on
any available independent sources. As a result, the Fund is particularly
dependent on the analytical abilities of the Adviser.

BORROWER CREDIT RISK. Senior Loans, like most other debt obligations, are
subject to the risk of default. Default in the payment of interest or principal
on a Senior Loan will result in a reduction in income to the Fund, a reduction
in the value of the Senior Loan and a potential decrease in the Fund's net asset
value and market value. The risk of default will increase in the event of an
economic downturn or a substantial increase in interest rates.

5
<PAGE> 9

The Fund may acquire Senior Loans of Borrowers that are experiencing, or are
more likely to experience, financial difficulty, including Senior Loans issued
in highly leveraged transactions. The Fund may even acquire and retain in its
portfolio Senior Loans of Borrowers that have filed for bankruptcy protection.
Because of the protective terms of Senior Loans, the Adviser believes that the
Fund is more likely to recover more of its investment in a defaulted Senior Loan
than would be the case for most other types of defaulted debt securities.
Nevertheless, even in the case of collateralized Senior Loans, there is no
assurance that sale of the collateral would raise enough cash to satisfy the
Borrower's payment obligation or that the collateral can or will be liquidated.
In the case of bankruptcy, liquidation may not occur and the court may not give
Lenders the full benefit of their senior position. Uncollateralized Senior Loans
involve a greater risk of loss.

INVESTMENT IN NON-U.S. ISSUERS. The Fund may invest up to 20% of its total
assets, measured at the time of investment, in U.S. dollar denominated Senior
Loans to Borrowers that are organized or located in countries other than the
United States. Although the Senior Loans will require payment of interest and
principal in U.S. dollars, these Borrowers may have significant non-U.S. dollar
revenues. Investment in non-U.S. issuers involves special risks, including that
non-U.S. issuers may be subject to less rigorous accounting and reporting
requirements than U.S. issuers, less rigorous regulatory requirements, differing
legal systems and laws relating to creditors' rights, the potential inability to
enforce legal judgments, fluctuations in currency values and the potential for
political, social and economic adversity.

PARTICIPATIONS. The Fund may purchase Participations in Senior Loans. Under a
Participation the Fund generally will have rights that are more limited than the
rights of Lenders or of persons who acquire a Senior Loan by Assignment. In a
Participation the Fund typically has a contractual relationship with the Lender
selling the Participation, but not with the Borrower. As a result, the Fund
assumes the credit risk of the Lender selling the Participation in addition to
the credit risk of the Borrower. In the event of the insolvency of the Lender
selling the Participation, the Fund may be treated as a general creditor of the
Lender and may not have a senior claim to the Lender's interest in the Senior
Loan.

FUND BORROWINGS. The Fund is authorized to borrow money in an amount up to
33 1/3% of the Fund's total assets (including the amount borrowed) to finance
repurchases of Shares. The rights of any lenders to the Fund to receive payments
of interest on and repayments of principal of any borrowings will be senior to
the rights of Shareholders. The loan agreement for any borrowing likely will
limit certain activities of the Fund, including the payment of dividends to
holders of Shares in certain circumstances. Interest payments and fees incurred
in connection with borrowings will reduce the amount of net income available for
payment to Shareholders. The Fund will not use borrowings for investment
leverage purposes. Accordingly, the Fund will not purchase additional portfolio
securities at any time that borrowings exceed 5% of the Fund's total assets
(including the amount borrowed). See "Repurchase of Shares."

CERTAIN INVESTMENT PRACTICES. The Fund may use various investment practices
that involve special risks, including engaging in interest rate and other
hedging and risk management transactions. See "Investment Practices and Special
Risks."

6
<PAGE> 10

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

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

The following schedule presents financial highlights for one 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
1998 1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period.......................... $9.963 $10.002 $10.046 $10.052 $10.004 $ 9.998 $9.985 $10.008 $10.000
------ ------- ------- ------- ------- ------- ------ ------- -------
Net Investment Income........... .675 .701 .735 .756 .618 .600 .698 .907 .815
Net Realized and Unrealized
Gain/Loss..................... .015 (.042) (.028) (.004) .015 .008 .004 (.008) .005
------ ------- ------- ------- ------- ------- ------ ------- -------
Total from Investment
Operations...................... .690 .659 .707 .752 .633 .608 .702 .899 .820
------ ------- ------- ------- ------- ------- ------ ------- -------
Less:
Distributions from Net
Investment Income............. .677 .698 .751 .758 .585 .600 .689 .910 .812
Distributions in Excess of Net
Investment Income............. -0- -0- -0- -0- -0- .002 -0- .012 -0-
------ ------- ------- ------- ------- ------- ------ ------- -------
Total Distributions............... .677 .698 .751 .758 .585 .602 .689 .922 .812
------ ------- ------- ------- ------- ------- ------ ------- -------
Net Asset Value, End of Period.... $9.976 $ 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.

7
<PAGE> 11

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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
1998 1997 1996 1995 1994 1993 1992 1991 JULY 31, 1990
---- ---- ---- ---- ---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Return(1)(2)............ 7.22% 6.79% 7.22% 7.82% 6.52% 6.17% 7.25% 9.41% 8.51%
Net Assets at End of Period
(in millions)............... $7,312.9 $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)............... 1.41% 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).... 6.81% 7.02% 7.33% 7.71% 6.16% 5.96% 6.98% 8.91% 9.91%*
Portfolio Turnover(3)......... 73% 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 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 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>

* Annualized

See Financial Statements and Notes to Financial Statements.

8
<PAGE> 12

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

Van Kampen Prime Rate Income Trust (the "Fund") is a non-diversified,
closed-end management investment company. It was organized as a Massachusetts
business trust on July 14, 1989. It commenced investment operations on October
4, 1989 and on July 17, 1998 adopted its current name. The Fund completed an
initial public offering of its common shares of beneficial interest ("Shares")
in October, 1989. Since November , 1989, the Fund has continuously offered its
Shares through Van Kampen Funds Inc. ("VKF") as principal underwriter. The net
proceeds from the sale of the Shares will be invested in accordance with the
Fund's investment objective and policies. The Fund's principal office is located
at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555 and
its telephone number is 1-800-421-5666.

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

INVESTMENT OBJECTIVE AND POLICIES

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

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. An investment in the Fund may not be
appropriate for all investors and should not be considered a complete investment
program. There is no assurance that the Fund will achieve its investment
objective. You should carefully consider the risks of investing in the Fund. See
"Special Risk Considerations."

DESCRIPTION OF SENIOR LOANS

In normal market conditions, the Fund plans to invest at least 80% of its
assets in adjustable rate senior loans ("Senior Loans"). Because Senior Loans
have very large minimum investments, typically $5 million or more, the Fund
provides individual investors access to a market that normally is limited to
institutional investors.

INTEREST RATES AND MATURITY. Interest rates on Senior Loans adjust
periodically. The interest rates are adjusted based on a base rate plus a
premium or spread over the base rate. The base rate usually is the London
Inter-Bank Offered Rate ("LIBOR"), the prime rate offered by one or more major
United States banks (the "Prime Rate") or the certificate of deposit ("CD") rate
or other base lending rates used by commercial lenders. LIBOR, as provided for
in Loan Agreements, usually is an average of the interest rates quoted by
several designated banks as the rates at which they pay interest to major
depositors in the London interbank market on U.S. dollar denominated deposits.
The Adviser believes that changes in short-term LIBOR rates are closely related
to changes in the Federal Reserve federal funds rate, although the two are not
technically linked. The Prime Rate quoted by a major U.S. bank is generally the
interest rate at which that bank is willing to lend U.S. dollars to is most
creditworthy borrowers, although it may not be the bank's lowest available rate.
The Fund expects that at least 65% of its assets will be invested in Senior
Loans that at the time of investment provided the Borrower with the option of
selecting an interest rate that is based on the Prime Rate. The CD rate, as
provided for in Loan Agreements, usually is the average rate paid on large
certificates of deposit traded in the secondary market.

Interest rates on Senior Loans may adjust daily, monthly, quarterly,
semi-annually or annually. The Fund will not invest more than 5% of its total
assets in Senior Loans with interest rates that adjust less often than
semi-annually. The Fund may use interest rate swaps and other investment
practices to shorten the effective interest rate adjustment period of Senior
Loans. If the Fund does so, it considers the shortened period to be the
adjustment period of the Senior Loan. The Fund's portfolio of Senior Loans will
at all times have a dollar-weighted average time until the next interest rate
adjustment of 90 days or less. As short term interest rates rise, interest
payable to the Fund should increase. As short term interest rates decline,
interest payable to the Fund should decrease. The amount of time that will pass
before the Fund experiences the effects of changing short-term interest rates
will depend on the dollar-weighted average time until the next interest rate
adjustment on the Fund's portfolio of Senior Loans.

When interest rates rise, the values of fixed income securities generally
decline. When interest rates fall, the values of fixed income securities
generally increase. The Fund believes that investing in adjustable rate Senior
Loans should limit fluctuations in the Fund's net asset value caused by changes
in interest rates. The Fund expects the values of its Senior Loan investments to
fluctuate less than the values of fixed rate, longer-term income securities in
response to the changes in interest rates. Changes in interest rates can,
however, cause some fluctuation in the Fund's net asset value.

9
<PAGE> 13

The Fund expects that its Senior Loans will have stated maturities ranging
from three to ten years, although the Fund has no policy limiting the maturity
of Senior Loans that it purchases. Senior Loans usually have mandatory and
optional prepayment provisions. Because of prepayments, the actual remaining
maturity of Senior Loans may be considerably less than their stated maturity.
The Fund estimates that the actual maturity of the Senior Loans in its portfolio
will be approximately 18-24 months. Because the interest rates on Senior Loans
adjust periodically, the Fund and the Adviser believe that the reinvestment by
the Fund in Senior Loans after prepayment should not result in a significant
reduction in the interest payable to the Fund. Fees received by the Fund may
even enhance the Fund's income. See " -- The Senior Loan Process," below.

PROTECTIVE PROVISIONS OF SENIOR LOANS. Senior Loans have the most senior
position in a Borrower's capital structure or share the senior position with
other senior debt securities of the Borrower. This capital structure position
generally gives holders of Senior Loans a priority claim on some or all of the
Borrower's assets in the event of default. Most of the Fund's Senior Loan
investments will be secured by specific assets of the Borrower. These Senior
Loans will frequently be secured by all assets of the Borrower that qualify as
collateral, such as trademarks, accounts receivable, inventory, buildings, real
estate, franchises, and common and preferred stock in its subsidiaries and
affiliates. Collateral may also include guarantees or other credit support by
affiliates of the Borrower. In some cases, a collateralized Senior Loan may be
secured only by stock of the Borrower or its subsidiaries. The Loan Agreement
may or may not require the Borrower to pledge additional collateral to secure
the Senior Loan if the value of the initial collateral declines. In certain
circumstances, the Loan Agreement may authorize the Agent to liquidate the
collateral and to distribute the liquidation proceeds pro rata among the
Lenders. The Fund may invest up to 20% of its total assets in Senior Loans that
are not secured by specific collateral. Such unsecured Senior Loans involve a
greater risk of loss.

Senior Loans also have contractual terms designed to protect Lenders. Loan
Agreements often include restrictive covenants that limit the activities of the
Borrower. These covenants may include mandatory prepayment out of excess cash
flows, restrictions on dividend payments, the maintenance of minimum financial
ratios, limits on indebtedness and other financial tests. Breach of these
covenants generally is an event of default and, if not waived by the Lenders,
may give Lenders the right to accelerate principal and interest payments.

BORROWERS. Senior Loans are loans made to corporations, partnerships and
other entities ("Borrowers"). Borrowers operate in a variety of industries and
geographic regions. The Fund does not intend to invest more than 5% of its total
assets in Senior Loans of a single Borrower. In addition, the Fund does not
intend to invest more than 25% of its total assets in Borrowers that conduct
their principal businesses in the same industry. Most Senior Loans are made to
U.S. Borrowers. The Fund may, however, invest up to 20% of its total assets in
Senior Loans made to non-U.S. Borrowers. These Senior Loans must be U.S. dollar
denominated and pay principal and interest in U.S. dollars. Investing in Senior
Loans of non-U.S. Borrowers involves special risks. See "Special Risk
Considerations -- Investment in Non-U.S. Issuers."

The capital structure of a Borrower may include Senior Loans, senior and
junior subordinated debt, preferred stock and common stock. Senior Loans
typically have the most senior claim on Borrower's assets and common stock the
most junior claim. The proceeds of Senior Loans that the Fund will purchase
usually will be used by Borrowers to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, debt refinancings
and, to a lesser extent, for general operating and other purposes. [The Fund
does not intend to acquire Senior Loans if the proceeds will be used primarily
to finance construction or real estate development projects.]

The Fund may purchase and retain in its portfolio Senior Loans of Borrowers
that have filed for protection under the federal bankruptcy laws or that have
had involuntary bankruptcy petitions filed against them by creditors. Because of
the protective features of Senior Loans, the Fund and the Adviser believe that
Senior Loans of Borrowers that either are experiencing, or are more likely to
experience, financial difficulty may represent attractive investment
opportunities. Investing in Senior Loans does, however, involve investment risk,
and some Borrowers default on their Senior Loan payments. The Fund attempts to
manage these risks through portfolio diversification and analyses and monitoring
of Borrowers.

The Fund invests in a Senior Loan only if, in the Adviser's judgment, the
Borrower can meet its payment obligations. The Adviser performs its own
independent credit analysis of the Borrower in addition to utilizing information
prepared and supplied by the Agent or other Lenders. When evaluating a Borrower
the Adviser considers many factors, including the Borrower's past and future
projected financial performance. The Adviser also considers a Borrower's
management,

10
<PAGE> 14

collateral and industry. The Fund acquires a collateralized Senior Loan only if
the Adviser believes that the collateral coverage equals or exceeds the
outstanding principal amount of the Senior Loan. The Adviser continues to
monitor a Borrower on an ongoing basis for so long as the Fund continues to own
the Senior Loan. Although the Adviser will use its best judgment in selecting
Senior Loans, there can be no assurance that such analysis will disclose factors
that may impair the value of a Senior Loan. You should expect the Fund's net
asset value to fluctuate as a result of changes in the credit quality of
Borrowers and other factors. A serious deterioration in the credit quality of a
Borrower could cause a permanent decrease in the Fund's net asset value. See
"Special Risk Considerations -- Borrower Credit Risk."

The Adviser generally relies on its own credit analyses of Borrowers and not
on analyses prepared by ratings agencies or other independent parties. There is
no minimum rating or other independent evaluation of a Borrower or its
securities limiting the Fund's investments. Although a Senior Loan often is not
rated by any rating agency at the time the Fund purchases the Senior Loan,
rating agencies have become more active in rating an increasing number of Senior
Loans and at any given time a substantial portion of the Senior Loans in the
Fund's portfolio may be rated. There is no limit on the percentage of the Fund's
assets that may be invested in Senior Loans that are rated below investment
grade or that are unrated but of comparable quality.

The following table sets forth the market value, based on the higher of
Standard & Poor's or Moody's Investors Service, Inc. rating categories, of the
Senior Loans held by the Fund as of July 31, 1998:

<TABLE>
<S> <C>
Rated Obligations........................................... 62%
BBB: 1.1%; BB: 43.3%; B: 16.6%; CCC: 1.0%
Unrated Obligations......................................... 38%
</TABLE>

THE SENIOR LOAN PROCESS

Senior Loans generally are negotiated between a Borrower and several financial
institutions ("Lenders") represented by one or more Lenders acting as agent
("Agent") of all the Lenders. The Agent is responsible for negotiating the loan
agreement ("Loan Agreement") that establishes the terms and conditions of the
Senior Loan and the rights of the Borrower and the Lenders. The Agent is paid a
fee by the Borrower for its services.

The Agent generally is required to administer and manage the Senior Loan on
behalf of other Lenders. When evaluating Senior Loans, the Adviser may consider,
and may rely in part, on analysis performed by the Agent and other Lenders. This
analysis may include an evaluation of the value and sufficiency of any
collateral securing Senior Loans. As to collateralized Senior Loans, the Agent
usually is required to monitor the collateral. The Agent may rely on independent
appraisals of specific collateral. The Agent need not, however, obtain an
independent appraisal of assets pledged as collateral in all cases. The Agent
generally is also responsible for determining that the Lenders have obtained a
perfected security interest in the collateral securing a Senior Loan. If 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 (as defined below).

The Fund normally relies on the Agent to collect principal of and interest on
a Senior Loan. Furthermore, the Fund also relies in part on the Agent to monitor
compliance by the Borrower with the restrictive covenants in the Loan Agreement
and to notify the Fund (or the Lender from who the Fund has purchased a
Participation) of any adverse change in the Borrower's financial condition. The
Fund acts as a Lender with respect to a syndicated Senior Loan only where the
Agent at the time of investment has outstanding debt or deposit obligations
rated investment grade by a nationally recognized statistical rating
organization or determined by the Adviser to be of comparable quality. A rating
agency's top four major rating categories generally are considered to be
investment grade. For a description of Moody's Investor's Service, Inc. rating
categories see Appendix A. The lowest tier of investment grade rating is
considered to have speculative characteristics. The Fund will not purchase
interests in Senior Loans unless the Agent, Lender and any other person
positioned between the Fund and the Borrower has entered into an agreement that
provides for the holding of assets in safekeeping for, or the prompt
disbursement of assets to, the Fund. Insolvency of the Agent or other persons
positioned between the Fund and the Borrower could result in losses for the
Fund. See "Special Risk Considerations -- Senior Loans."

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 include three primary types: facility fees,

11
<PAGE> 15

commitment fees and prepayment penalties. Facility fees are paid to Lenders when
a Senior Loan is originated. Commitment fees are paid to Lenders on an ongoing
basis based on the unused portion of a Senior Loan commitment. Lenders may
receive prepayment penalties when a Borrower prepays a Senior Loan. The Fund
receives these fees directly from the Borrower if the Fund is an Original Lender
(as defined below) or, in the case of commitment fees and prepayment penalties,
if the Fund acquires an Assignment. Whether the Fund receives a facility fee in
the case of an Assignment, or any fees in the case of a Participation, depends
on negotiations between the Fund and the Lender selling such interests. When the
Fund buys an Assignment, it may be required to pay a fee, or forgo a portion of
interest and fees payable to it, to the Lender selling the Assignment.
Occasionally, the assignor pays a fee to the assignee. A person selling a
Participation to the Fund may deduct a portion of the interest and any fees
payable to the Fund as an administrative fee. The Fund may be required to pass
along to a person that buys a Senior Loan from the Fund a portion of any fees
that the Fund is entitled to.

The Fund may have obligations under a Loan Agreement, including the obligation
to make additional loans in certain circumstances. The Fund intends to reserve
against such contingent obligations by segregating cash, liquid securities and
liquid Senior Loans as a reserve. The Fund will not purchase Senior Loans that
would require the Fund to make additional loans if as a result of such purchase
all of the Fund's additional loan commitments in the aggregate 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.

TYPES OF SENIOR LOAN INVESTMENTS

The Fund may act as one of the group of Lenders originating a Senior Loan (an
"Original Lender"), may purchase assignments or novations ("Assignments") of
portions of Senior Loans from third parties, and may invest in participations
("Participations") in Senior Loans. Senior Loans also include certain foreign
debt that are in the form of notes or Assignments rather than Loan Agreements.
All of these interests in Senior Loans are sometimes referred to simply as
Senior Loans.

ORIGINAL LENDER. When the Fund acts as an Original Lender it may participate
in structuring the Senior Loan. When the Fund is an Original 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 of interest on or
principal of a Senior Loan, releasing collateral, changing the maturity of a
Senior Loan or a change in control of the Borrower frequently require the
unanimous vote or consent of all Lenders affected. The Fund will never act as
the Agent or principal negotiator or administrator of a Senior Loan.

ASSIGNMENTS. 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. Assignments may, however, be arranged
through private negotiations, 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.

PARTICIPATIONS. When the Fund purchases a Participation in a Senior Loan, the
Fund will usually have a contractual relationship only with the Lender selling
the Participation and not with the Borrower. The Fund may have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of such payments from the Borrower. As a result, the Fund may assume the
credit risk of both the Borrower and the Lender selling the Participation. In
the event of insolvency of the Lender selling a Participation, the Fund may be
treated as a general creditor of the Lender.

The Fund has taken the following measures in an effort to minimize these
risks. The Fund will only acquire Participations if the Lender selling the
Participation and any other persons positioned between the Fund and the Lender
(i) at the time of investment has outstanding debt or deposit obligations rated
investment grade by a rating Agency 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. A Participation is retaining an interest in the underlying Senior
Loan. In the event that the Adviser does not believe that the person selling a
participation to the Fund is retaining an interest in the underlying Senior
Loan, the Fund will only purchase the Participation if, in

12
<PAGE> 16

addition to the requirements set forth above, the person selling the
Participation (i) is an entity qualified under the Investment Company Act of
1940, as amended (the "1940 Act"), 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 generally will not have the right to enforce compliance by the
Borrower with the Loan Agreement, nor rights to any funds acquired by other
Lenders through set-off against the Borrower. In addition, when the Fund holds a
Participation in a Senior Loan it may not have the right to vote on whether 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 may not consider the interests of
the Fund. The Fund may not benefit directly from the collateral supporting a
Senior Loan in which it has purchased the Participation, although Lenders that
sell Participations generally are required to distribute liquidation proceeds
received by them pro rata among the holders of such Participations.

OTHER SENIOR DEBT SECURITIES. The Fund may invest up to 5% of its total
assets in certain senior debt securities that are in the form of notes or
assignments rather than Loan Agreements. The Fund expects to purchase these
senior debt securities only in the case of non-U.S. Borrowers. The Fund will
only purchase senior debt securities if (i) the senior debt securities represent
the only form of senior debt financing of the Borrower or (ii) the senior debt
securities are pari passu in the capital structure with Senior Loans of a
Borrower and the Adviser determines that the terms, conditions, covenants and
collateral package of the senior debt securities are substantially similar, or
more favorable to the Fund, compared to the Senior Loans of such Borrower. There
may be no person performing the role of the Agent for senior debt securities. As
a result, the Fund may be more dependent on the ability of the Adviser to
monitor and administer these Senior Loans. Senior debt securities will be
treated as Senior Loans for purposes of the Fund's policy of normally investing
at least 80% of its total assets in Senior Loans.

The Fund also may invest up to 5% of its total assets in structured notes with
rates of return determined by reference to the total rate of return on one or
more Senior Loans referenced in such notes. The rate of return on the structured
note may be determined by applying a multiplier to the rate of total return on
the referenced loan or loans. Application of a multiplier is comparable to the
use of financial leverage, a speculative technique. Leverage magnifies the
potential for gain and the risk of loss; as a result, a relatively small decline
in the value of a referenced Senior Loan could result in a relatively large loss
in the value of a structured note. Structured notes will be treated as Senior
Loans for purposes of the Fund's policy of normally investing at least 80% of
its total assets in Senior Loans.

OTHER IMPORTANT INVESTMENT POLICIES

The Fund may invest up to 20% of its total asset in warrants, equity
securities and junior debt securities acquired in connection with the
acquisition, restructuring or disposition of Senior Loans. The Fund also may
convert a warrant into the underlying security. Although the Fund generally will
acquire interests in warrants, equity and junior debt securities only when the
Adviser believes that the value being given by the Fund in exchange for such
interests is substantially outweighed by their potential value, investment in
warrants, equity and junior debt securities entails certain risks in addition to
those associated with investments in Senior Loans. These risks include the
potential for increasing fluctuations in the Fund's net asset value. Any equity
securities and junior debt securities held by the Fund will not be treated as
Senior Loans and thus will not count toward the 80% of the Fund's total assets
that normally will be invested in Senior Loans.

During normal market conditions, the Fund may invest up to 20% of its total
assets in high quality, short-term debt securities with remaining maturities of
one year or less. These may include commercial paper rated at least in the top
two rating categories, 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 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. These securities may pay interest at adjustable rates or 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.

13
<PAGE> 17

- --------------------------------------------------------------------------------
SPECIAL RISK CONSIDERATIONS
- --------------------------------------------------------------------------------

NO TRADING MARKET FOR SHARES. The Fund is a closed-end investment company
designed for long-term investors. The Fund does not intend to list the Shares
for trading on any national securities exchange. There is not expected to be any
secondary trading market in the Shares. The Shares are illiquid. In the event
that the Fund's Board of Trustees does not authorize the Fund to make
repurchases of its Shares, you will not be able to otherwise sell your Shares.
Even if the Fund does make repurchases, there is no guarantee that you will be
able to resell to the Fund all of the Shares that you desire to sell at any
particular time.

SENIOR LOANS. There is less readily available, reliable information about most
Senior Loans than is the case for many other types of securities. In addition,
there is no minimum rating or other independent evaluation of a Borrower or its
securities limiting the Fund's investments, and the Adviser relies primarily on
its own evaluation of Borrower credit quality rather than on any available
independent sources. As a result, the Fund is particularly dependent on the
analytical abilities of the Adviser.

Senior Loans are not listed on any national securities exchange or automated
quotation system and no active trading market exists for many Senior Loans. As a
result, many Senior Loans are illiquid, meaning that the Fund may not be able to
sell them quickly at a fair price. The market for illiquid securities is more
volatile than the market for liquid securities. However, many Senior Loans are
of a large principal amount and are held by a large number of owners. In the
Adviser's opinion, this should enhance their liquidity. In addition, in recent
years the number of institutional investors purchasing Senior Loans has
increased. The risks of illiquidity are particularly important when the Fund's
operations require cash, and may in certain circumstances require that the Fund
borrow to meet short-term cash requirements. To the extent that a secondary
market does exist for certain Senior Loans, the market may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods. The Fund has no limitation on the amount of its assets that may be
invested in securities that are not readily marketable or that are subject to
restrictions on resale. The substantial portion of the Fund's assets invested in
Senior Loans may restrict the ability of the Fund to dispose of its investments
in a timely fashion and at a fair price, and could result in capital losses to
the Fund and holders of Shares. The market for Senior Loans could be disrupted
in the event of an economic downturn or a substantial increase or decrease in
interest rates. This could result in increased volatility in the market and in
the Fund's net asset value and market price per Share. Illiquid securities are
also difficult to value.

If legislation or state or federal regulators impose additional requirements
or restrictions on the ability of financial institutions to make loans that are
considered highly leveraged transactions, the availability of Senior Loans for
investment by the Fund may be adversely affected. In addition, such requirements
or restrictions could reduce or eliminate sources of financing for certain
Borrowers. This would increase the risk of default. If legislation or federal or
state regulators require financial institutions to dispose of Senior Loans that
are considered highly leveraged transactions or subject such Senior Loans to
increased regulatory scrutiny, financial institutions may determine to sell such
Senior Loan interests. Such sales could result in prices that, in the opinion of
the Adviser, do not represent fair value. If the Fund attempts to sell a Senior
Loan interest at a time when a financial institution is engaging in such a sale,
the price the Fund could get for the Senior Loan may be adversely affected.

Selling Lenders and other persons positioned between the Fund and the Borrower
will likely conduct their principal business activities in the banking, finance
and financial services industries. The Fund may be more at risk to any single
economic, political or regulatory occurrence affecting such industries. Persons
engaged in such industries may be more susceptible 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.

Should an Agent or a Lender positioned between the Fund and a Borrower become
insolvent or enter FDIC receivership or bankruptcy, where the Fund is an
Original Lender or has purchased an Assignment any interest of such person in
the Senior Loan and in any loan payment held by such person for the benefit of
the Fund should not be included in the person's estate. If, however, these items
are included in their estate, the Fund would incur costs and delays in realizing
payment and could suffer a loss of principal or interest.

Some Senior Loans are subject to the risk that a court, pursuant to fraudulent
conveyance or other similar laws, could subordinate the Senior Loans to
presently existing or future indebtedness of the Borrower or take other action
detrimental to Lenders. Such court action could under certain circumstances
include invalidation of Senior Loans.

14
<PAGE> 18

BORROWER CREDIT RISK. Senior Loans, like most other debt obligations, are
subject to the risk of default. Default in the payment of interest or principal
on a Senior Loan results in a reduction in income to the Fund, a reduction in
the value of the Senior Loan and a potential decrease in the Fund's net asset
value. The risk of default increases in the event of an economic downturn or a
substantial increase in interest rates. An increased risk of default could
result in a decline in the value of Senior Loans and in the Fund's net asset
value.

The Fund may acquire Senior Loans of Borrowers that are experiencing, or are
more likely to experience, financial difficulty, including Senior Loans of
Borrowers that have filed for bankruptcy protection. Borrowers may have
outstanding debt obligations that are rated below investment grade. More
recently, rating agencies have begun rating Senior Loans, and Senior Loans in
the Fund's portfolio may themselves be rated below investment grade. The Fund
may invest a substantial portion of its assets in Senior Loans of Borrowers that
have outstanding debt obligations rated below investment grade or that are
unrated but of comparable quality to such securities. Debt securities rated
below investment grade are viewed by the rating agencies as speculative and are
commonly known as "junk bonds." Senior Loans generally are not rated at the time
that the Fund purchases them. If a Senior Loan is rated at the time of purchase,
the Adviser may consider the rating when evaluating the Senior Loan but, in any
event, does not view ratings as a determinative factor in investment decisions.
As a result, the Fund is more dependant on the Adviser's credit analysis
abilities. Because of the protective terms of Senior Loans, the Adviser believes
that the Fund is more likely to recover more of its investment in a defaulted
Senior Loan than would be the case for most other types of defaulted debt
securities. The values of Senior Loans of Borrowers that have filed for
bankruptcy protection or that are experiencing payment difficulty will reflect,
among other things, the Adviser's assessment of the likelihood that the Fund
ultimately will receive repayment of the principal amount of such Senior Loans,
the likely duration, if any, of a lapse in the scheduled payment of interest and
repayment of principal and prevailing interest rates. As of July 31, 1998, the
Fund held in its portfolio and had reduced the value of 3 Senior Loans (the
aggregate value of which represented approximately .92% of the value of the
Fund's total assets on such date) of Borrowers that were subject to protection
under the federal bankruptcy laws.

In the case of collateralized Senior Loans, there is no assurance that sale of
the collateral would raise enough cash to satisfy the Borrower's payment
obligation or that the collateral can or will be liquidated. In the event of
bankruptcy, liquidation may not occur and the court may not give Lenders the
full benefit of their senior positions. 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 Loans. To the extent that
a Senior Loan is collateralized by stock in the Borrower or its subsidiaries,
such stock may lose all of its value in the event of bankruptcy of the Borrower.
Uncollateralized Senior Loans involve a greater risk of loss.

INVESTMENT IN NON-U.S. ISSUERS. The Fund may invest up to 20% of its total
assets, measured at the time of investment, in U.S. dollar denominated Senior
Loans to Borrowers that are organized or located in countries other than the
United States. Although the Senior Loans will require payment of interest and
principal in U.S. dollars, these Borrowers may have significant non-U.S. dollar
revenues. Investment in non-U.S. issuers involves special risks. These risks
include that non-U.S. issuers may be subject to less rigorous accounting and
reporting requirements than U.S. issuers, less rigorous regulatory requirements,
differing legal systems and laws relating to creditors' rights, the potential
inability to enforce legal judgments, fluctuations in currency values and the
potential for political, social and economic adversity.

EQUITY SECURITIES AND JUNIOR DEBT SECURITIES. Warrants, equity securities and
junior debt securities have a subordinate claim on a Borrower's assets as
compared with Senior Loans. As a result, the values of warrants, equity
securities and junior debt 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 increase the volatility of the Fund's net
asset value.

15
<PAGE> 19

FUND BORROWINGS. The Fund is authorized to borrow money in an amount up to
33 1/3% of the Fund's total assets (including the amount borrowed) to finance
repurchases of Shares. The rights of any lenders to the Fund to receive payments
of interest on and repayments of principal of any borrowings will be senior to
the rights of Shareholders. The loan agreement for any borrowing likely will
limit certain activities of the Fund, including the payment of dividends to
holders of Shares in certain circumstances. Interest payments and fees incurred
in connection with borrowings will reduce the amount of net income available for
payment to Shareholders. Borrowings may also result in greater volatility in the
Fund's net asset value. The Fund will not use borrowings for investment leverage
purposes. Accordingly, the Fund will not purchase additional portfolio
securities at any time that borrowings exceed 5% of the Fund's total assets
(including the amount borrowed). See "Repurchase of Shares."

NON-DIVERSIFIED STATUS. The Fund has registered as a "non-diversified"
investment company. This means that it may invest more than 5% of the value of
its assets in the obligations of any single issuer, including Senior Loans of a
single Borrower and Participations purchased from a single Lender. Although the
Fund does not intend to invest more than 5% of the value of its assets in Senior
Loans of a single Borrower, it may invest more than 5% of its assets in
Participations purchased from a single Lender. If the Fund invests a relatively
high percentage of its assets in obligations of a limited number of issuers, the
Fund will be more at risk to any single corporate, economic, political or
regulatory event that impacts one or more of those issuers.

ANTI-TAKEOVER PROVISIONS. The Fund's Declaration of Trust includes provisions
that could limit the ability of other persons to acquire control of the Fund or
to change the composition of its Board of Trustees. See "Description of Capital
Structure -- Anti-Takeover Provisions in the Declaration of Trust."

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

The Fund may: use interest rate and other hedging transactions, lend portfolio
holdings, purchase and sell Senior Loans and other securities on a "when issued"
or "delayed delivery" basis, and use repurchase and reverse repurchase
agreements. These investment practices involve risks. Although the Adviser
believes that these investment practices may aid the Fund in achieving its
investment objective, there is no assurance that these 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,
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.

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

16
<PAGE> 20

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 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.
17
<PAGE> 21

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.

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 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

18
<PAGE> 22

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 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 gain 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 gain
dividends), see "Capital Gains Rates" 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" below. It is possible, although the Fund believes it is unlikely,
that, in connection with a tender offer, distributions to tendering shareholders
may be subject to tax as ordinary income (rather than as gain or loss), which in
turn may result in deemed distributions subject to tax as ordinary income for
non-tendering shareholders. 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
19
<PAGE> 23

less will be treated as a long-term capital loss to the extent of any capital
gain 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. The maximum tax rate applicable to net capital gains
recognized by individuals and certain other non-corporate taxpayers is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.

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.

- --------------------------------------------------------------------------------
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 Investment Advisory Corp. (the "Adviser") is the Fund's investment
adviser. The Adviser is a wholly-owned subsidiary of Van Kampen Investments Inc.
Van Kampen Investments Inc. is an indirect wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. The Adviser's principal office is located at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555.

Van Kampen Investments Inc. is a diversified asset management company with
more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $68 billion under management or
supervision. Van Kampen Investments Inc.'s more than 50 open-end and 39
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.

Morgan Stanley Dean Witter & 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 securities lending.

INVESTMENT ADVISORY AGREEMENT. Subject to the authority of the Board of
Trustees, 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 requires the Adviser to supply
investment research and portfolio management. The Adviser's responsibilities
include, but are not limited to;

- selecting which securities the Fund should purchase, hold or sell;

- choosing the brokers through which the Fund will execute its portfolio
transactions,

- furnishing offices, necessary facilities and equipment, and

- permitting the use of its officers and employees to serve without
compensation as Trustees and officers 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 the percentage of the Fund's average net assets shown in the table
below. The advisory fee is higher than the fees paid by most management
investment companies, although it is comparable to the

20
<PAGE> 24

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 commencement investment operations. Mr. Maillet
has been employed by the Adviser since 1989. Mr. Maillet also has primary
responsibility for the day to day management of the portfolio of the Van Kampen
Senior Floating Rate Fund, a continuously offered closed-end investment company,
and Van Kampen Series Income Trust, a closed-end investment company listed on
the New York Stock Exchange, both investing primarily in interests in Senior
Loans and having investment objectives and policies substantially similar to
those of the Fund.

THE ADMINISTRATOR. The administrator for the Fund is Van Kampen Investments
Inc. ("Van Kampen" and in such capacity, the "Administrator"). Its principal
business address is 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181-5555. The Administrator is the parent company of the Adviser.

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement"), the Administrator (i) monitors
provisions of Loan Agreements and any Participation and Assignment and is
responsible for recordkeeping for Senior Loans; (ii) arranges for the printing
and dissemination of reports to holders of Shares; (iii) arranges for
dissemination of the Fund's proxy and any tender offer materials to holders of
Shares, and oversees the tabulation of proxies by the Fund's transfer agent;
(iv) negotiates the terms and conditions under which custodian services are
provided to the Fund and the fees to be paid by the Fund in connection
therewith; (v) negotiates the terms and conditions under which dividend
disbursing services are provided to the Fund, and the fees to be paid by the
Fund in connection therewith and reviews the provision of dividend disbursing
services to the Fund; (vi) provides the Fund's dividend disbursing agent and
custodian with such information as is required for them to effect payment of
dividends and distributions and to implement the Fund's dividend reinvestment
plan; (vii) makes such reports and recommendations to the Board of Trustees as
the Trustees reasonably request; and (viii) provides 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 Shares of substantially all net investment income of the Fund. Net
investment income consists of all interest income, fee income and other ordinary
income earned by the Fund and net short-term capital gains, less all expenses of
the Fund. Expenses of the Fund are accrued each day. Distributions cannot be
assured, and the amount of each monthly distribution is likely to vary. Net
realized long-term capital gains, if any, generally will be distributed at least
annually. You may elect to have distributions automatically reinvested in
additional Shares. See "Dividend Reinvestment Plan."

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

You may choose to have your dividend and capital gain distributions reinvested
in additional Shares at net asset value (without a sales charge). If you do not
make this election, all distributions will be made in cash.

All correspondence concerning the dividend reinvestment plan should be
directed to the State Street Bank and Trust Company, as Plan Agent, c/o Van
Kampen Investor Services Inc., P.O. Box 418256, Kansas City, MO 64153-9256.
Please call (800) 341-2911 between the hours of 7:00 a.m. and 7:00 p.m. Central
Standard Time if you have questions regarding the Plan.

21
<PAGE> 25

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 Shares 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 distribution payment
date. Purchases may be made only if shares of the selected fund are available
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 repurchase Shares through a tender offer for all or a
portion of the Fund's then outstanding Shares. Such repurchases would be made at
the net asset value of the Shares on the expiration date of the tender offer.
Management of the Fund expects to recommend that the Board of Trustees approve
such repurchases quarterly. Although tender offers, if undertaken and completed,
will provide some liquidity for holders of the Shares, there is no assurance
that tender offers will in fact be undertaken or completed or, if completed,
that they will provide sufficient liquidity for all holders of Shares who may
desire to sell such Shares. As such, investment in the 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 VKF will be imposed
on most 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 Shares
generally would increase the liquidity of the Shares, the repurchase of Shares
by the Fund will decrease the total assets of the Fund and, therefore, increase
the Fund's expense ratio. Because of the nature of the Fund's portfolio, the
Adviser anticipates potential difficulty in disposing of portfolio securities in
order to consummate tender offers for the Shares. As a result, the Fund may be
required to borrow money in order to finance repurchases.

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of 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 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 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 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 Shares. The Fund does not intend to use borrowings for long-term
financial 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, as amended
and restated on April 16, 1998 (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 $500,000,000 to the Fund, which is not secured by the assets of the Fund
or other collateral. This credit facility can provide the Fund with additional
liquidity to meet its obligations to purchase

22
<PAGE> 26

Shares pursuant to any tender offer that the Fund may make. The credit facility
provided pursuant to the Credit Agreement will terminate on April 16, 1999,
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.

Should the Fund determine to make a tender offer for its Shares, a notice
describing the tender offer, containing information shareholders should consider
in deciding whether to tender their Shares and including instructions on how to
tender 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 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
Shares.

Upon the death of a holder of Shares, VKF will waive any early withdrawal
charge (discussed below) applicable to the first $100,000 worth of such holder's
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 VKF'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. 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 Shares. Information
concerning the waiver of the early withdrawal charge may be obtained by
contacting the Fund.

EARLY WITHDRAWAL CHARGE. An early withdrawal charge designed to recover
offering expenses will be charged in connection with most 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 Shares
accepted for cash tender from a record holder of Shares the value of which
exceeds the aggregate value at the time the tender is accepted of (a) all Shares
owned by such holder that were purchased more than five years prior to such
acceptance, (b) all Shares owned by such holder that were acquired through
reinvestment of distributions, and (c) the increase, if any, of value of all
other Shares owned by such holder (namely those purchased within the five years
preceding the acceptance) over the purchase price of such Shares. The early
withdrawal charge will be paid to VKF. For the fiscal years ended July 31, 1996,
1997 and 1998, VKF received payments totalling $5,721,300, $9,075,812 and
$16,169,200, 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
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
AFTER PURCHASE EARLY WITHDRAWAL CHARGE
------------------ -----------------------
<S> <C> <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 Shares for
cash through VKF 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 Shares without incurring an early withdrawal charge. If the investor
should submit for repurchase pursuant to a tender offer $5,000 worth of Shares,
an early withdrawal charge would be imposed on $3,000 worth of the 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.

23
<PAGE> 27

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

The prospectus for each VK 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 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 to the date hereof (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 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
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 Share represents an equal proportionate interest in
the assets of the Fund with each other Share in the Fund. Holders of 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 Shares. Each whole 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 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 Shares credited to an investor's account. Share certificates
which have been issued to an investor may be returned at any time.

The 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 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 Share during such period.

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------- -------- --------
<S> <C> <C>
September 30, 1998.......................................... $ 9.98 $ 9.93
June 30, 1998............................................... 9.99 9.96
March 31, 1998.............................................. 9.99 9.96
December 31, 1997........................................... 9.98 9.96
September 30, 1997.......................................... 9.98 9.96
June 30, 1997............................................... 9.98 9.97
March 31, 1997.............................................. 9.99 9.97
</TABLE>

24
<PAGE> 28

<TABLE>
<CAPTION>
QUARTERLY PERIOD ENDING HIGH LOW
----------------------- -------- --------
<S> <C> <C>
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>

As of September 30, 1998, the net asset value per Share was $9.93. The
following table sets forth certain information with respect to the Shares as of
September 30, 1998:

<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 0 774,125,597
</TABLE>

To the knowledge of the Fund, as of September 30, 1998, no person held 5% or
more of the Fund's Shares either beneficially or of record, except that Van
Kampen Trust Company, 2800 Post Oak Blvd., Houston, TX 77056, owned of record
6.18%. Further, as of such date, officers and trustees of the Fund as a group
owned less than 1% of the 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 Shares, such provisions could have the effect of depriving
holders of Shares of an opportunity to sell their Shares at a premium over
prevailing market prices.

The Declaration of Trust requires the favorable vote of the holders of at
least two-thirds of the outstanding Shares then entitled to vote to approve,
adopt or authorize certain transactions with 5%-or-greater holders of 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. For purposes of these provisions, a
5%-or-greater holder of 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
Shares of the Fund. The transactions subject to these special approval
requirements are: (i) the merger or consolidation of the Fund or any

25
<PAGE> 29

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).

A Trustee may be removed from office (i) with cause by a written instrument
signed by at least two-thirds of the remaining Trustees or (ii) by a vote of the
holders of at least two-thirds of the Shares.

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.

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

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

The Fund offers continuously its Shares through VKF, the principal
underwriter, whose offices are located at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555. The 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 Shares at any time without prior notice.

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

The Shares will be offered by the Fund at the public offering price next
computed 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 Share. There will be
no initial sales charge or underwriting discount on purchases of Shares.

VKF will compensate broker-dealers participating in the continuous offering at
a rate of 3.0% of the dollar value of Shares purchased from the Fund by such
broker-dealers. If the Shares remain outstanding after one year from the date of
their original purchase, VKF will compensate such broker-dealers at an annual
rate, paid quarterly, in an amount based on a percentage of the dollar value of
such 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 VKF 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 Shares or the amount that
the Fund will receive from the sale of Shares. The compensation paid to
broker-dealers at the time of purchase and any quarterly payments mentioned
above will

26
<PAGE> 30

be paid by VK out of its own assets, and not out of the assets of the Fund. An
early withdrawal charge payable to VK will be imposed on most 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 VK, 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. VK 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 VK. Once the transfer agent has
received this application, such investor's checking account at his designated
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.

Investments by Tax-Sheltered Retirement Plans. Shares are available for
purchase in connection with certain types of tax-sheltered retirement plans.
Eligible investors may establish individual retirement accounts ("IRAs");
Employee Pension Plans ("SEP's"); other pension and profit sharing plans; 401(k)
plans; or Section 403(b)(7) plans. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh plans.

The purchase of Shares 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 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
Share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per 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 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.

When utilized by the Fund, distribution rate and compounded distribution rate
figures 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.

27
<PAGE> 31

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,
TREASURY BILL RATE AND
LONDON INTER-BANK OFFERED RATE
(AS OF 12/31 OF EACH CALENDAR YEAR)
-------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Prime Rate(1)............................................ 12.06% 9.99% 8.38% 8.15% 9.24% 10.88% 10.01%
3 Month Treasury Bill Rate(2)............................ 8.6000% 7.1000% 5.5300% 5.7700% 8.0700% 7.6300% 6.7400%
3 Month LIBOR(3)......................................... 8.7500% 8.0000% 6.3750% 7.4375% 9.6200% 8.3750% 7.6300%
</TABLE>

<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Prime Rate(1)............................................ 8.46% 6.25% 6.00% 8.50% 8.83% 8.50% 8.44%
3 Month Treasury Bill Rate(2)............................ 4.0700% 3.2200% 3.0600% 5.6000% 5.1400% 4.9100% 5.1600%
3 Month LIBOR(3)......................................... 4.3125% 3.4375% 3.3750% 6.5000% 5.6250% 5.5625% 5.8125%
</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 3 Month Treasury Bill Rate. Source: Bloomberg.

(3) The 3 Month 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 Accounting Agreement between it and the Fund. Van Kampen
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 Shares offered hereby have been
passed upon for the Fund by Skadden, Arps, Slate, Meagher & Flom LLP.

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

The financial statements for the period ended July 31, 1998, 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.

28
<PAGE> 32

- --------------------------------------------------------------------------------
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B- 2
Investment Restrictions..................................... B- 2
Trustees and Officers....................................... B- 4
Portfolio Transactions...................................... B- 8
Management of the Fund...................................... B- 9
Dividend Reinvestment Plan.................................. B-11
Net Asset Value............................................. B-12
Taxation.................................................... B-13
Repurchase of Shares........................................ B-15
Independent Accountants' Report............................. B-18
Financial Statements for the Year Ended July 31, 1998....... B-19
Notes to Financial Statements............................... B-34
</TABLE>

29
<PAGE> 33

APPENDIX A

MOODY'S INVESTORS SERVICE

A brief description of the applicable Moody's Investors Service (Moody's)
rating symbols and their meanings (as published by Moody's Investor Service)
follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A-1
<PAGE> 34

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

2. SHORT-TERM DEBT

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

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

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

-- Leading market positions in well-established industries.

-- High rates of return on funds employed.

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

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

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

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

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

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

A-2
<PAGE> 35

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 PRIME RATE INCOME TRUST

1 Parkview Plaza

P.O. Box 5555

Oakbrook Terrace, IL 60181-5555

Investment Adviser

VAN KAMPEN INVESTMENT ADVISORY CORP.

1 Parkview Plaza

P.O. Box 5555-5555

Oakbrook Terrace, IL 60181-5555

Principal Underwriter

VAN KAMPEN FUNDS INC.

1 Parkview Plaza

P.O. Box 5555

Oakbrook Terrace, IL 60181-5555

Dividend Disbursing and Transfer Agent

VAN KAMPEN INVESTOR
SERVICES INC.
P.O. BOX 418256
Kansas City, MO 64141-9256
Attn: Van Kampen 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 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> 36

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

PRIME RATE
INCOME TRUST

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

P R O S P E C T U S

NOVEMBER , 1998

[LOGO]
PRIT PRO 10/98
<PAGE> 37

VAN KAMPEN

PRIME RATE INCOME TRUST

STATEMENT OF ADDITIONAL INFORMATION

Van Kampen Prime Rate Income Trust, formerly known as Van Kampen American
Capital Prime Rate Income Trust (prior to July 17, 1998) (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 [ ], 1998, (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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies and Special Risk
Considerations............................................ B-2
Investment Restrictions..................................... B-2
Trustees and Officers....................................... B-4
Portfolio Transactions...................................... B-8
Management of the Fund...................................... B-9
Dividend Reinvestment Plan.................................. B-11
Net Asset Value............................................. B-12
Taxation.................................................... B-13
Repurchase of Shares........................................ B-15
Independent Accountants' Report............................. B-18
Financial Statements for the Year Ended July 31, 1998....... B-19
Notes to Financial Statements............................... B-34
</TABLE>

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 , 1998.

B-1
<PAGE> 38

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 should 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. 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. For further discussion of the characteristics
of Senior Loan interests and the associated special risk considerations, see
"Investment Objective and Policies" and "Special Risk Considerations" in the
Prospectus.

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 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.

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.

B-2
<PAGE> 39

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 has adopted
supplementally a more restrictive non-fundamental investment policy that in
effect changes the phrase "more than 25%" to "25% or more." For purposes of
investment restriction number 2 and the supplement just described, 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.

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.

FUND STRUCTURE. The Fund's fundamental investment policies and restrictions
give the Fund the flexibility to pursue its investment objective through a fund
structure commonly known as a "master-feeder" structure. If the Fund converts to
a master-feeder structure, the existing 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 potentially would 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. The Fund's Board of Trustees presently
does not intend to affect any conversion of the Fund to a master-feeder
structure.

B-3
<PAGE> 40

TRUSTEES AND OFFICERS

The table below sets forth the officers and trustees of the Fund, their
principal occupations for the last five (5) years and their affiliations, if
any, with Van Kampen Investments Inc. ("Van Kampen"), Van Kampen Investment
Advisory Corp. (the "Adviser"), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc., the distributor of the Fund's shares
("VKF"), Van Kampen Management Inc., Van Kampen Advisors Inc., Van Kampen
Investor Services Inc., Van Kampen Insurance Agency of Illinois Inc., Van Kampen
Insurance Agency of Texas Inc., Van Kampen Recordkeeping Services Inc., American
Capital Contractual Services, Inc., Van Kampen Trust Company and Van Kampen
Exchange Corp. The Adviser and Asset Management sometimes are referred to herein
collectively as the "Advisers." For purposes hereof, the term "Fund Complex"
currently consists of 42 investment companies (including the Fund) advised by
the Adviser on its affiliates that have the same members on each investment
company's Board of Trustees. Unless otherwise noted the address of each of the
Trustees and officers is 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL
60181-5555.

DENNIS J. MCDONNELL,* DATE OF BIRTH 05/20/42, PRESIDENT, CHAIRMAN OF THE BOARD
AND TRUSTEE. Mr. McDonnell is Executive Vice President and a Director of Van
Kampen, President, Chief Operating Officer and a Director of the Advisers, Van
Kampen Advisors Inc., and Van Kampen Management Inc. Director or officer of
certain other subsidiaries of Van Kampen. Mr. McDonnell is also a Director of
Global Decisions Group LLC. Prior to July of 1998, Director and Executive Vice
President of VK/AC Holding, Inc. 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. Mr. McDonnell is also President, Chairman of the Board,
Trustee and Managing General Partner of each of the funds in the Fund Complex
and President of other investment companies advised by the Advisers or their
affiliates.

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
McClouth 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 550 Washington Avenue, Glencoe, Illinois 60022. Mr. Myers is also a
Trustee, Director and Managing General Partner of each of the funds in the Fund
Complex.

ROD DAMMEYER, DATE OF BIRTH 11/05/40, TRUSTEE. Mr. Dammeyer is Managing Partner
of Equity Group Investments, Inc. (EGI), a company that makes private equity
investments in other companies, and Vice Chairman 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 member of
the Board of Directors of TeleTech Holdings Inc., Lukens, Inc., Metal
Management, Inc., Stericycle, Inc., Transmedia Networks, Inc., Jacor
Communications, Inc., CNA Surety, Corp., IMC Global Inc., Antec Corporation,
Groupo Azucarero Mexico (GAM) and Kent State University Foundation. Mr. Dammeyer
was previously a Director of Santa Fe Energy Resources, Inc., Falcon Building
Products, Inc., Lomas Financial Corporation, Santa Fe Pacific Corporation,
Q-Tel, S.A. de C.V. and Servicios Financieros Quadrum, S.A. Prior to 1998, Mr.
Dammeyer was a Director of Capsure Holdings Corp., Revco D.S., Inc., the Chase
Manhattan Corporation National Advisory Board and Sealy, Inc. His address is Two
North Riverside Plaza, Suite 1950, Chicago, Illinois 60606. Mr. Dammeyer is also
a Trustee and Managing General Partner of each of the funds in the Fund Complex.

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

B-4
<PAGE> 41

Manufacturers' Association. His address is 1800 Swift Drive, Oak Brook, Illinois
60523. Mr. Arch is also a Trustee and Managing General Partner of each of the
funds in the Fund Complex.

STEVEN MULLER, DATE OF BIRTH 11/22/27, TRUSTEE. Dr. Muller is Chairman of The
21(st) Century Foundation (public affairs). He is President Emeritus of The
Johns Hopkins University. He is also a Director of Beneficial Corporation (bank
holding company) and Millpore Corporation (biotechnology). Prior to December,
1997, Dr. Muller was a director of the Common Sense Trust and, prior to May,
1997, a Director of BT Alex. Brown & Sons (investment banking). His address is
The Johns Hopkins University, Suite 711, 1619 Massachusetts Avenue, N.W.,
Washington, D.C. 20036. Dr. Muller is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex.

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 and Managing General
Partner of each of the funds in the Fund Complex.

DON G. POWELL, DATE OF BIRTH 10/19/39, TRUSTEE. Mr. Powell is Chairman and a
Director of Van Kampen, VKF, the Advisers and Van Kampen Investor Services Inc.
Mr. Powell is also Chairman and Director of certain other subsidiaries of Van
Kampen, Chairman of the Board of Governors and the Executive Committee of the
Investment Company Institute. Prior to July 1998, Director and Chairman of VK/AC
Holding, Inc. Prior to November 1996, President, Chief Executive Officer and a
Director of VK/AC Holding, Inc. His address is 2800 Post Oak Blvd., Houston, TX
77056. Mr. Powell is Trustee and Managing General Partner of each of the funds
in the Fund Complex and Trustee and Director of other investment companies
advised by the Advisers or their affiliates.

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 and Managing General
Partner of each of the funds in the Fund Complex.

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), legal counsel
to each of the funds in the Fund Complex, and other investment companies advised
by the Advisers or their affiliates. His address is 333 West Wacker Drive,
Chicago, Illinois 60606. Mr. Whalen is also a Trustee and Managing General
Partner of each of the funds in the Fund Complex and Trustee and Director of
other investment companies advised by the Advisers or their affiliates.

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 Asset Management, Van Kampen Management, Inc. and Van Kampen
Advisors Inc. Prior to September of 1996, he was a Director of McCarthy,
Crisanti & Maffei, Inc. He is Vice President of each of the funds in the Fund
Complex and certain other investment companies advised by the Advisers or their
affiliates.

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 Management Inc. and Asset Management.

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. He is also Executive Vice President, General Counsel, Assistant
Secretary and Director of the Advisers, VKF and Van Kampen Investor Services
Inc., and of certain other subsidiaries of Van Kampen. Prior to July of 1998,
Mr. Nyberg was Executive Vice President, General Counsel, Secretary and Director
of VK/AC Holding, Inc. Prior to September of 1996, he

B-5
<PAGE> 42

was General Counsel of McCarthy, Crisanti & Maffei, Inc. He is a Vice President
and Secretary of each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers and their affiliates, and is a
Director of ICI Mutual Insurance Co., a provider of insurance to members of the
Investment Company Institute.

EDWARD C. WOOD, III, DATE OF BIRTH 01/11/56, VICE PRESIDENT. Mr. Wood is Senior
Vice President of Van Kampen, the Advisers and Van Kampen Management Inc. He is
also Senior Vice President and Chief Operating Officer of VKF. Mr. Wood is Vice
President of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers and their affiliates.

CURTIS W. MORELL, DATE OF BIRTH 08/04/46, VICE PRESIDENT AND CHIEF ACCOUNTING
OFFICER. Mr. Morell is Senior Vice President of Van Kampen and the Advisers.
His address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Morell is Vice
President and Chief Accounting Officer of each of the funds in the Fund Complex
and certain other investment companies advised by the Advisers and their
affiliates.

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, VKF, the Advisers and of certain other subsidiaries of Van Kampen. Prior
to September of 1996, Mr. Wetherell was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Mr. Wetherell is an Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.

NICHOLAS DALMASO, DATE OF BIRTH 03/01/65, ASSISTANT SECRETARY. Mr. Dalmaso is
Vice President, Assistant Secretary and Associate General Counsel of Van Kampen,
VKF, the Advisers and of certain other subsidiaries of Van Kampen. Mr. Dalmaso
is Assistant Secretary of each of the funds in the Fund Complex and certain
other investment companies advised by the Advisers and their affiliates.

JAMES J. BOYNE, DATE OF BIRTH 04/10/66, ASSISTANT SECRETARY. Mr. Boyne is Vice
President, Associate General Counsel and Assistant Secretary of Van Kampen, VKF,
the Advisers, Van Kampen Investor Services Inc., and of certain other
subsidiaries of Van Kampen. Prior to July of 1998, Mr. Boyne was Vice President,
Associate General Counsel and Assistant Secretary of VK/AC Holding, Inc. Prior
to September of 1996, Mr. Boyne was Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. He is Assistant Secretary of the Fund, Van Kampen Senior Floating
Rate Fund and Van Kampen Senior Income Trust.

SCOTT E. MARTIN, DATE OF BIRTH 08/20/56, ASSISTANT SECRETARY. Mr. Martin is
Senior Vice President, Deputy General Counsel and Secretary of Van Kampen, VKF,
the Advisers, Van Kampen Investor Services Inc., and of certain other
subsidiaries of Van Kampen. Prior to July of 1998, Mr. Martin was Senior Vice
President, Deputy General Counsel and Assistant Secretary of VK/AC Holding, Inc.
Prior to September of 1996, Mr. Boyne was Deputy General Counsel and Secretary
of McCarthy, Crisanti Maffei, Inc. He is a Assistant Secretary of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.

HUEY P. FALGOUT, JR., DATE OF BIRTH 11/15/63, ASSISTANT SECRETARY. Mr. Falgout
is Vice President and an Attorney of Van Kampen, the Advisers, VKF, Van Kampen
Investor Services Inc, and of certain other subsidiaries of Van Kampen. His
address is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Falgout is Assistant
Secretary of each of the funds in the Fund Complex and certain other investment
companies advised by the Advisers and their affiliates.

JOHN L. SULLIVAN, DATE OF BIRTH 08/20/55, TREASURER AND CHIEF FINANCIAL
OFFICER. Mr. Sullivan is First Vice President of Van Kampen and the Advisers.
Mr. Sullivan is Chief Financial Officer of each of the funds in the Fund Complex
and certain other investment companies advised by the Advisers and their
affiliates.

STEVEN M. HILL, DATE OF BIRTH 10/16/64, ASSISTANT TREASURER. Mr. Hill is Vice
President of Van Kampen and the Advisers. Mr. Hill is Treasurer of each of the
funds in the Fund Complex and certain other investment companies advised by the
Advisers and their affiliates.

TANYA M. LODEN, DATE OF BIRTH 11/19/59, CONTROLLER. Ms. Loden is Vice President
of Van Kampen and the Advisers. Her address is 2800 Post Oak Blvd., Houston, TX
77056. Ms. Loden is Controller of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers and their affiliates.

B-6
<PAGE> 43

MICHAEL ROBERT SULLIVAN, DATE OF BIRTH 03/30/33, ASSISTANT CONTROLLER. Mr.
Sullivan is Assistant Vice President of Van Kampen and the Advisers. His address
is 2800 Post Oak Blvd., Houston, TX 77056. Mr. Sullivan is Assistant Controller
of each of the funds in the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates.

*Such trustees are "interested persons" as defined in the 1940 Act.
Messrs. McDonnell and Powell are interested persons of the Adviser and
the Fund by reason of their positions 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 hold the same positions with other funds in the Fund
Complex. The officers and Trustees as a group own less than 1% of the Fund's
outstanding Shares. The compensation of the officers and trustees who are
affiliated persons (as defined in the 1940 Act) of the Advisory Corp, VKF or Van
Kampen is paid by the respective entity. The Fund pays the compensation of all
other officers and trustees of the Fund. Funds in the Fund Complex, including
the Fund, pay the Trustees who are not affiliated persons of the Advisory Corp,
VKF or Van Kampen, an annual Fund Complex retainer (generally equal to the
product of $2,500 times the number of funds in the Fund Complex), which retainer
is then allocated among funds in the Fund Complex based on their relative net
assets, and $250 per fund per meeting of the Board of Trustees, 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 Advisory Corp,
VKF or Van Kampen, have at least ten years of service (including years of
service prior to adoption of the retirement plan) and retire at or after
attaining the age of 60, are eligible to receive a retirement benefit equal to
$2,500 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
Advisory Corp, VKF or Van Kampen, 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 funds in the Fund Complex as selected by the trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of other
funds in the Fund Complex 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.

COMPENSATION TABLE

<TABLE>
<CAPTION>
FUND COMPLEX
--------------------------------------------------------------
TOTAL
AGGREGATE ESTIMATED AGGREGATE COMPENSATION
YEAR OF COMPENSATION PENSION OR RETIREMENT ESTIMATED AGGREGATE BEFORE DEFERRAL
ELECTION/ BEFORE DEFERRAL BENEFITS ACCRUED ANNUAL BENEFITS FROM THE
NAME(1) APPOINTMENT FROM THE FUND(2) AS PART OF EXPENSES(3) UPON RETIREMENT(4) FUND COMPLEX(5)
------- ----------- ---------------- ---------------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
David C. Arch......... 1989 $23,055 $10,861 $85,000 $160,625
Rod Dammeyer.......... 1989 23,055 19,532 85,000 160,625
Howard J Kerr......... 1992 23,055 37,215 85,000 160,625
Steven Muller......... 1998 23,055 22,686 0 160,625
Theodore A. Myers..... 1989 23,055 66,530 85,000 160,625
Hugo F.
Sonnenschein........ 1994 23,055 18,878 85,000 160,625
Wayne W. Whalen....... 1989 23,042 22,126 85,000 160,375
</TABLE>

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

(1) Each of Messrs. McDonnell and Powell is an affiliated person of the
Adviser, VKF and Van Kampen, 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, 1998. The following trustees
deferred all or a portion of their compensation from the Fund during the
fiscal year

B-7
<PAGE> 44

ended July 31, 1998: Mr. Dammeyer $23,055; Mr. Sonnenschein $23,055; Mr. Kerr
$23,055; and Mr. Whalen $23,042. The cumulative deferred compensation (including
interest) accrued with respect to each trustee from the Fund as of July 31, 1998
is as follows: Mr. Dammeyer $41,486; Mr. Sonnenschein $41,451; Mr. Kerr
$16,044; and Mr. Whalen $36,604. 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 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 represent the sum of the estimated Pension
or Retirement Benefit Accruals expected to be accrued by the 42 operating
investment companies in the Fund Complex as of December 31, 1998 for their
respective fiscal year ends in 1998. The retirement plan is described above
the table.

(4) The amounts shown in this column represent the sum of the estimated annual
benefits payable per year by the 42 operating investment companies in the
Fund Complex as of December 31, 1998 for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the compensation table.

(5) The amounts shown in this column are accumulated from the Aggregate
Compensation of the 42 investment companies in the Fund Complex for the
year ended December 31, 1997 before deferral by the trustees under the
deferred compensation plan. The Adviser also serves as investment adviser
for other investment companies; however, with the exception of Messrs.
McDonnell, Powell 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
$268,447 for the year ended December 31, 1997.

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, although a more developed market may exist for
certain Senior Loans. 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 many 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 "Special Risk Considerations" in the
Prospectus.

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 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, VKF or Van Kampen. For the fiscal years ended July 31, 1996, 1997 and
1998, the Fund paid brokerage commissions of $179,000, $51,563 and $0,
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

B-8
<PAGE> 45

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. In this regard allocations of Senior Loans by the
Adviser will be made taking into account a variety of factors, including the
assets of such clients then available for investment in Senior Loans, such
clients' relative net asset value and such clients' investment objectives,
policies and limitations. 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.

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 Investments Inc. Van Kampen Investments
Inc. is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.
The Adviser's principal office is located at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181.

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 May 28, 1997. The Advisory

B-9
<PAGE> 46

Agreement continues 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 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 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, 1996, 1997 and 1998, the
Fund recognized investment advisory fees pursuant to the Advisory Agreement of
$36,408,493 $52,313,966 and $63,011,682, 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 Shares are offered for sale. 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, 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 ADMINISTRATOR

The administrator for the Fund is Van Kampen Investments Inc. (in such
capacity, the "Administrator"), who is an affiliate of the Adviser. For the
fiscal years ended July 31, 1996, 1997 and 1998, the Fund recognized
administrative fees pursuant to the Administration Agreement of $9,614,696,
$13,976,102 and $16,947,689, 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 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 Shares, expenses of
filing reports and other documents filed with governmental agencies, expenses of
annual and special meetings of holders of 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.

B-10
<PAGE> 47

OTHER AGREEMENTS

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

DIVIDEND REINVESTMENT PLAN

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

State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for Shareholders in administering the Plan. Participants in the Plan
will receive 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 Shareholder's account in the Plan and furnishes
monthly written confirmations of all transactions in the accounts, including
information needed by Shareholders for personal and tax records. Shares will be
held by the Plan Agent in non-certificated form in the name of the participant,
and each Shareholder's proxy will include those Shares purchased 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 Shareholders, such as banks, brokers or nominees, which hold
Shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of Shares certified from time to time by the
record Shareholders as representing the total amount registered in the record
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 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 Shareholders of the
Fund.

All registered 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 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 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 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 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 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.

B-11
<PAGE> 48

When a participant withdraws from the Plan or upon termination of the Plan as
provided above, certificates for whole 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 Share credited to such account. All correspondence concerning the dividend
reinvestment plan should be directed to the State Street Bank and Trust Company,
as Plan Agent, c/o Van Kampen Investor Services Inc., P.O. Box 418256, Kansas
City, MO 64153-9256. Please call (800) 341-2911 between the hours of 7:00 a.m.
and 7:00 p.m. Central Standard Time if you have questions regarding the Plan.

NET ASSET VALUE

The net asset value per share of the Fund's 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 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 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

B-12
<PAGE> 49

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 $9.92
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 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. 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. In October 1997, domestic stocks declined by more than
10% in less than one week and world markets were affected by currency
instability and market volatility in Asia.

TAXATION

FEDERAL INCOME 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; and (b) 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).

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 an amount equal to the sum of (a) 98% of its
ordinary income for such year and (b) 98% of its capital gain net income (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

B-13
<PAGE> 50

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.

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.

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 gain 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 gain
dividends), see "Capital Gains Rate" 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.

B-14
<PAGE> 51

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
identification number (in the case of individuals, their social security number)
and certain required certifications, or who are otherwise subject to backup
withholding. Foreign shareholders, including shareholders who are nonresident
aliens, may be subject to U.S. withholding tax on certain distributions (whether
received in cash or shares) at a rate of 30% or such lower rate as prescribed by
an applicable income tax treaty.

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 Rate" below. It is
possible, although the Fund believes it is unlikely, that, in connection with a
tender offer, distributions to tendering shareholders may be subject to tax as
ordinary income (rather than gain or loss), which in turn may result in deemed
distributions subject to tax as ordinary income for non-tendering shareholders.
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

The maximum tax applicable to net capital gains recognized by individuals and
other non-corporate taxpayers is (i) the same as the maximum ordinary income tax
rate for capital assets held for one year or less or (ii) 20% for capital assets
held for more than one year.

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, as amended
and restated on April 16, 1998 (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 $500,000,000 to the Fund, which is not secured by the assets of the Fund
or other collateral. The Fund has not drawn down any of the funds available
under the Credit Agreement. The proceeds of any amounts borrowed under the
Credit Agreement are to be used to provide the Fund with additional liquidity to
meet its obligations to purchase

B-15
<PAGE> 52

Shares pursuant to any tender offer that it may make. The Credit Agreement has
terms and conditions substantially similar to the following:

a. The Fund is entitled to borrow loans ("Loans") from the Financial
Institutions amounts which in the aggregate do not exceed the lesser of (i)
the $500 million credit facility each or (ii) twelve and one half percent
(12.5%) of the net asset value of the Fund (defined as total assets minus
total liabilities minus assets subject to liens).

b. Loans made under the Credit Agreement, if any, will bear interest daily, at
the Fund's option, (i) at a rate per annum equal to the federal funds rate
from time to time plus 0.375%, provided, however, that during any period
the aggregate outstanding loans exceed $250 million, the rate shall be the
federal funds rate plus 0.50%, or (ii) at a rate per annum equal to a
reserve-adjusted interbank offered rate offered by BofA's Grand Cayman
Branch ("IBOR") plus 0.375% per annum, provided, however, that during any
period the aggregate outstanding loans exceed $250 million, the rate shall
be IBOR plus 0.50%. Such interest will be due on the outstanding principal
amount (i) as to any federal funds rate loan on the last business day of
each calendar quarter and (ii) as any offshore rate loan, from one (1) day
to sixty (60) days from the date of the loan, as selected by the Fund in
advance. Overdue payments of principal and interest will bear interest,
payable upon demand, at a penalty rate. No Loan shall be outstanding for a
period of more than sixty (60) days, and there shall be no more than three
Interest Periods in effect in respect of an offshore rate loan.

c. The Fund paid approximately $107,000 of fees and expenses to BofA or its
affiliates on the date the Credit Agreement was executed. In addition,
during the term of the Credit Agreement, the Fund is obligated to pay a
commitment fee computed at the rate of 0.07% per annum on the average daily
unused amount of the facility.

d. The principal amount of loans made under the Credit Agreement, if any, are
required to be paid sixty (60) days from the date of the loan. The Fund is
entitled to prepay a loan in multiples of $1,000,000, provided that the
Fund gives sufficient notices of prepayment. On the Commitment Termination
Date (as defined below), all outstanding principal and accrued interest
under the Credit Agreement will be due and payable in full.

e. The drawdown of the initial Loan, if any, under the Credit Agreement is
subject to certain conditions, including, among other things, the Fund
executing and delivering a promissory note made payable to the order of
each Financial Institution, in the form attached to the Credit Agreement
(the "Promissory Notes").

The drawdown of each Loan, if any, is further conditioned upon the
satisfaction of additional conditions, including, without limitation, (i)
the providing of notice with respect to the Loan, (ii) the Fund's asset
coverage ratio must be at least 8 to 1; (iii) there being no default or
event of default in existence; (iv) the representations and warranties made
in the Credit Agreement continuing to be true and (v) there are no loans
outstanding for more than sixty (60) days on the day preceding the proposed
borrowing date.

f. The Credit Agreement contains various affirmative and negative covenants
of the Fund, including, without limitation, obligations: (i) to provide
periodic financial information; (ii) with limited exceptions, to not
consolidate with or merge into any other entity or have any other entity
merge into it and to not sell all or any substantial part of its assets;
(iii) to continue to engage in its current type of business and to
maintain its existence as a business trust; (iv) to comply with applicable
laws, rules and regulations and perform its obligations under the Credit
Agreement; (v) to maintain insurance on its property and business; (vi) to
limit the amount of its debt based upon 12.5% of the net asset value of
the Fund; and (vii) to not create any lien on any of its assets, with
certain exceptions.

B-16
<PAGE> 53

g. The Credit Agreement also contains various events of default (with certain
specified grace periods), including, without limitation: (i) failure to pay
when due any amounts required to be paid to Financial Institutions under
the Credit Agreement or the Promissory Notes; (ii) any material
misrepresentations in the Credit Agreement or documents delivered to
Financial Institutions; (iii) failure to observe or perform certain terms,
covenants and agreements contained in the Credit Agreement, the Promissory
Notes or other documents delivered to the Financial Institutions; (iv)
failure to comply with the Fund's fundamental investment policies or
investment restrictions; (v) failure to comply with all material provisions
of the Investment Company Act of 1940; (vi) the voluntary or involuntary
bankruptcy of the Fund; (vii) the entry of judgments for the payment of
money in excess of $5,000,000 in the aggregate which remains unsatisfied or
unstayed for a period of 30 days; and (viii) a change in control of the
Fund's investment adviser.

h. The credit facility provided pursuant to the Credit Agreement will
terminate on April 16, 1999 (the "Commitment Termination Date"), unless
extended pursuant to the terms thereof, and all accrued interest and
principal will be due thereon.

The Fund intends to repay any loans under the Credit Agreement from proceeds
from the specified pay-downs from the interests in Senior Loans (as defined
below) which will be acquired and from proceeds from the sale of Shares.

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 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 Shares if Shares were
repurchased. The Trustees may modify these conditions in light of experience.

Any tender offer made by the Fund for its Shares will be at a price equal to
the net asset value of the 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 Shares and will establish
procedures which will be specified in the tender offer documents, to enable
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 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 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 Shares
will be recorded and reported as an offset to Shareholders' equity and
accordingly will reduce the Fund's total assets. If Treasury Shares are retired,
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 Shares
tendered, the Fund may realize gains and losses.

B-17
<PAGE> 54

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders of

Van Kampen Prime Rate Income Trust:

We have audited the accompanying statement of assets and liabilities of Van
Kampen Prime Rate Income Trust (the "Trust"), including the portfolio of
investments, as of July 31, 1998, 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 owned as of July
31, 1998, 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 Prime Rate Income Trust as of July 31, 1998, 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 4, 1998

B-18
<PAGE> 55

PORTFOLIO OF INVESTMENTS

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS 90.5%
AEROSPACE/DEFENSE 1.6%
$ 7,074 Aerostructures Corp., Term Loan....................... NR NR 12/31/03 $ 7,074,194
4,766 Alliant Techsystems, Inc., Term Loan.................. Ba2 BB 03/15/01 4,769,907
7,500 Fairchild Holding Corp., Term Loan.................... NR NR 06/18/04 7,500,000
42,813 Gulfstream Delaware Corp., Term Loan.................. NR NR 09/30/02 42,825,899
15,248 K & F Industries, Inc., Term Loan..................... Ba3 B+ 10/15/05 15,247,755
7,920 Tri-Star, Inc., Term Loan............................. NR NR 09/30/03 7,929,384
27,209 United Defense Industries, Inc., Term Loan............ B1 B+ 10/06/05 to 10/06/06 27,207,940
6,538 Whittaker Corp., Term Loan............................ NR NR 05/30/03 6,538,464
2,000 Whittaker Corp., Revolving Credit..................... NR NR 05/30/01 2,000,000
--------------
121,093,543
--------------
AUTOMOTIVE 2.7%
34,000 American Axle and Manufacturing, Inc., Co., Term
Loan.................................................. NR NR 04/30/06 34,000,000
8,500 American Bumper and Manufacturing Co., Term Loan...... NR NR 04/30/04 8,507,780
40,970 Breed Technologies, Inc., Term Loan................... B1 BB 04/27/04 to 04/27/06 40,970,032
68,701 Federal Mogul Corp., Term Loan........................ Ba2 NR 12/31/03 to 12/31/05 68,710,580
379 Federal Mogul Corp., Revolving Credit................. Ba2 NR 03/12/04 379,562
4,904 JMS Automotive Rebuilders, Inc., Term Loan............ NR NR 06/30/04 4,903,681
7,883 Murray's Discount Auto Stores, Inc., Term Loan........ NR NR 06/30/03 7,882,625
9,748 The Plastech Group, Term Loan......................... NR NR 04/01/02 to 04/01/04 9,747,576
20,000 Safelite Glass Corp., Term Loan....................... Ba3 NR 12/23/04 to 12/23/05 20,000,044
--------------
195,101,880
--------------
BROADCASTING -- CABLE 7.7%
19,175 Adelphia Cable Partners, L.P., Revolving Credit....... Ba2 NR 12/31/03 19,205,696
22,500 Bresnan Communications Co., L.P., Term Loan........... NR NR 03/31/06 22,567,009
5,910 Cable Systems International, Inc., Term Loan.......... NR NR 12/31/02 5,912,020
43,971 Charter Communications Entertainment I, Term Loan..... NR NR 06/30/04 43,971,090
17,500 Charter Communications Entertainment II, Term Loan.... Ba3 NR 12/31/07 17,500,025
32,000 Charter Communications Entertainment II & Long Beach,
Term Loan............................................. Ba3 NR 03/31/06 32,049,512
47,381 Chelsea Communications, Inc., Term Loan............... NR NR 12/31/04 47,381,250
16,603 Coaxial Communications of Central Ohio, Term Loan..... NR NR 12/31/99 16,603,352
12,000 Encore Investments, Term Loan......................... NR NR 06/30/04 12,000,314
37,000 Falcon Holdings Group, L.P., Term Loan................ Ba3 BB 12/31/07 37,000,057
15,000 Frontiervision Operating Partners, L.P., Term Loan.... Ba3 BB 03/31/06 15,000,043
22,361 Garden State Cablevision, L.P., Revolving Credit...... NR NR 06/30/05 22,358,780
14,972 Hilton Head Communications, L.P., Revolving Credit.... NR NR 06/30/03 14,996,182
11,000 Insight Communication Co., L.P., Term Loan............ NR NR 03/31/05 11,007,462
7,360 Insight Communication Co., L.P., Revolving Credit..... NR NR 03/31/05 7,367,956
53,500 InterMedia Partners IV, L.P., Term Loan............... Ba3 NR 01/01/05 to 12/31/07 53,504,334
62,427 Marcus Cable Operating Co., Term Loan................. Ba3 NR 12/31/02 to 04/30/04 62,454,707
4,171 Marcus Cable Operating Co., Revolving Credit.......... Ba3 NR 12/31/02 4,171,005
4,426 Mark Twain Cablevision, L.P., Term Loan............... NR NR 06/30/04 4,426,981
23,727 TCI Pacific, Inc., Term Loan.......................... NR NR 12/31/04 23,725,330
30,286 Triax Midwest Associates, Term Loan................... NR NR 06/30/06 to 06/30/07 30,286,004
798 Triax Midwest Associates, Revolving Credit............ NR NR 06/30/06 798,258
27,029 TW Fanch, Revolving Credit............................ NR NR 12/31/04 27,065,373
17,000 UCA Group, Revolving Credit........................... NR NR 09/30/03 17,000,318
15,000 USA Networks, Inc., Term Loan......................... Ba1 NR 12/31/03 15,000,093
--------------
563,353,151
--------------
</TABLE>

See Notes to Financial Statements

B-19
<PAGE> 56
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
BROADCASTING -- DIVERSIFIED 1.4%
$ 76,638 Chancellor Broadcasting Co., Term Loan................ Ba1 BB- 06/30/05 $ 76,764,326
23,497 Chancellor Broadcasting Co., Revolving Credit......... Ba1 BB- 06/30/05 23,571,806
--------------
100,336,132
--------------
BROADCASTING -- RADIO 0.5%
35,000 Jacor Communications, Inc., Term Loan................. Ba2 BB- 12/31/04 34,997,219
--------------
BROADCASTING -- TELEVISION 2.0%
12,000 Benedek Broadcasting Corp., Term Loan................. B1 NR 05/01/01 to 11/01/02 12,000,054
20,000 Black Entertainment Television, Inc., Term Loan....... NR NR 06/30/06 20,000,000
5,000 Lin Television Corp., Term Loan....................... Ba3 B- 03/31/07 4,999,794
43,421 NTL Group (UK), Inc., Term Loan....................... NR NR 12/31/05 43,421,166
66,000 Sinclair Broadcasting, Term Loan...................... Ba2 BB- 09/15/05 66,000,440
--------------
146,421,454
--------------
BUILDINGS & REAL ESTATE 0.7%
50,000 Walter Industries, Inc., Term Loan.................... NR NR 10/15/03 49,998,394
--------------
CHEMICAL, PLASTICS & RUBBER 3.3%
11,283 Cedar Chemical Corp., Term Loan....................... NR NR 10/30/03 11,287,698
10,581 Foamex, L.P., Term Loan............................... Ba3 B+ 06/30/05 to 06/30/06 10,585,600
5,276 Foamex, L.P., Revolving Credit........................ Ba3 B+ 06/12/03 5,277,046
10,000 Harris Specialty Chemicals, Inc., Term Loan........... NR NR 03/31/06 10,000,000
14,409 High Performance Plastics, Inc., Term Loan............ NR NR 03/31/05 14,409,091
58,310 Huntsman Group Holdings, Term Loan.................... Ba2 NR 12/31/02 to 12/31/05 58,319,167
10,762 Huntsman Group Holdings, Revolving Credit............. Ba2 NR 12/31/02 10,761,845
19,800 Huntsman Specialty Chemical Corp., Term Loan.......... Ba2 NR 03/15/04 to 03/15/05 19,806,383
5,102 NEN Acquisition, Inc., Term Loan...................... NR NR 03/31/05 5,118,605
9,900 Pioneer Americas Acquisition Corp., Term Loan......... B2 B+ 12/31/06 9,903,972
12,033 Reid Plastics, Inc., Term Loan........................ NR NR 11/12/03 12,044,728
43,021 Sterling Chemicals, Inc., Term Loan................... Ba3 NR 09/30/04 42,989,054
11,807 Texas Petrochemicals Corp., Term Loan................. Ba3 BB- 06/30/01 to 06/30/04 11,808,670
1,476 Texas Petrochemicals Corp., Revolving Credit.......... Ba3 BB- 12/31/02 1,475,593
6,538 TruSeal Technologies, Inc., Term Loan................. NR NR 06/30/04 6,536,586
8,180 Vinings Industries, Inc., Term Loan................... NR NR 03/31/05 8,179,988
--------------
238,504,026
--------------
COMMUNICATIONS -- TELEPHONE 0.2%
4,750 International Data Response Corp., Term Loan.......... NR NR 12/31/01 to 12/31/02 4,759,044
7,155 Mitel Corp., Term Loan................................ NR NR 12/26/03 7,155,000
--------------
11,914,044
--------------
CONSTRUCTION MATERIALS 1.9%
22,796 Behr Process Corp., Term Loan......................... NR NR 03/31/02 to 03/31/05 22,802,929
1,588 Behr Process Corp., Revolving Credit.................. NR NR 03/31/02 1,588,078
1,639 Brand Scaffold Services, Inc., Term Loan.............. B1 NR 09/30/02 1,644,625
10,000 Dayton Superior Corp., Term Loan...................... NR NR 09/29/05 10,000,084
6,833 Enclosures Holding Co., Term Loan..................... NR NR 02/28/05 6,925,478
13,671 Falcon Building Products, Inc., Term Loan............. B1 B+ 06/30/05 13,695,671
59,549 National Gypsum Co., Term Loan........................ NR NR 09/20/03 59,548,756
4,655 Panolam Industries, Inc., Term Loan................... NR NR 10/31/02 4,654,916
6,973 Reliant Building Products, Inc., Term Loan............ B1 B+ 03/31/04 6,973,479
14,925 Werner Holding Co., Inc., Term Loan................... Ba3 B+ 11/30/04 to 11/30/05 14,924,503
--------------
142,758,519
--------------
</TABLE>

See Notes to Financial Statements

B-20
<PAGE> 57
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
CONTAINERS, PACKAGING & GLASS 3.9%
$ 25,000 Dr. Pepper Bottling Holdings, Inc., Term Loan......... NR NR 12/31/05 $ 25,000,000
8,373 Fleming Packaging Corp., Term Loan.................... NR NR 08/30/04 8,372,500
9,967 Graham Packaging Co., Term Loan....................... B1 B+ 01/31/06 to 01/31/07 9,966,400
30,000 Huntsman Packaging Corp., Term Loan................... Ba2 BB- 09/30/05 to 09/30/06 30,000,000
29,850 IPC, Inc., Term Loan.................................. B1 NR 10/02/04 29,850,331
163,244 Stone Container Corp., Term Loan...................... Ba3 B+ 04/01/00 to 10/01/03 163,619,032
3,639 Stone Container Corp., Revolving Credit............... Ba3 B+ 05/15/99 3,639,468
8,051 Stronghaven, Inc., Term Loan.......................... NR NR 05/15/04 8,059,566
7,182 Tekni-Plex, Inc., Term Loan........................... B1 B+ 03/03/06 7,182,000
--------------
285,689,297
--------------
DIVERSIFIED MANUFACTURING 2.3%
4,024 Advanced Accessory Systems, LLC, Term Loan............ B1 B+ 10/30/04 4,024,443
9,000 CII Carbon, LLC, Term Loan............................ NR NR 06/25/08 9,003,360
6,406 ConMed Corp., Term Loan............................... B1 BB- 12/30/04 6,405,629
7,425 Desa International, Term Loan......................... Ba3 B+ 12/26/04 7,425,002
52,500 Evenflo & Spalding Holdings Corp., Term Loan.......... Ba3 B- 09/30/03 to 03/30/06 51,455,013
7,450 Evenflo & Spalding Holdings Corp., Revolving Credit... Ba3 B- 09/30/03 7,300,999
25,838 International Wire Group, Inc., Term Loan............. B1 NR 09/30/03 25,850,749
10,833 Intesys Technologies, Inc., Term Loan................. NR NR 06/30/04 to 06/30/06 10,833,351
763 Intesys Technologies, Inc., Revolving Credit.......... NR NR 06/30/06 762,671
8,782 M.W. Manufacturers, Term Loan......................... NR NR 09/15/02 8,782,483
8,500 Neenah Foundry Co., Term Loan......................... Ba3 BB- 09/30/05 8,500,000
24,896 UCAR International, Inc., Term Loan................... Ba2 B- 12/31/02 24,903,744
6,161 U.F. Acquisition, Term Loan........................... NR NR 12/15/02 6,161,250
--------------
171,408,694
--------------
ECOLOGICAL 1.4%
100,400 Safety-Kleen Corp., Term Loan......................... Ba3 BB 04/03/05 to 04/03/06 100,400,381
--------------
EDUCATION & CHILD CARE 0.2%
8,690 Kindercare Learning Centers, Inc., Term Loan.......... Ba3 B+ 03/21/06 8,690,000
5,000 La Petite Academy, Inc., Term Loan.................... B2 B 05/11/05 5,000,052
--------------
13,690,052
--------------
ELECTRONICS 3.3%
14,925 Alliance Imaging, Inc., Term Loan..................... B1 B+ 12/18/03 to 06/18/04 14,924,340
22,252 Amphenol Corp., Term Loan............................. Ba3 B+ 10/03/04 to 05/19/06 22,244,225
6,738 Banker's Systems, Inc., Term Loan..................... NR NR 11/01/02 6,737,500
7,268 Beltone Electronics, Inc., Term Loan.................. NR NR 10/31/03 to 10/31/04 7,267,582
9,205 Berg Electronics, Inc., Term Loan..................... Ba3 NR 06/30/03 9,204,172
5,850 Berg Electronics, Inc., Revolving Credit.............. Ba3 NR 06/30/03 5,850,011
10,894 Chatham Technologies Acquisition, Inc., Term Loan..... NR NR 08/18/03 to 08/18/05 10,894,175
5,888 Claricom, Inc., Term Loan............................. NR NR 11/30/02 5,887,963
7,000 Control Data Systems, Inc., Term Loan................. NR NR 11/26/00 7,000,012
43,768 DecisionOne Corp., Term Loan.......................... B1 B+ 08/07/03 to 08/07/05 43,768,158
17,143 Fairchild Semiconductor Corp., Term Loan.............. Ba3 BB 03/11/03 17,141,305
5,400 Fisher Scientific International, Inc., Term Loan...... Ba3 B+ 01/21/05 to 01/21/06 5,501,762
15,451 Graphic Controls Corp., Term Loan..................... B1 NR 09/28/03 15,393,342
3,981 Labtec, Inc., Term Loan............................... NR NR 10/07/04 3,980,921
8,358 Rowe International, Inc., Term Loan (a)............... NR NR 03/31/00 7,104,583
8,786 Sarcom, Inc., Term Loan............................... NR NR 12/31/02 8,805,564
25,000 Sterling Diagnostic Imaging, Inc., Term Loan.......... NR NR 09/30/05 25,000,000

</TABLE>

See Notes to Financial Statements

B-21

<PAGE> 58
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
ELECTRONICS (CONTINUED)
$ 13,707 Viasystems, Inc., Term Loan........................... B1 B+ 03/31/04 to 06/30/05 $ 13,714,170
91 Viasystems, Inc., Revolving Credit.................... B1 B+ 12/31/02 90,506
2,500 Wavetek Corp., Term Loan.............................. Ba3 BB- 12/15/02 2,500,026
500 Wavetek Corp., Revolving Credit....................... Ba3 BB- 12/15/02 500,005
4,925 WGL Acquisition Corp., Term Loan...................... NR NR 07/30/04 4,925,000
--------------
238,435,322
--------------
ENTERTAINMENT/LEISURE 4.3%
24,886 AMF Group, Inc., Term Loan............................ Ba2 BB- 03/31/03 to 03/31/04 24,879,867
21,500 ASC Network Corp., Term Loan.......................... NR NR 05/31/06 21,500,000
2,500 Camelot Music Holdings, Inc., Revolving Credit........ NR NR 01/27/02 2,500,000
33,000 Fleer Corp., Term Loan (a) (b)........................ NR NR 02/28/02 24,750,000
20,000 Florida Panthers Holding, Inc., Term Loan............. NR NR 12/15/98 20,000,000
7,920 KSL Recreation Group, Inc., Term Loan................. B2 B+ 04/30/05 to 04/30/06 7,927,479
4,503 KSL Recreation Group, Inc., Revolving Credit.......... B2 B+ 04/30/04 4,502,783
79,000 Metro-Goldwyn-Mayer, Inc., Term Loan.................. Ba1 NR 03/31/05 to 03/31/06 79,000,000
28,080 Metro-Goldwyn-Mayer, Inc., Revolving Credit........... Ba1 NR 09/30/03 28,080,273
7,000 Regal Cinemas, Inc., Term Loan........................ Ba3 BB- 05/27/06 to 05/27/07 7,000,000
9,646 RTI Funding Corp., Term Loan.......................... NR NR 02/08/03 to 02/08/04 9,645,988
10,000 SFX Entertainment, Inc., Term Loan.................... B1 BB- 03/31/06 10,000,027
6,700 Sportcraft, Ltd., Term Loan........................... NR NR 12/31/02 6,700,000
46,819 Viacom, Inc., Term Loan............................... Ba2 BB+ 04/01/02 to 07/01/02 46,837,385
4,152 Viacom, Inc., Revolving Credit........................ Ba2 BB+ 07/01/02 4,156,049
15,000 WestStar Cinemas, Inc., Term Loan..................... NR NR 09/30/05 15,000,000
--------------
312,479,851
--------------
FARMING & AGRICULTURE 0.4%
9,628 CBP Resources, Inc., Term Loan........................ NR NR 09/30/03 9,628,170
8,977 Seminis, Inc., Term Loan.............................. NR NR 12/31/03 to 12/31/04 8,977,005
4,937 Walco International, Inc., Term Loan.................. NR NR 03/31/04 4,945,000
3,416 Windy Hill Pet Food Co., Inc., Term Loan.............. Ba3 BB- 12/31/03 3,422,921
151 Windy Hill Pet Food Co., Inc., Revolving Credit....... Ba3 BB- 12/31/03 152,863
--------------
27,125,959
--------------
FINANCE 7.4%
1,586 Ark Asset Holdings, Inc., Term Loan................... NR NR 11/30/01 1,586,008
14,000 Blackstone Capital Co., Term Loan..................... NR NR 05/31/99 14,010,310
25,000 Bridge Information Systems, Inc., Term Loan........... NR NR 05/27/05 25,000,000
65,458 HM/RB Partners, L.P., Term Loan....................... NR NR 12/31/98 65,457,611
45,500 Mafco Finance Corp., Term Loan........................ NR NR 04/28/00 45,500,000
6,240 Mafco Finance Corp., Revolving Credit................. NR NR 04/28/00 6,240,016
39,982 OSI Holdings Corp., Term Loan......................... B2 NR 10/15/04 39,981,042
37,490 Patriot American Hospitality, Inc., Term Loan......... NR NR 03/31/99 to 03/31/03 37,488,577
65,000 Paul G. Allen, Term Loan.............................. NR NR 06/10/03 64,998,874
131,159 Starwood Hotels and Resorts, Inc., Term Loan.......... NR NR 02/23/99 to 02/23/03 131,159,105
107,899 Ventas Realty Ltd., Inc., Term Loan................... NR NR 04/30/03 107,886,471
--------------
539,308,014
--------------
FOOD/BEVERAGE 1.5%
11,500 Amerifoods Cos., Inc., Term Loan...................... NR NR 06/30/99 to 06/30/02 10,925,000
9,097 Edwards Baking Corp., Term Loan....................... NR NR 09/30/03 to 09/30/05 9,096,864
12,500 Favorite Brands International, Inc., Term Loan........ B2 B 05/19/05 12,500,000
</TABLE>

See Notes to Financial Statements

B-22
<PAGE> 59
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

FOOD/BEVERAGE (CONTINUED)
$ 20,337 Fleming Cos., Inc., Term Loan......................... Ba3 B+ 07/25/04 $ 20,397,673
6,176 Fleming Cos., Inc., Revolving Credit.................. Ba3 B+ 07/25/03 6,307,373
7,500 Leon's Bakery, Inc., Term Loan........................ NR NR 05/02/05 7,500,000
7,257 Mistic Brands, Inc., Term Loan........................ NR NR 06/01/04 to 06/01/05 7,257,057
5,700 Southern Foods Group, Inc., Term Loan................. Ba3 BB- 02/28/06 5,700,004
22,898 Stroh Brewery Co., Term Loan.......................... NR NR 06/30/03 22,897,740
5,550 Windsor Quality Food Co., Ltd., Term Loan............. NR NR 12/31/01 5,550,431
--------------
108,132,142
--------------
FOOD STORES/GROCERY 1.5%
42,756 Bruno's, Inc., Term Loan (a) (b)...................... Caa2 NR 12/02/03 to 04/15/05 38,039,434
4,830 Bruno's, Inc., Revolving Credit (a) (b)............... Caa2 NR 12/02/03 4,294,150
12,464 Eagle Family Foods, Inc., Term Loan................... B1 B+ 12/31/05 12,464,338
4,592 Harvest Foods, Inc., Term Loan (a) (b)................ NR NR 06/30/02 91,830
30,954 Pathmark Stores, Inc., Term Loan...................... B1 B+ 06/15/01 to 12/15/01 30,987,966
3,636 Pathmark Stores, Inc., Revolving Credit............... B1 B+ 06/15/01 3,660,949
8,474 Randall's Food Markets, Inc., Term Loan............... Ba3 B+ 06/27/06 8,473,905
1,014 Randall's Food Markets, Inc., Revolving Credit........ Ba3 B+ 06/27/04 1,014,089
8,391 Star Markets Co., Inc., Term Loan..................... Ba3 NR 12/31/02 to 12/31/03 8,395,532
2,574 Star Markets Co., Inc., Revolving Credit.............. Ba3 NR 12/31/01 2,574,222
--------------
109,996,415
--------------
HEALTH CARE & BEAUTY AIDS 1.4%
7,180 Chattem, Inc., Term Loan.............................. Ba2 NR 02/14/04 7,177,281
17,216 Mary Kay Cosmetics, Inc., Term Loan................... NR NR 03/06/04 17,239,037
214 Mary Kay Cosmetics, Inc., Revolving Credit............ NR NR 03/06/04 219,013
24,750 Playtex Products, Inc., Term Loan..................... Ba2 BB 09/15/03 24,762,453
54,725 Revlon Consumer Products Corp., Term Loan............. Ba3 BB- 05/30/02 54,759,540
--------------
104,157,324
--------------
HEALTHCARE 10.8%
6,500 Charter Behavioral, Revolving Credit.................. NR NR 06/17/02 6,521,986
58,987 Community Health Systems, Inc., Term Loan............. NR NR 12/31/03 to 12/31/05 58,987,066
50,836 Dade International, Inc., Term Loan................... B1 NR 12/31/02 to 12/31/04 50,833,800
26,865 Extendicare Health Services, Inc., Term Loan.......... Ba3 B+ 12/31/03 26,865,189
27,397 FPA Medical Management, Inc., Term Loan............... Caa3 D 09/30/01 21,937,560
3,310 FPA Medical Management, Inc., Debtor in Possession.... Caa3 D 02/01/09 3,310,000
30,398 Genesis Healthcare Ventures, Inc., Term Loan.......... Ba3 B+ 09/30/04 to 06/01/05 30,398,333
150,000 Integrated Health Services, Inc., Term Loan........... Ba3 B+ 09/15/04 to 12/31/05 150,000,000
8,955 Kinetic Concepts, Inc., Term Loan..................... Ba3 B+ 12/31/04 to 12/31/05 8,955,038
50,000 Magellan Health Services, Inc., Term Loan............. B1 B+ 02/12/05 50,043,973
6,714 Medical Specialties Group, Inc., Term Loan............ NR NR 06/30/01 to 06/30/04 6,714,775
11,000 Mediq/PRN Life Support Services, Inc., Term Loan...... B1 B+ 06/30/06 11,009,847
16,230 MedPartners, Inc., Term Loan.......................... Ba3 BB- 05/31/01 16,229,793
3,536 MedPartners, Inc., Revolving Credit................... Ba3 BB- 05/31/01 3,535,718
15,209 Multicare Companies, Inc., Term Loan.................. B1 B+ 09/30/04 to 06/01/05 15,208,750
45,000 National Medical Care, Inc., Term Loan................ Ba1 BB 09/30/03 45,072,780
13,500 Oxford Health Plans, Inc., Term Loan.................. B3 NR 05/15/03 13,500,012
25,000 Paragon Health Network, Inc., Term Loan............... Ba3 B+ 03/31/05 to 03/31/06 25,000,000
35,142 Quest Diagnostics, Inc., Term Loan.................... Ba3 BB+ 12/05/02 to 06/30/06 35,186,936
7,940 SMT Health Services, Inc., Term Loan.................. NR NR 08/30/03 7,939,863
</TABLE>

See Notes to Financial Statements

B-23

<PAGE> 60
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

HEALTHCARE (CONTINUED)
$ 49,704 Sun Healthcare Group, Inc., Term Loan................. Ba3 B+ 11/12/04 to 11/12/05 $ 49,709,375
90,000 Total Renal Care Holdings, Inc., Term Loan............ Ba2 NR 03/31/08 90,000,000
61,111 Vencor, Inc., Term Loan............................... B1 B+ 01/15/05 61,111,220
--------------
788,072,014
--------------
HOME & OFFICE FURNISHINGS, HOUSEWARES & DURABLE
CONSUMER PRODUCTS 1.7%
13,000 Corning Consumer Products, Co., Term Loan............. B1 BB- 10/09/06 13,000,000
50,765 Dal-Tile Group, Inc., Term Loan....................... NR NR 12/31/02 to 12/31/03 50,858,413
4,582 Dal-Tile Group, Inc., Revolving Credit................ NR NR 12/31/02 4,583,515
34,000 Furniture Brands International, Inc., Term Loan....... NR NR 06/30/07 34,014,648
20,834 Imperial Home Decor Group, Inc., Term Loan............ B1 B+ 03/12/04 to 03/13/06 20,834,026
2,252 Imperial Home Decor Group, Inc., Revolving Credit..... B1 B+ 03/12/04 2,252,252
--------------
125,542,854
--------------
HOTELS, MOTELS, & GAMING 0.8%
41,000 Aladdin Gaming, LLC, Term Loan........................ B2 NR 02/26/08 41,000,000
9,759 Alliance Gaming Corp., Term Loan...................... B2 NR 01/31/05 9,758,833
2,143 Alliance Gaming Corp., Delayed Draw Term Loan......... B1 BB 01/31/05 2,142,783
4,941 Las Vegas Sands, Inc., Term Loan...................... NR B+ 11/30/03 4,941,236
780 Las Vegas Sands, Inc., Revolving Credit............... NR B+ 11/30/03 779,836
--------------
58,622,688
--------------
INSURANCE 0.2%
17,500 BRW Acquisition, Inc., Term Loan...................... NR NR 07/10/06 to 07/10/07 17,500,000
--------------
MACHINERY 0.4%
9,500 Alliance Laundry Systems, LLC, Term Loan.............. B1 B+ 06/30/05 9,501,790
15,000 Ocean Rig (Norway), Term Loan......................... NR NR 06/01/08 15,000,700
5,916 RIGCO N. A., LLC, Term Loan........................... NR NR 09/30/98 5,919,724
--------------
30,422,214
--------------
MINING, STEEL, IRON, & NON-PRECIOUS METALS 0.4%
10,195 Alliance Coal Corp., Term Loan........................ NR NR 12/31/01 to 12/31/02 10,199,370
5,486 Earle M. Jorgensen, Term Loan......................... B1 B+ 03/31/04 5,507,098
9,603 Fairmont Minerals Ltd., Term Loan..................... NR NR 02/25/05 9,602,396
4,997 Global Metal Technologies, Inc., Term Loan............ NR NR 03/13/05 4,996,202
--------------
30,305,066
--------------
NATURAL RESOURCES -- COAL 0.1%
4,711 Centennial Resources, Inc., Term Loan................. NR NR 03/31/02 to 03/31/04 4,248,201
--------------
NON-DURABLE CONSUMER PRODUCTS 0.1%
4,045 Homemaker Industries, Inc., Term Loan................. NR NR 06/30/04 4,053,574
--------------
PAPER & FOREST PRODUCTS 0.9%
24,509 Crown Paper Co., Term Loan............................ Ba3 BB 08/23/02 24,512,546
3,258 Crown Paper Co., Revolving Credit..................... Ba3 BB 08/23/02 3,259,818
4,000 CST/Office Products Corp., Term Loan.................. NR NR 12/31/01 4,003,767
15,000 Le Group Forex, Inc., Term Loan....................... NR BB 06/30/05 15,000,000
17,156 Paper Acquisition Corp., Term Loan.................... NR NR 06/17/01 17,156,190
--------------
63,932,321
--------------
PERSONAL & MISCELLANEOUS SERVICES 0.5%
9,150 Arena Brands, Inc., Term Loan......................... NR NR 06/01/02 9,150,000
600 Arena Brands, Inc., Revolving Credit.................. NR NR 06/01/02 600,000
22,795 Boyds Collection Ltd., Term Loan...................... Ba3 B+ 04/21/06 22,795,022
</TABLE>

See Notes to Financial Statements

B-24
<PAGE> 61
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

PERSONAL & MISCELLANEOUS SERVICES (CONTINUED)
$ 4,786 Smarte Carte Corp., Term Loan......................... NR NR 06/30/03 $ 4,790,084
--------------
37,335,106
--------------
PHARMACEUTICALS 0.4%
17,167 Endo Pharmaceuticals, Inc., Term Loan................. NR NR 06/30/04 17,166,717
11,726 King Pharmaceuticals, Inc., Term Loan................. NR NR 02/27/04 11,725,916
--------------
28,892,633
--------------
PRINTING/PUBLISHING 4.2%
15,000 Advanstar Communications, Term Loan................... Ba3 B+ 04/30/05 15,000,000
13,889 ADVO, Inc., Term Loan................................. NR NR 09/29/03 13,889,458
35,000 American Media Operations, Inc., Term Loan............ Ba2 BB- 03/31/04 35,000,094
9,950 Bear Island Paper Co., LLC, Term Loan................. Ba3 B+ 12/31/05 9,949,705
9,000 Cygnus Publishing, Inc., Term Loan.................... NR NR 06/05/05 9,018,267
60,000 Journal Register Co., Term Loan....................... Ba1 BB+ 09/30/06 60,000,000
32,385 Morris Communications, Inc., Term Loan................ NR NR 03/31/04 to 06/30/05 32,393,080
34,315 Outdoor Systems, Inc., Term Loan...................... Ba2 BB- 06/30/04 34,323,366
19,000 PRIMEDIA, Inc., Term Loan............................. Ba3 NR 06/30/04 19,001,836
7,429 TransWestern Publishing, L.P., Term Loan.............. Ba3 B+ 10/01/04 7,429,412
7,845 Von Hoffman Press, Inc., Term Loan.................... B1 B+ 05/30/03 to 05/30/05 7,852,215
2,016 Von Hoffman Press, Inc., Revolving Credit............. B1 B+ 05/30/03 2,016,000
5,000 Yellow Book USA, L.P., Term Loan...................... NR NR 12/15/05 to 12/05/06 5,000,000
45,000 Ziff-Davis Publishing, Inc., Term Loan................ Ba2 BB 03/31/05 45,000,000
9,975 21st Century Newspaper, Inc., Term Loan............... NR NR 09/15/05 9,973,953
--------------
305,847,386
--------------
RESTAURANTS & FOOD SERVICE 1.9%
12,500 Applebee's International, Inc., Term Loan............. Ba3 NR 03/31/06 12,500,429
5,657 California Pizza Kitchen, Inc., Term Loan............. NR NR 09/30/04 5,657,250
943 Carvel Corp., Term Loan............................... NR NR 12/31/98 848,403
37,730 CKE Restaurants, Inc., Term Loan...................... Ba2 NR 04/15/03 37,730,196
9,893 IM Stadium, Inc., Term Loan........................... NR NR 12/31/02 to 12/31/03 9,892,833
5,932 Jet Plastica Industries, Inc., Term Loan.............. NR NR 12/31/02 to 12/31/04 5,944,157
42,253 S.C International Services, Inc., Term Loan........... Ba3 NR 08/28/02 42,252,500
26,275 Shoney's, Inc., Term Loan............................. Ba3 NR 04/30/02 26,275,244
--------------
141,101,012
--------------
RETAIL -- CATALOG 0.0%
2,267 Brylane, L.P., Term Loan.............................. Ba2 NR 10/20/02 2,266,667
860 Brylane, L.P., Revolving Credit....................... Ba2 NR 06/30/02 860,017
--------------
3,126,684
--------------
RETAIL -- LUXURY GOODS 0.1%
9,321 Ebel USA, Inc., Term Loan............................. NR NR 09/30/01 9,322,247
--------------
RETAIL -- OFFICE PRODUCTS 0.7%
6,386 Identity Group, Inc., Term Loan....................... NR NR 11/22/03 6,392,008
45,000 U.S. Office Products Co., Term Loan................... B1 B- 06/09/06 45,000,235
--------------
51,392,243
--------------
RETAIL -- OIL & GAS 0.2%
11,900 TravelCenters of America, Inc., Term Loan............. Ba2 BB 03/31/05 11,915,060
--------------
RETAIL -- SPECIALTY 0.2%
7,083 Hollywood Entertainment Corp., Revolving Credit....... Ba3 NR 09/05/02 7,083,330
7,952 Luxottica Group SPA, Term Loan........................ NR NR 06/30/01 7,952,383
--------------
15,035,713
--------------
RETAIL -- STORES 1.1%
11,500 Advance Stores Inc., Term Loan........................ NR NR 04/15/06 11,500,199
</TABLE>

See Notes to Financial Statements

B-25
<PAGE> 62
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

RETAIL -- STORES (CONTINUED)
$ 17,086 Color Tile, Inc., Term Loan........................... NR NR 12/31/98 $ 6,663,504
5,897 Kirkland's Holdings, Term Loan........................ NR NR 06/30/02 5,898,978
7,500 Nebraska Book Co., Inc., Term Loan.................... B1 B+ 03/31/06 7,500,010
24,407 Payless Cashways, Inc., Term Loan..................... B3 NR 11/30/02 24,406,856
5,700 Payless Cashways, Inc., Revolving Credit.............. B3 NR 05/31/02 5,700,006
15,702 Peebles, Inc., Term Loan.............................. NR NR 06/09/02 15,699,633
4,922 Vitamin Shoppe Industries, Inc., Term Loan............ NR NR 05/15/04 4,921,857
--------------
82,291,043
--------------
TELECOMMUNICATIONS -- CELLULAR 3.4%
10,000 American Cellular Wireless, Inc., Term Loan........... B2 NR 06/30/07 10,002,667
100,000 BCP SP Ltd., Term Loan................................ NR NR 03/16/00 99,000,420
75,000 Cellular, Inc., Financial Corp. (CommNet), Term
Loan.................................................. B1 B 09/18/06 to 09/18/07 75,001,104
65,000 Western Wireless Corp., Term Loan..................... B1 NR 03/31/05 65,000,101
--------------
249,004,292
--------------
TELECOMMUNICATIONS -- HYBRID 1.5%
21,120 Atlantic Crossing, Term Loan.......................... NR NR 11/30/02 21,120,151
90,000 Nextel Finance Co., Term Loan......................... Ba3 B- 09/30/06 90,001,092
2,870 Nextel Finance Co., Term Loan (Argentina)............. Ba3 B- 03/31/03 2,870,034
--------------
113,991,277
--------------
TELECOMMUNICATIONS -- PERSONAL COMMUNICATION
SYSTEMS 4.9%
50,000 Cox Communications, Inc., Term Loan................... Baa2 NR 12/31/06 49,995,848
74,822 Omnipoint Communications, Inc., Term Loan............. B2 B 02/17/06 74,822,229
11,000 Powertel PCS, Inc., Revolving Credit.................. NR NR 03/31/06 11,000,000
78,775 Sprint Spectrum L.P., Term Loan....................... Ba1 NR 01/31/02 78,847,703
70,000 Sprint, Lucent Technologies Vendor Facility, Term
Loan.................................................. NR NR 06/30/01 70,180,074
50,000 Sprint, Northern Telecom Vendor Facility, Term Loan... NR NR 03/31/05 50,252,588
21,000 Triton PCS, Inc., Term Loan........................... B1 B 05/04/07 21,000,000
--------------
356,098,442
--------------
TELECOMMUNICATIONS -- WIRELESS MESSAGING 2.2%
28,105 Arch Communications, Inc., Term Loan.................. B3 B- 12/31/02 to 06/30/06 28,108,136
30,412 Iridium Operating LLC, Term Loan...................... B2 B 12/31/98 30,412,502
12,500 Metrocall, Inc., Term Loan............................ B1 B 12/31/04 12,500,035
3,916 Metrocall, Inc., Revolving Credit..................... B1 B 12/31/04 3,981,840
64,005 Mobilemedia Communications, Inc., Term Loan........... NR NR 06/30/02 to 06/30/03 64,006,982
2,555 Mobilemedia Communications, Inc., Revolving Credit.... NR NR 06/30/02 2,555,872
9,500 Teletouch Communications, Inc., Term Loan............. NR NR 11/30/05 9,500,059
11,000 TSR Wireless LLC, Term Loan........................... NR NR 06/30/05 10,999,698
--------------
162,065,124
--------------
TEXTILES & LEATHER 1.1%
11,213 American Marketing Industries, Inc., Term Loan........ NR NR 11/30/02 11,212,500
8,910 GFSI, Inc., Term Loan................................. NR NR 03/31/04 8,914,031
14,913 Joan Fabrics Corp., Term Loan......................... NR NR 06/30/05 to 06/30/06 14,913,158
13,392 Johnston Industries, Inc., Term Loan.................. NR NR 07/01/00 13,391,679
9,925 Norwood Promotional Products, Inc., Term Loan......... NR NR 08/28/04 9,924,575
10,783 Polyfibron Technologies, Inc., Term Loan.............. NR NR 12/28/03 10,790,749
6,512 Simmons Co., Term Loan................................ Ba3 NR 03/31/03 6,512,466
6,984 William Carter Co., Term Loan......................... Ba3 BB- 10/30/03 6,988,949
--------------
82,648,107
--------------
</TABLE>

See Notes to Financial Statements

B-26

<PAGE> 63
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal Bank Loan Ratings+
Amount Moody's S&P Stated
(000) Borrower (Unaudited) Maturity* Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
TRANSPORTATION -- CARGO 1.4%
$ 28,695 Atlas Freighter Leasing, Inc., Term Loan.............. Ba3 NR 05/29/04 to 06/30/04 $ 28,707,711
9,975 CTC Distribution Services, LLC, Term Loan............. NR NR 02/15/06 9,975,083
39,245 Evergreen International Aviation, Inc., Term Loan..... Ba3 NR 05/31/02 to 05/31/03 39,321,652
7,550 Gemini Air Cargo, Inc., Term Loan..................... B1 NR 12/12/02 7,550,000
7,500 North American Van Lines, Inc., Term Loan............. NR NR 03/30/05 7,500,000
9,000 OmniTrax Railroads, LLC, Term Loan.................... NR NR 05/14/05 9,000,070
--------------
102,054,516
--------------
TRANSPORTATION -- MANUFACTURING COMPONENTS 0.5%
27,860 Cambridge Industries, Inc., Term Loan................. B1 NR 06/30/05 27,876,493
9,250 Eagle-Picher Industries, Inc., Term Loan.............. B1 B+ 08/31/05 to 08/31/06 9,250,027
--------------
37,126,520
--------------
TRANSPORTATION -- PERSONAL 0.9%
17,176 Blue Bird Body Co., Term Loan......................... Ba2 BB- 11/02/02 to 11/01/03 17,183,816
49,964 Continental Airlines, Inc., Term Loan................. Ba1 BB 07/31/02 to 07/31/04 50,000,617
--------------
67,184,433
--------------
TRANSPORTATION -- RAIL MANUFACTURING 0.3%
23,003 Johnstown America Industries, Inc., Term Loan......... Baa3 NR 03/31/03 23,003,430
--------------
TOTAL VARIABLE RATE ** SENIOR LOAN INTERESTS 90.5%............................................... 6,617,436,013
--------------
FIXED INCOME SECURITIES 0.8%
London Fog Industries, Inc. ($13,541,264 par, 10.00% coupon, maturing 02/27/03)................... 13,541,264
Satelites Mexicanos ($39,969,000 par, 10.00% coupon, maturing 06/30/04)........................... 40,018,961
--------------
TOTAL FIXED INCOME SECURITIES..................................................................... 53,560,225
--------------
EQUITIES 1.6%
AFC Enterprises, Inc. (604,251 common shares) (c)(d).............................................. 3,625,506
Best Products Co., Inc. (297,480 common shares) (d)............................................... 0
Best Products Co., Inc. (Warrants for 28,080 common shares) (d)................................... 0
Camelot Music Holdings, Inc. (1,994,717 common shares) (d)........................................ 84,775,472
Classic Cable, Inc. (Warrants for 760 common shares) (d).......................................... 0
Dan River, Inc. (192,060 common shares) (d)....................................................... 2,904,908
Flagstar Cos., Inc. (8,755 common shares) (d)..................................................... 22
London Fog Industries, Inc. (1,083,301 common shares) (c)(d)...................................... 24,298,441
London Fog Industries, Inc. (Warrants for 66,580 common shares) (d)............................... 446,752
Nextel Communications, Inc. (Warrants for 60,000 common shares) (c)(d)............................ 706,875
Payless Cashways, Inc. (1,024,159 common shares) (d).............................................. 2,304,358
RIGCO N.A., LLC (Warrants for .325% interest of company's fully diluted equity) (d)............... 16,250
Sarcom, Inc. (43 common shares) (d)............................................................... 0
--------------
TOTAL EQUITIES.................................................................................... 119,078,584
--------------
TOTAL LONG-TERM INVESTMENTS 92.9%
(Cost $6,795,256,044)............................................................................. 6,790,074,822
--------------
</TABLE>

See Notes to Financial Statements

B-27
<PAGE> 64
PORTFOLIO OF INVESTMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Principal
Amount
(000) Borrower Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
VARIABLE RATE ** SENIOR LOAN INTERESTS (CONTINUED)
SHORT-TERM INVESTMENTS 6.3%
COMMERCIAL PAPER 2.0%
Case Credit Corp. ($30,000,000 par, maturing 08/03/98, yielding 5.80% to 5.82%)................. $ 29,990,311
CSX Corp. ($30,000,000 par, maturing 08/06/98, yielding 5.77%).................................. 29,975,958
Illinois Central Railroad Co. ($7,900,000 par, maturing 08/05/98 to 08/11/98, yielding 5.70% to
5.81%).......................................................................................... 7,890,108
Nabisco, Inc. ($10,000,000 par, maturing 08/05/98, yielding 5.70%).............................. 9,993,667
Rite Aid Corp. ($8,500,000 par, maturing 08/06/98, yielding 5.70%).............................. 8,493,271
Safeway, Inc. ($14,000,000 par, maturing 09/02/98, yielding 5.71%).............................. 13,928,942
Tandy Corp. ($5,000,000 par, maturing 08/04/98, yielding 5.67%)................................. 4,997,638
Texas Utilities Co. ($31,000,000 par, maturing 08/04/98, yielding 5.82%)........................ 30,984,965
Western Resources, Inc. ($15,000,000 par, maturing 08/03/98, yielding 5.75%).................... 14,995,208
--------------
TOTAL COMMERCIAL PAPER.......................................................................... 151,250,068
--------------
SHORT-TERM LOAN PARTICIPATIONS 4.3%
Alltel Corp. ($5,000,000 par, maturing 08/07/98, yielding 5.66%)................................ 5,000,000
American Stores Co. ($22,500,000 par, maturing 08/31/98 to 09/28/98, yielding 5.78% to 5.80%)... 22,500,000
Anadarko Pete Corp. ($26,500,000 par, maturing 08/05/98 to 08/21/98, yielding 5.69%)............ 26,500,000
Bell Atlantic Financial Services, Inc. ($4,000,000 par, maturing 08/03/98, yielding 5.67%)...... 4,000,000
Cabot Corp. ($7,800,000 par, maturing 08/13/98, yielding 5.70%)................................. 7,800,000
Centex Corp. ($12,500,000 par, maturing 08/03/98, yielding 5.80%)............................... 12,500,000
Englehard Corp. ($30,000,000 par, maturing 08/04/98 to 08/07/98, yielding 5.69% to 5.76%)....... 30,000,000
International Paper Co. ($30,000,000 par, maturing 08/03/98, yielding 5.80%).................... 30,000,000
Nabisco, Inc. ($20,000,000 par, maturing 08/03/98, yielding 5.81%).............................. 20,000,000
Ralston Purina Co. ($39,000,000 par, maturing 08/04/98 to 08/09/98, yielding 5.69% to 5.76%).... 39,000,000
Tandy Corp. ($7,000,000 par, maturing 08/18/98, yielding 5.71%)................................. 7,000,000
Temple Inland, Inc. ($50,000,000 par, maturing 08/05/98 to 08/25/98, yielding 5.78% to 5.82%)... 50,000,000
Times Mirror Co. ($20,900,000 par, maturing 08/05/98, yielding 5.60% to 5.63%).................. 20,900,000
Times Mirror ($2,400,000 par, maturing 08/04/98, yielding 5.60%)................................ 2,400,000
Universal Corp. ($20,000,000 par, maturing 08/07/98, yielding 5.67%)............................ 20,000,000
Western Resources, Inc. ($15,000,000 par, maturing 08/20/98, yielding 5.71%).................... 15,000,000
--------------
TOTAL SHORT-TERM LOAN PARTICIPATIONS............................................................ 312,600,000
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $463,850,068)............................................................................. 463,850,068
--------------
TOTAL INVESTMENTS 99.2%
(Cost $7,259,106,112)........................................................................... 7,253,924,890
OTHER ASSETS IN EXCESS OF LIABILITIES 0.8%...................................................... 58,958,513
--------------
NET ASSETS 100.0%............................................................................... $7,312,883,403
------------
</TABLE>

NR = Not rated

(a) This Senior Loan interest is non-income producing.

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

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

+ Bank loans rated below Baa by Moody's Investor Service, Inc. or BBB by
Standard & Poor's Group are considered to be below investment grade.

* 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-28
<PAGE> 65

STATEMENT OF ASSETS AND LIABILITIES

July 31, 1998

<TABLE>
- --------------------------------------------------------------------------------

<S> <C>
ASSETS:
Total Investments (Cost $7,259,106,112)..................... $7,253,924,890
Receivables:
Interest and Fees......................................... 57,766,824
Fund Shares Sold.......................................... 26,406,743
Investments Sold.......................................... 9,271,953
Other....................................................... 55,596
--------------
Total Assets.......................................... 7,347,426,006
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 9,528,711
Custodian Bank............................................ 7,513,945
Investment Advisory Fee................................... 5,771,520
Administrative Fee........................................ 1,556,016
Fund Shares Repurchased................................... 1,368,644
Distributor and Affiliates................................ 1,299,338
Accrued Expenses............................................ 4,074,334
Deferred Facility Fees...................................... 3,273,920
Trustees' Deferred Compensation and Retirement Plans........ 156,175
--------------
Total Liabilities..................................... 34,542,603
--------------
NET ASSETS.................................................. $7,312,883,403
==============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 733,069,022 shares issued and
outstanding).............................................. $ 7,330,690
Paid in Surplus............................................. 7,327,247,726
Accumulated Undistributed Net Investment Income............. 10,753,143
Net Unrealized Depreciation................................. (5,181,222)
Accumulated Net Realized Loss............................... (27,266,934)
--------------
NET ASSETS.................................................. $7,312,883,403
==============
NET ASSET VALUE PER COMMON SHARE ($7,312,883,403 divided by
733,069,022 shares outstanding)........................... $ 9.98
==============
</TABLE>

See Notes to Financial Statements

B-29
<PAGE> 66

STATEMENT OF OPERATIONS

For the Year Ended July 31, 1998
- --------------------------------------------------------------------------------

INVESTMENT INCOME:
Interest.................................................... $536,579,706
Fees........................................................ 17,284,122
Other....................................................... 3,414,378
------------
Total Income............................................ 557,278,206
------------
EXPENSES:
Investment Advisory Fee..................................... 63,011,682
Administrative Fee.......................................... 16,947,689
Shareholder Services........................................ 7,456,983
Legal....................................................... 2,007,500
Custody..................................................... 1,898,141
Trustees' Fees and Expenses................................. 192,260
Other....................................................... 4,191,259
------------
Total Expenses.......................................... 95,705,514
------------
NET INVESTMENT INCOME....................................... $461,572,692
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(17,725,403)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (31,460,156)
End of the Period......................................... (5,181,222)
------------
Net Unrealized Appreciation During the Period............... 26,278,934
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 8,553,531
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $470,126,223
============
</TABLE>

See Notes to Financial Statements

B-30
<PAGE> 67

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended July 31, 1998 and 1997
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1998 July 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Net Investment Income....................................... $ 461,572,692 $ 392,667,747
Net Realized Gain/Loss...................................... (17,725,403) 442,960
Net Unrealized Appreciation/Depreciation During the
Period.................................................... 26,278,934 (25,147,243)
-------------- --------------
Change in Net Assets from Operations........................ 470,126,223 367,963,464
Distributions from Net Investment Income.................... (461,726,242) (390,215,999)
-------------- --------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... 8,399,981 (22,252,535)
-------------- --------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Common Shares Sold............................ 1,654,063,711 1,781,772,630
Value of Shares Issued Through Dividend Reinvestment........ 245,628,149 209,636,808
Cost of Shares Repurchased.................................. (832,176,219) (597,973,300)
-------------- --------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 1,067,515,641 1,393,436,138
-------------- --------------
TOTAL INCREASE IN NET ASSETS................................ 1,075,915,622 1,371,183,603
NET ASSETS:
Beginning of the Period..................................... 6,236,967,781 4,865,784,178
-------------- --------------
End of the Period (Including accumulated undistributed net
investment income of $10,753,143 and $5,369,829,
respectively)............................................... $7,312,883,403 $6,236,967,781
============== ==============
</TABLE>

See Notes to Financial Statements

B-31
<PAGE> 68

STATEMENT OF CASH FLOWS

For the Year Ended July 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
CHANGE IN NET ASSETS FROM OPERATIONS........................ $ 470,126,223
---------------
Adjustments to Reconcile the Change in Net Assets from
Operations to Net Cash Used for Operating Activities:
Increase in Investments at Value.......................... (1,046,568,647)
Increase in Interest and Fees Receivables................. (12,378,076)
Increase in Receivable for Investments Sold............... (8,515,656)
Increase in Other Assets.................................. (18,384)
Decrease in Deferred Facility Fees........................ (14,834,232)
Increase in Investment Advisory and Administrative Fees
Payable................................................. 1,043,363
Increase in Distributor and Affiliates Payable............ 357,450
Increase in Accrued Expenses.............................. 2,210,345
Increase in Deferred Compensation and Retirement Plans
Expenses................................................ 87,832
---------------
Total Adjustments....................................... (1,078,616,005)
---------------
NET CASH USED FOR OPERATING ACTIVITIES...................... (608,489,782)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Shares Sold................................... 1,650,625,395
Payments on Shares Repurchased.............................. (831,182,017)
Increase in Intra-day Credit Line with Custodian Bank....... 2,416,918
Cash Dividends Paid......................................... (213,370,514)
---------------
Net Cash Provided by Financing Activities................. 608,489,782
---------------
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-32

<PAGE> 69

FINANCIAL HIGHLIGHTS

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

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

Year Ended July 31,
----------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 9.963 $ 10.002 $ 10.046 $ 10.052 $ 10.004
-------- -------- -------- -------- --------
Net Investment Income..................................... .675 .701 .735 .756 .618
Net Realized and Unrealized Gain/Loss..................... .015 (.042) (.028) (.004) .015
-------- -------- -------- -------- --------
Total from Investment Operations............................ .690 .659 .707 .752 .633
Less Distributions from Net Investment Income............... .677 .698 .751 .758 .585
-------- -------- -------- -------- --------
Net Asset Value, End of the Period.......................... $ 9.976 $ 9.963 $ 10.002 $ 10.046 $ 10.052
======== ======== ======== ======== ========
Total Return (a)............................................ 7.22% 6.79% 7.22% 7.82% 6.52%
Net Assets at End of the Period (In millions)............... $7,312.9 $6,237.0 $4,865.8 $2,530.1 $1,229.0
Ratio of Expenses to Average Net Assets..................... 1.41% 1.42% 1.46% 1.49% 1.53%
Ratio of Net Investment Income to Average Net Assets........ 6.81% 7.02% 7.33% 7.71% 6.16%
Portfolio Turnover (b)...................................... 73% 83% 66% 71% 74%
</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-33
<PAGE> 70

NOTES TO FINANCIAL STATEMENTS

July 31, 1998
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen Prime Rate Income Trust, formerly known as 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 $6,617,436,013 (90.5% of net assets) is determined in the
absence of actual market values by Van Kampen 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. Facilities fees on senior loans purchased after July 31, 1997, are treated
as market discounts. Market premiums and discounts are amortized over the stated
life of each applicable security.

B-34
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

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, 1998, the Trust had an accumulated capital
loss carryforward for tax purposes of $3,873,769, which will expire between July
31, 2004 and July 31, 2006. Net realized gains or losses may differ for
financial and tax reporting purposes primarily as a result of wash sales, past
October losses which may not be recognized for tax purposes until the first day
of the following fiscal year and losses that were recognized for tax purposes
but not for book purposes at the end of the fiscal year.

At July 31, 1998, for federal income tax purposes cost of long- and
short-term investments is $7,264,846,206, the aggregate gross unrealized
appreciation is $37,643,032 and the aggregate gross unrealized depreciation is
$48,564,348 resulting in net unrealized depreciation of $10,921,316.

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.

Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 1998 fiscal year have been identified and appropriately
reclassified. Permanent differences relating to expenses which are not
deductible for tax purposes totaling $293,828 were reclassified from accumulated
undistributed net investment income to capital, $3,294,396 relating to losses
recognized on the sale of securities which are deferred for tax purposes were
reclassified from accumulated net realized gains/losses to capital and
$5,243,036 relating to income and gain/loss recognized on restructured
securities were reclassified from accumulated net investment income to
accumulated net realized gain/loss.

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 Funds 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.

B-35
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

For the year ended July 31, 1998, the Trust recognized expenses of
approximately $375,100 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, 1998, the Trust recognized expenses of
approximately $81,300 representing Van Kampen Funds Inc. or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Trust.

Van Kampen Investor Services Inc., ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Trust. For the year ended July
31, 1998, the Trust recognized expenses for these services of approximately
$5,423,300. Beginning in 1998, the transfer agency fees are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
market benchmarks.

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

The Trust provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. 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 $2,500.

3. CAPITAL TRANSACTIONS

At July 31, 1998 and July 31, 1997, paid in surplus aggregated $7,327,247,726
and $6,264,390,819, respectively.

Transactions in common shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, 1998 JULY 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning Shares............................................ 626,018,023 486,490,317
----------- -----------
Shares Sold................................................. 165,907,778 178,438,954
Shares Issued Through Dividend Reinvestment................. 24,636,104 20,996,830
Shares Repurchased.......................................... (83,492,883) (59,908,078)
----------- -----------
Net Increase in Shares Outstanding.......................... 107,050,999 139,527,706
----------- -----------
Ending Shares............................................... 733,069,022 626,018,023
=========== ===========
</TABLE>

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from investments sold and
repaid, excluding short-term investments, were $5,864,054,259 and
$4,408,914,721, 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, 1998, 83,492,883 shares were tendered and repurchased by the
Trust.

B-36
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

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 Van Kampen. Any early withdrawal charge
which is required to be imposed will be made in accordance with the following
schedule.

<TABLE>
<CAPTION>
WITHDRAWAL
YEAR OF REPURCHASE 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, 1998, Van Kampen received early withdrawal
charges of approximately $16,169,200 in connection with tendered shares of the
Trust.

7. COMMITMENTS

Pursuant to the terms of certain of the Variable Rate Senior Loan agreements,
the Trust had unfunded loan commitments of approximately $417,155,600 as of July
31, 1998. 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 $500,000,000. 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.

B-37
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

July 31, 1998
- --------------------------------------------------------------------------------

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, 1998, 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>
Lehman Brothers............................................. $100,000 $100,000
Chase Securities Inc........................................ 77,732 77,735
Bankers Trust............................................... 60,071 59,991
Bank of New York............................................ 52,257 52,257
Donaldson Lufkin Jenrette................................... 9,748 9,748
Canadian Imperial Bank of Commerce.......................... 6,619 6,622
Goldman Sachs............................................... 6,480 6,350
Fleet National Bank......................................... 3,000 3,000
-------- --------
Total....................................................... $315,907 $315,703
======== ========
</TABLE>

9. YEAR 2000 COMPLIANCE (UNAUDITED)

Van Kampen utilizes a number of computer programs across its entire operation
relying on both internal software systems as well as external software systems
provided by third parties. In 1996 Van Kampen initiated a CountDown 2000 Project
to review both the internal systems and external vendor connections. The goal of
this project is to position our business to continue unaffected as a result of
the century change. At this time, there can be no assurance that the steps taken
will be sufficient to avoid any adverse impact to the Trust, but we do not
anticipate that the move to Year 2000 will have a material impact on our ability
to continue to provide the Trust with service at current levels. In addition, it
is possible that the securities markets in which the Trust invests may be
detrimentally affected by computer failures throughout the financial services
industry beginning January 1, 2000. Improperly functioning trading systems may
result in settlement problems and liquidity issues.

B-38
<PAGE> 75

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, 1998; Statement of Assets and Liabilities as of July 31,
1998; Statement of Operations for the year ended July 31, 1998;
Statement of Changes in Net Assets for the fiscal years ended
July 31, 1998 and 1997; Statement of Cash Flows for the year
ended July 31, 1998; Notes to Financial Statements

(B) EXHIBITS

<TABLE>
<S> <C> <C>
(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(4)
(h(1)) Offering Agreement(4)
(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(4)
(j(2)) Transfer Agency and Service Agreement(4)
(k(1)) Administration Agreement(4)
(k(2)) Amended and Restated Legal Services Agreement(4)
(l(i)) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP(5)
(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.

(4) Incorporated by reference to Post-Effective Amendment No. 1 to the Fund's
Registration Statement on Form N-2, File Nos. 333-14999 and 811-5845, filed
on November 13, 1997.

(5) Incorporated by reference to the Fund's Registration's Statement on Form
N-2, File Nos. 333-45531 and 811-5845, filed on February 3, 1998.

(+) Filed herewith.

ITEM 25: MARKETING ARRANGEMENTS

See Exhibit h to this Registration Statement.

C-1
<PAGE> 76

ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

<TABLE>
<S> <C>
Securities and Exchange Commission fees..................... $676,464.50
National Association of Securities Dealers, Inc. fees....... $ 30,500
Printing and engraving expenses............................. $ 45,000
Legal fees.................................................. $ 40,000
Accounting expenses......................................... $ 3,000
Miscellaneous expenses...................................... $ 4,035.50
-----------
Total........................................ $ 799,000
===========
</TABLE>

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

Not applicable

ITEM 28: NUMBER OF HOLDERS OF SECURITIES

At October 27, 1998

<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Shares of Beneficial Interest, par value
$.01 per share................................... 247,826
</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> 77

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 1 Parkview Plaza, P.O.
Box 5555, Oakbrook Terrace, Illinois 60181-5555, Van Kampen 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 1 Parkview Plaza, P.O.
Box 5555, 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 Funds Inc., at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555.

ITEM 32: MANAGEMENT SERVICES

Not applicable

ITEM 33: UNDERTAKINGS

1. Registrant undertakes to suspend offering of its 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> 78

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO
THE 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 28TH DAY OF OCTOBER, 1998.

VAN KAMPEN

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 AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED ON OCTOBER 28, 1998 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)

Trustee
- -----------------------------------------------------
Theodore A. Myers

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

Trustee
- -----------------------------------------------------
David C. Arch

/s/ STEVEN MULLER* Trustee
- -----------------------------------------------------
Steven Muller

/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell

/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>

October 28, 1998

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

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

C-4

<PAGE> 1

[KPMG PEAT MARWICK LLP LETTERHEAD]

EXHIBIT(n)

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Trustees and Shareholders
Van Kampen 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.

KPMG Peat Marwick LLP

Chicago, Illinois
October 27, 1998

<PAGE> 1
Exhibit (24)

POWER OF ATTORNEY

The undersigned, being officers and trustees of Van Kampen Prime Rate
Income Trust, a Massachusetts business trust (the "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 an on behalf of the undersigned, any and all
amendments to the Registration Statement filed by the Trust with the Securities
and Exchange Commission pursuant to the provisions of the Securities Act of 1933
and the Investment Company Act of 1940 and covering the Trust's shares of
beneficial interest.

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: October 27, 1998

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

- ---------------------------- Chairman, President and Trustee
Dennis J. McDonnell

- ---------------------------- Trustee
David C. Arch

- ---------------------------- Trustee
Rod Dommeyer

- ---------------------------- Trustee
Steven Muller

- ---------------------------- Trustee
Theodore A. Myers

- ---------------------------- Trustee
Don G. Powell

- ---------------------------- Trustee
Hugo F. Sonnenschein

- ---------------------------- Trustee
Howard J. Kerr

- ---------------------------- Trustee
Wayne W. Whalen

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

<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> PRIME RATE INCOME TRUST
<MULTIPLIER> 1

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<INVESTMENTS-AT-COST> 7,259,106,112
<INVESTMENTS-AT-VALUE> 7,253,924,890
<RECEIVABLES> 93,445,520
<ASSETS-OTHER> 55,596
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,347,426,006
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34,542,603
<TOTAL-LIABILITIES> 34,542,603
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,334,578,416
<SHARES-COMMON-STOCK> 733,069,022
<SHARES-COMMON-PRIOR> 626,018,023
<ACCUMULATED-NII-CURRENT> 10,753,143
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,266,934)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (5,181,222)
<NET-ASSETS> 7,312,883,403
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 536,579,706
<OTHER-INCOME> 20,698,500
<EXPENSES-NET> (95,705,514)
<NET-INVESTMENT-INCOME> 461,572,692
<REALIZED-GAINS-CURRENT> (17,725,403)
<APPREC-INCREASE-CURRENT> 26,278,934
<NET-CHANGE-FROM-OPS> 470,126,223
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (461,726,242)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 165,907,778
<NUMBER-OF-SHARES-REDEEMED> (83,492,883)
<SHARES-REINVESTED> 24,636,104
<NET-CHANGE-IN-ASSETS> 1,075,915,622
<ACCUMULATED-NII-PRIOR> 5,369,829
<ACCUMULATED-GAINS-PRIOR> (7,592,891)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 63,011,682
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95,705,514
<AVERAGE-NET-ASSETS> 6,779,031,291
<PER-SHARE-NAV-BEGIN> 9.963
<PER-SHARE-NII> 0.675
<PER-SHARE-GAIN-APPREC> 0.015
<PER-SHARE-DIVIDEND> (0.677)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.976
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>