VAN KAMPEN PRIME RATE INCOME TRUST, 497, 1998-10-06

VAN KAMPEN PRIME RATE INCOME TRUST
497, 1998-10-06

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

The Board of Trustees of the Fund currently intends, each quarter, to
consider authorizing the Fund to make tender offers for all or a portion of its
outstanding common shares of beneficial interest ("Common Shares") at the then
current net asset value of the Common Shares. An early withdrawal charge payable
to Van Kampen Funds Inc. ("VK") will be imposed on most Common Shares held for
less than five years that are accepted for repurchase pursuant to a tender offer
by the Fund. The Fund does not intend to list the Common Shares on any national
securities exchange and none of the Fund, the Adviser or VK intends to make a
secondary market in the Common Shares at any time. Accordingly, Common Shares of
the Fund have no history of public trading, and there is not expected to be any
secondary trading market in the Common Shares. An investment in the Common
Shares should be considered illiquid. SEE "REPURCHASE OF SHARES."
(Continued on next page.)

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

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COMMON SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, NOR GUARANTEED
OR ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. COMMON SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.

This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Common Shares of the Fund. Please
read and retain this Prospectus for future reference. A Statement of Additional
Information dated March 9, 1998, as supplemented on July 14, 1998, has been
filed with the Securities and Exchange Commission ("SEC") and can be obtained
without charge by calling 1-800-341-2911 or, for Telecommunications Device for
the Deaf, 1-800-421-2833. A table of contents to the Statement of Additional
Information is located at page 34 of this Prospectus. This Prospectus
incorporates by reference the entire Statement of Additional Information. The
Statement of Additional has been filed with the SEC and is available along with
other related materials at the SEC's internet web site (http://www.sec.gov).

VAN KAMPEN FUNDS LOGO

THIS PROSPECTUS IS DATED MARCH 9, 1998,
AS SUPPLEMENTED ON JULY 17, 1998 AND OCTOBER 6, 1998.
<PAGE> 2

(Continued from previous page.)

The Fund completed an initial public offering of its Common Shares in October,
1989. Since November 13, 1989 the Fund has engaged in a continuous offering of
its Common Shares through VK, as principal underwriter, and through selected
broker-dealers and financial services firms, at a price per Common Share equal
to net asset value. There is no initial sales charge or underwriting discount on
purchases of Common Shares. VK will compensate from its own assets the
broker-dealers and financial services firms participating in the continuous
offering. The minimum initial investment is $1,000. The minimum initial
investment for tax sheltered retirement plans is $250. See "Purchasing Shares of
the Fund." The Fund has registered 230,000,000 Common Shares for sale under the
Registration Statement to which this Prospectus relates. The Fund expects to
incur approximately $799,000 in expenses in connection with the offering of such
Common Shares, which expenses will be charged as operating expenses of the Fund.

Senior Loans in which the Fund may invest generally will pay interest at rates
which are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major United States bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. Senior
Loans generally will hold the most senior position in the capital structure of
the Borrowers and generally will be secured with specific collateral, which may
include guarantees, although the Fund may also invest in Senior Loans that are
not secured by any collateral. The terms of Senior Loans typically will include
various restrictive covenants which are designed to limit certain activities of
the Borrowers. It is anticipated that the proceeds of the Senior Loans in which
the Fund will acquire interests will be used primarily to finance leveraged
buyouts, recapitalizations, mergers, acquisitions, stock repurchases and, to a
lesser extent, to finance internal growth and for other corporate purposes of
Borrowers. SEE "INVESTMENT OBJECTIVE AND POLICIES AND SPECIAL RISK
CONSIDERATIONS."

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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Expenses............................................... 4
Prospectus Summary.......................................... 5
Financial Highlights........................................ 10
The Fund.................................................... 12
Use of Proceeds............................................. 12
Investment Objective and Policies and Special Risk
Factors................................................... 12
Certain Characteristics of Senior Loan Interests.......... 12
Special Risk Considerations............................... 18
Investment Practices and Special Risks...................... 20
Taxation.................................................... 23
Management of the Fund...................................... 24
Distributions............................................... 25
Dividend Reinvestment Plan.................................. 25
Repurchase of Shares........................................ 26
Description of Common Shares................................ 28
Purchasing Shares of the Fund............................... 30
Communications With Shareholders............................ 32
Custodian, Dividend Disbursing and Transfer Agent........... 33
Legal Opinions.............................................. 33
Experts..................................................... 33
Additional Information...................................... 33
Table of Contents for the Statement of Additional
Information............................................... 34
</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 VK. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE COMMON SHARES BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.

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FUND EXPENSES
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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 COMMON SHARES)
Investment Advisory and Administration Fees(2)............ 1.19%
Interest Payments on Borrowed Funds....................... 0.00%
Other Expenses............................................ 0.23%
----------
Total Annual Operating Expenses....................... 1.42%
</TABLE>

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(1) An early withdrawal charge of 3.00% will be imposed on most Common 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 Common Shares......................... $14 $45 $78 $170
Assuming tender and repurchase of Common Shares on last day
of period and imposition of maximum applicable early
withdrawal charge........................................... $44 $65 $88 $170
</TABLE>

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

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

THE FUND. Van Kampen Prime Rate Income Trust (the "Fund") is a non-diversified,
closed-end management investment company, organized as a Massachusetts business
trust on July 14, 1989. The Fund completed an initial public offering of its
common shares of beneficial interest ("Common Shares") in October, 1989. Since
November 13, 1989 the Fund has engaged in a continuous offering of its Common
Shares through Van Kampen Funds Inc. ("VK") (an indirect affiliate of the Fund),
as principal underwriter. As of February 23, 1998, the Fund had 679,900,280
Common Shares outstanding and had net assets of $6,785,404,794. See "The Fund."

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

INVESTMENT OBJECTIVE AND POLICIES. The Fund's investment objective is to
provide a high level of current income, consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in a
professionally managed portfolio of interests in floating or variable rate
senior loans ("Senior Loans") to corporations, partnerships and other entities
("Borrowers") which operate in a variety of industries and geographical regions
(including domestic and foreign entities). Although the Fund's net asset value
will vary, the Fund's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize fluctuations in the Fund's net asset value
as a result of changes in interest rates. Senior Loans in which the Fund will
purchase interests generally pay interest at rates which are periodically
redetermined by reference to a base lending rate plus a premium. These base
lending rates are generally the prime rate offered by one or more major United
States banks ("Prime Rate"), the London Inter-Bank Offered Rate ("LIBOR"), the
Certificate of Deposit ("CD") rate or other base lending rates used by
commercial lenders. The Fund's net asset value may be affected by changes in the
credit quality of Borrowers with respect to Senior Loan interests in which the
Fund invests. An investment in the Fund may not be appropriate for all investors
and is not intended to be a complete investment program. No assurance can be
given that the Fund will achieve its investment objective.

Senior Loans generally are arranged through private negotiations between a
Borrower and several financial institutions ("Lenders") represented in each case
by one or more such Lenders acting as agent ("Agent") of the several Lenders. On
behalf of the several Lenders, the Agent will be primarily responsible for
negotiating the loan agreement ("Loan Agreement") that establishes the relative
terms and conditions of the Senior Loan and rights of the Borrower and the
several Lenders. The Fund may invest in participations ("Participations") in
Senior Loans, may purchase assignments ("Assignments") of portions of Senior
Loans from third parties and may act as one of the group of Lenders originating
a Senior Loan (an "Original Lender"). The Fund will purchase an Assignment or
act as Original Lender with respect to a syndicated Senior Loan, initially, only
where the Agent with respect to such Senior Loan at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by
Moody's Investors Service ("Moody's")) or determined by the Adviser to be of
comparable quality. When the Fund purchases a Participation, the Fund will
typically enter into a contractual relationship with the Lender selling such
Participation, but not with the Borrower. As a result, the Fund may assume the
credit risk of both the Borrower and the Lender selling the Participation and
the Fund may not directly benefit from the collateral supporting the Senior Loan
in which it has purchased the Participation. The Fund will purchase a
Participation only when the Lender selling such Participation, and any other
person interpositioned between such Lender and the Fund, at the time of
investment have outstanding debt obligations rated investment grade or
determined by the Adviser to be of

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comparable quality. Further, the Fund will not purchase interests in Senior
Loans unless such Agent, Lender or interpositioned person has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund. With respect to any given Senior
Loan, the rights of the Fund when it acquires a Participation may be different
from, and more limited than, the rights of Original Lenders or of persons who
acquire an Assignment. Participations may entail certain risks relating to the
creditworthiness of the parties from which the Participations are obtained. The
Fund may pay a fee or forgo a portion of interest payments to the Lender selling
a Participation or Assignment pursuant to the terms of such Participation or
Assignment.

In normal market conditions, at least 80% of the Fund's total assets will be
invested in Senior Loans (either as an Original Lender or as a purchaser of an
Assignment or Participation) of domestic borrowers or foreign borrowers (so long
as Senior Loans to such foreign borrowers are U.S. dollar denominated and
payments of interest and repayments of principal pursuant to such Senior Loans
are required to be made in U.S. dollars). It is anticipated that the proceeds of
the Senior Loans in which the Fund will acquire interests primarily will be used
to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock
repurchases and, to a lesser extent, to finance internal growth and for other
corporate purposes of Borrowers. Senior Loans have the most senior position in a
Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. Senior Loans generally are
secured by specific collateral, which may include guarantees. The Fund may
invest up to 20% of its total assets in interests in Senior Loans which are not
secured by any collateral. The Fund may also acquire warrants, equity securities
and junior debt securities in connection with its investments in Senior Loans.
Such equity securities and junior debt securities will not be treated by the
Fund as Senior Loans. Investment in Senior Loans which are not secured by
specific collateral and in warrants, equity securities and junior debt
securities entails certain risks in addition to those associated with investment
in collateralized Senior Loans.

Loan Agreements may provide for various restrictive covenants designed to
limit the activities of the Borrower in an effort to protect the interests of
the Lenders. Breach of such covenants, if not waived by the Lenders, is
generally an event of default under the Loan Agreement and may give the Lenders
the right to accelerate principal and interest payments. The Adviser will
consider the terms of such restrictive covenants in deciding whether to invest
in Senior Loans for the Fund's portfolio. When the Fund holds a Participation in
a Senior Loan it may not have the right to vote to waive enforcement of any
restrictive covenant breached by a Borrower. Lenders voting in connection with a
potential waiver of a restrictive covenant may have interests different from
those of the Fund and such Lenders may not consider the interests of the Fund in
connection with their votes.

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash and liquid securities as a reserve
against such commitments. The Fund will not purchase interests in Senior Loans
that would require the Fund to make any such additional loans if such additional
loan commitments would exceed 20% of the Fund's total assets.

The Fund may invest in Senior Loans, the Borrowers with respect to which have
outstanding debt securities which are rated below investment grade by a
nationally recognized statistical rating organization or are unrated but of
comparable quality to such securities. Debt securities rated below investment
grade, or unrated but of comparable quality, commonly are referred to as "junk
bonds." The rating agencies have begun assigning ratings to an increasing number
of Senior Loans. The Fund will invest only in those Senior Loans with respect to
which the Borrower, in the opinion of the Adviser, demonstrates one or more of
the following characteristics: sufficient cash flow to service debt; adequate
liquidity; successful operating history; strong competitive position;
experienced management; and, with respect to collateralized

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Senior Loans, adequate collateral coverage of the Senior Loan. In addition, the
Adviser will consider, and may rely in part, on analyses performed by Lenders
other than the Fund. A substantial portion of the Fund's investments in Senior
Loans may be rated below investment grade. Although the Adviser may consider
such ratings or other analyses in determining whether to invest in a particular
Senior Loan, the Adviser is not required to consider such ratings and such
ratings will not be the determinative factor in the Adviser's analysis.

The Fund may invest up to 20% of its total assets in certain senior debt
securities that are in the form of notes or bonds 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 foreign 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 foreign 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. 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.

INVESTMENT ADVISER. Van Kampen Investment Advisory Corp. (the "Adviser"), a
wholly-owned subsidiary of Van Kampen Investments Inc., is the Fund's investment
adviser. The Adviser also serves as investment adviser to the Van Kampen Senior
Floating Rate Fund, a continuously offered closed-end investment company with
investment objectives and policies substantially similar to those of the Fund.
See "Management of the Fund."

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

FEES AND EXPENSES. The Fund will pay the Adviser a monthly fee at an annual
rate of 0.95% of the average net assets of the Fund (as defined), such annual
rate is reduced when average net assets exceed $4 billion. The Fund will pay the
Administrator a monthly fee at an annual rate of 0.25% of the average net assets
of the Fund (as defined). See "Management of the Fund."

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

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

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

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

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

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

Credit Risks Associated with Investments in Participations. The Fund may
purchase Participations in Senior Loans. With respect to any given Senior Loan,
the terms of Participations may result in the Fund having rights which differ
from,

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

Credit Risks Associated with Senior Loans. Senior Loans, like other corporate
debt obligations, are subject to the risk of non-payment of scheduled interest
or principal. Such non-payment would result in a reduction of income to the
Fund, a reduction in the value of the Senior Loan experiencing non-payment and a
potential decrease in the net asset value of the Fund. Although Senior Loans in
which the Fund will invest may be secured by specific collateral, there can be
no assurance that liquidation of such collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal or that
such collateral could be readily liquidated. In the event of bankruptcy of a
Borrower, the Fund could experience delays or limitations with respect to its
ability to realize the benefits of any collateral securing a Senior Loan. To the
extent that the Fund invests a portion of its assets in Senior Loans that are
not secured by specific collateral, the Fund will not enjoy the benefits of
collateralization with respect to such Senior Loans. See "Investment Objective
and Policies and Special Risk Considerations."

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

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

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

Investments in Non-U.S. Issuers. The Fund may invest in Senior Loans to
Borrowers or other senior debt securities of Borrowers that are organized or
located in countries other than the United States, provided that such Senior
Loans or other senior debt securities are denominated in U.S. dollars and
provide for the payment of interest and repayment of principal in U.S. dollars.
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 are U.S. issuers, less rigorous regulatory requirements, differing legal
systems and laws relating to creditors' rights, the potential inability to
enforce legal judgments and the potential for political, social and economic
adversities.

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

9
<PAGE> 10

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

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

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

(Continued on following page)

See Financial Statements and Notes to Financial Statements.

10
<PAGE> 11

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

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

* Annualized

See Financial Statements and Notes to Financial Statements.

11
<PAGE> 12

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

Van Kampen Prime Rate Income Trust (the "Fund") is a non-diversified,
closed-end management investment company which was organized as a Massachusetts
business trust on July 14, 1989, which 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
("Common Shares") in October, 1989. Since November 13, 1989, the Fund has also
engaged in a continuous offering of the Common Shares through Van Kampen Funds
Inc. ("VK") (an indirect affiliate of the Fund), as principal underwriter. As of
February 20, 1998, the Fund had 679,900,280 Common Shares outstanding and had
net assets of $6,785,404,794. The net asset value per Common Share of the Fund
on February 20, 1998 was $9.98. The Fund's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 and its telephone number is
1-800-421-5666.

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

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

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

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

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

The Fund's investment objective is to provide a high level of current income,
consistent with preservation of capital. The Fund seeks to achieve its objective
through investment primarily in a professionally managed portfolio of interests
in floating or variable rate senior loans ("Senior Loans") to corporations,
partnerships and other entities ("Borrowers") which operate in a variety of
industries and geographical regions (including domestic and foreign entities).
Although the Fund's net asset value will vary, the Fund's policy of acquiring
interests in floating or variable rate Senior Loans is expected to minimize the
fluctuations in the Fund's net asset value as a result of changes in interest
rates. The Fund's net asset value may be affected by changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the Fund
invests.

CERTAIN CHARACTERISTICS OF SENIOR LOAN INTERESTS

12
<PAGE> 13

behalf of the several Lenders, the Agent, which is frequently the commercial
bank or other entity that originates the Senior Loan and the person that invites
other parties to join the lending syndicate, will be primarily responsible for
negotiating the loan agreement or agreements ("Loan Agreement") that establish
the relative terms, conditions and rights of the Borrower and the several
Lenders. In larger transactions it is common to have several Agents; however,
generally only one such Agent has primary responsibility for documentation and
administration of the Senior Loan. Agents are typically paid a fee or fees by
the Borrower for their services.

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

It is anticipated that the proceeds of the Senior Loans in which the Fund will
acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. The Fund currently does not intend to acquire interests in Senior
Loans the proceeds of which would be used primarily to finance construction or
real estate development projects. Senior Loans have the most senior position in
a Borrower's capital structure, although some Senior Loans may hold an equal
ranking with other senior securities of the Borrower. The capital structure of
Borrowers may include Senior Loans, senior and junior subordinated debt,
preferred stock and common stock issued by the Borrower, typically in descending
order of seniority with respect to claims on the Borrower's assets. Senior Loans
generally are secured by specific collateral, which may include guarantees. The
Fund may also invest up to 20% of its total assets in Senior Loans which are not
secured by any collateral. To the extent that the Fund invests a portion of its
assets in Senior Loans that are not secured by specific collateral, the Fund
will not enjoy the benefits associated with collateralization with respect to
such Senior Loans and such Senior Loans may pose a greater risk of nonpayment of
interest or loss of principal than do collateralized Senior Loans. As discussed
below, the Fund may also acquire warrants, equity securities and junior debt
securities issued by the Borrower or its affiliates as part of a package of
investments in the Borrower or its affiliates. Warrants, equity securities and
junior debt securities will not be treated as Senior Loans and thus assets
invested in such securities will not count toward the 80% of the Fund's total
assets that normally will be invested in Senior Loans. The Fund will acquire
such interests in warrants, equity securities and junior debt securities only as
an incident to the intended purchase of interests in Senior Loans. In order to
borrow money pursuant to collateralized Senior Loans, a Borrower will
frequently, for the term of the Senior Loan, pledge as collateral assets,
including but not limited to, trademarks, accounts receivable, inventory,
buildings, real estate, franchises and common and preferred stock in its
subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a collateralized Senior Loan
may be secured only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that may not be readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligations
under a Senior Loan.

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

Senior Loans in which the Fund will invest generally pay interest at rates
which are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime rate offered by one or
more major United States banks (the "Prime Rate"), the London Inter-Bank Offered
Rate ("LIBOR"), the certificate of deposit ("CD") rate or other base lending
rates used by commercial lenders. The Prime Rate quoted by a major U.S. bank is
the interest rate at which such bank is willing to lend U.S. dollars to its most
creditworthy borrowers. LIBOR, as provided for in Loan Agreements, is an average
of the interest rates quoted by several designated banks as the rates at which
such banks would offer to pay interest to major financial institutional
depositors in the London interbank market on

13
<PAGE> 14

U.S. dollar denominated deposits for a specified period of time. The CD rate, as
generally provided for in Loan Agreements, is the average rate paid on large
certificates of deposit traded in the secondary market. In normal market
conditions, at least 65% of the Fund's total assets will be invested in Senior
Loans which, at the time of the Fund's initial investment in such Senior Loans,
provided the Fund with a rate of return which was at least equal to the Prime
Rate existing on the date of such initial investment.

The Fund is not subject to any restrictions with respect to the maturity of
Senior Loans held in its portfolio. It is currently anticipated that the Fund's
assets invested in Senior Loans will consist of Senior Loans with stated
maturities of between three and ten years, inclusive, and with rates of interest
which are redetermined either daily, monthly, quarterly or semi-annually;
provided, however, that the Fund may invest up to 5% of its total assets in
Senior Loans which permit the Borrower to select an interest rate
redetermination period of up to one year. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the Fund's
net asset value as a result of changes in interest rates. The Senior Loans in
the Fund's portfolio will at all times have a dollar-weighted average time until
the next interest rate redetermination of 90 days or less. As a result, as
short-term interest rates increase, interest payable to the Fund from its
investments in Senior Loans should increase, and as short-term interest rates
decrease, interest payable to the Fund from its investments in Senior Loans
should decrease. The amount of time required to pass before the Fund will
realize the effects of changing short-term market interest rates on its
portfolio will vary with the dollar-weighted average time until the next
interest rate redetermination on the Senior Loans in the Fund's portfolio. The
Fund may utilize certain investment practices to, among other things, shorten
the effective interest rate redetermination period of Senior Loans in its
portfolio. In such event, the Fund will consider such shortened period to be the
interest rate redetermination period of the Senior Loan; provided, however, that
the Fund will not invest in Senior Loans which permit the Borrower to select an
interest rate redetermination period in excess of one year. Because most Senior
Loans in the Fund's portfolio will be subject to mandatory and/or optional
prepayment and there may be significant economic incentives for a Borrower to
prepay its loans, prepayments of Senior Loans in the Fund's portfolio may occur.
Accordingly, the actual remaining maturity of the Fund's portfolio invested in
Senior Loans may vary substantially from the average stated maturity of the
Senior Loans held in the Fund's portfolio. As a result of expected prepayments
from time to time of Senior Loans in the Fund's portfolio, the Fund estimates
that the actual average maturity of the Senior Loans held in its portfolio will
be approximately 18-24 months.

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

The Fund may purchase and retain in its portfolio a Senior Loan interest the
Borrower with respect to which has filed for protection under the federal
bankruptcy laws or has had an involuntary bankruptcy petition filed against it
by its creditors. As of July 31, 1997, the Fund held in its portfolio and had
reduced the value of three Senior Loan interests (the aggregate value of which
represented approximately 0.88% of the value of the Fund's total assets on such
date) the Borrowers with respect to which were subject to protection under the
federal bankruptcy laws. The values of such Senior Loan interests, if any,
reflect, among other things, the Adviser's assessment of the likelihood that the
Fund ultimately will receive full repayment of the principal amount of such
Senior Loan interests, the likely duration, if any, of a lapse in the scheduled
repayment of principal and prevailing interest rates. At times, in connection
with the restructuring of a Senior Loan either

14
<PAGE> 15

outside of bankruptcy court or in the context of bankruptcy court proceedings,
the Fund may determine or be required to accept equity securities or junior debt
securities in exchange for all or a portion of a Senior Loan interest. Depending
upon, among other things, the Adviser's evaluation of the potential value of
such securities in relation to the price that could be obtained by the Fund at
any given time upon sale thereof, the Fund may determine to hold such securities
in its portfolio. Any equity securities and junior debt securities held by the
Fund will not be treated as Senior Loans and thus will not count toward the 80%
of the Fund's total assets that normally will be invested in Senior Loans.

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

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

Participations by the Fund in a Lender's portion of a Senior Loan typically
will result in the Fund having a contractual relationship only with such Lender,
not with the Borrower. As a result, 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 such Lender of
such payments from the Borrower. In connection with purchasing Participations,
the Fund generally will have no right to enforce compliance by the Borrower with
the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower and the Fund may
not directly benefit from the collateral supporting the Senior Loan in which it
has purchased the Participation. As a result, the Fund may assume the credit
risk of both the Borrower and the Lender selling the Participation. In the event
of the insolvency of the Lender selling a Participation, the Fund may be treated
as a general creditor of such Lender, and may not benefit from any set-off
between such Lender and the Borrower. The Fund has taken the following measures
in an effort to minimize such risks. The Fund will only acquire Participations
if the Lender selling the Participation, and any other persons interpositioned
between the Fund and the Lender, (i) at the time of investment has outstanding
debt or deposit obligations rated investment grade (BBB or A-3 or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or P-3 or higher by Moody's
Investors Service ("Moody's")) or determined by the Adviser to be of comparable
quality and (ii) has entered into an agreement which provides for the holding of
assets in safekeeping for, or the prompt disbursement of assets to, the Fund.
Long-term debt rated BBB by S&P is regarded by S&P as having adequate capacity
to pay interest and repay principal and debt rated Baa by Moody's is regarded by
Moody's as a medium grade obligation, i.e., it is neither highly protected nor
poorly secured. Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is considered by S&P to be either overwhelming
or very strong and issues of commercial paper rated Prime-1 by Moody's are
considered by Moody's to have a superior ability for repayment of senior
short-term debt obligations. The Fund ordinarily will purchase a Participation
only if, at the time of such purchase, the Fund believes that the party from
whom it is purchasing such Participation is retaining an interest in the
underlying Senior Loan. In the event that the Fund

15
<PAGE> 16

does not so believe, it will only purchase such a Participation if, in addition
to the requirements set forth above, the party from whom the Fund is purchasing
such Participation (i) is a bank, a member of a national securities exchange or
other entity designated in the Investment Company Act of 1940, as amended, as
qualified to serve as a custodian for a registered investment company and (ii)
has been approved as a custodian by the Board of Trustees of the Fund (a
"Designated Custodian").

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

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

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

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

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

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<PAGE> 17

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

A Lender may have certain obligations pursuant to a Loan Agreement, which may
include the obligation to make additional loans in certain circumstances. The
Fund currently intends to reserve against such contingent obligations by
segregating a sufficient amount of cash, liquid securities and liquid Senior
Loans as a reserve against such commitments. The Fund will not purchase
interests in Senior Loans that would require the Fund to make any such
additional loans if such additional loan commitments would exceed 20% of the
Fund's total assets.

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

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 loan 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, a relatively small decline in the value of a
referenced note 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 assets on Senior
Loans.

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<PAGE> 18

SPECIAL RISK CONSIDERATIONS

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

Senior Loans in which the Fund will invest generally will not be registered
with the SEC or any state securities commission and will not be listed on any
national securities exchange. Although the Fund will generally have access to
financial and other information made available to the Lenders in connection with
Senior Loans, the amount of public information available with respect to Senior
Loans will generally be less extensive than that available for registered or
exchange listed securities. In addition, the Adviser is not required to consider
ratings by a nationally recognized statistical ratings organization when
evaluating Senior Loans, and such ratings will not be a determinative factor in
the Adviser's investment decisions. As a result, the performance of the Fund and
its ability to meet its investment objective is more dependent on the analytical
ability of the Adviser than would be the case for an investment company that
invests primarily in registered or exchange listed securities or that uses
securities ratings as a determinative investment factor.

Senior Loans, at present, generally are not readily marketable and may be
subject to restrictions on resale. Interests in Senior Loans generally are not
listed on any national securities exchange or automated quotation system and no
active trading market may exist for many of the Senior Loans in which the Fund
may invest. To the extent that a secondary

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<PAGE> 19

market may exist for certain of the Senior Loans in which the Fund invests, such
market may be subject to irregular trading activity, wide bid/ask spreads and
extended trade settlement periods. Senior Loans are thus relatively illiquid,
which illiquidity may impair the Fund's ability to realize the full value of its
assets in the event of a voluntary or involuntary liquidation of such assets.
Liquidity relates to the ability of the Fund to sell an investment in a timely
manner. The market for relatively illiquid securities tends to be more volatile
than the market for more liquid securities. The Fund has no limitation on the
amount of its assets which may be invested in securities which are not readily
marketable or are subject to restrictions on resale. Because a substantial
portion of the Fund's assets may be invested in Senior Loan interests, the
ability of the Fund to dispose of its investments in a timely fashion and at a
fair price may be restricted, and the Fund and holders of Common Shares may
suffer capital losses as a result. However, many of the Senior Loans in which
the Fund expects to purchase interests are of a relatively large principal
amount and are held by a relatively large number of owners which should, in the
Adviser's opinion, enhance the relative liquidity of such interests. The risks
associated with illiquidity are particularly acute in situations where the
Fund's operations require cash, such as when the Fund tenders for its Common
Shares, and may result in the Fund borrowing to meet short-term cash
requirements.

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

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

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

Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by the Fund's Adviser, Administrator and other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem". The Adviser and Administrator are taking steps that they believe are
reasonably designed to address the Year 2000 Problem with respect to computer
systems that they use and to obtain reasonable assurances that comparable steps
are being taken by each Fund's other major service providers. At this time,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact to the Fund.

In addition, it is possible that the markets for Senior Loans and other
securities in which the Fund 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. In addition, corporate and governmental data processing errors
may result in production problems for individual companies and overall economic
uncertainties. Earnings of individual issuers will be affected by remediation
costs, which, may be substantial and may be reported inconsistently in U.S. and
foreign financial statements. Accordingly, the Fund's investments may be
adversely affected.

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<PAGE> 20

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

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

INTEREST RATE AND OTHER HEDGING TRANSACTIONS

The Fund may enter into various interest rate hedging and risk management
transactions. Certain of these interest rate hedging and risk management
transactions may be considered to involve derivative instruments. A derivative
is a financial instrument whose performance is derived at least in part from the
performance of an underlying index, security or asset. The values of certain
derivatives can be affected dramatically by even small market movements,
sometimes in ways that are difficult to predict. There are many different types
of derivatives, with many different uses. The Fund expects to enter into these
transactions primarily to seek to preserve a return on a particular investment
or portion of its portfolio, and may also enter into such transactions to seek
to protect against decreases in the anticipated rate of return on floating or
variable rate financial instruments the Fund owns or anticipates purchasing at a
later date, or for other risk management strategies such as managing the
effective dollar-weighted average duration of the Fund's portfolio. In addition,
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 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

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<PAGE> 21

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.

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

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<PAGE> 22

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 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

22
<PAGE> 23

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.

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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.

If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.

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 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%. A special 28% tax
rate may apply to a portion of the capital gain dividends of the Fund to
individuals and other non-corporate taxpayers with respect to the Fund's taxable
year ended July 31, 1998.

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.

23
<PAGE> 24

- --------------------------------------------------------------------------------
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 One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.

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 $65 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 global custody, and securities lending.

INVESTMENT ADVISORY AGREEMENT. The business and affairs of the Fund will be
managed under the direction of the Fund's Board of Trustees. Subject to their
authority, the Adviser and the Fund's officers will supervise and implement the
Fund's investment activities and will be responsible for overall management of
the Fund's business affairs. The investment advisory agreement (the "Advisory
Agreement") between the Adviser and the Fund provides that the Adviser will
supply investment research and portfolio management, including the selection of
securities for the Fund to purchase, hold, or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed. The Adviser also
furnishes offices, necessary facilities and equipment and permits its officers
and employees to serve without compensation as Trustees and officers of the Fund
if duly elected to such positions.

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

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

PORTFOLIO MANAGEMENT. Jeffrey W. Maillet is a Senior Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since the Fund's commencement of investment operations. Mr.
Maillet has been employed by the Adviser since 1989. 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 investing primarily in interests in Senior Loans and having investment
objectives and policies virtually identical to those of the Fund.

THE ADMINISTRATOR. The administrator for the Fund is Van Kampen Funds Inc. (in
such capacity, the "Administrator"). Its principal business address is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Administrator is a
wholly-owned subsidiary of Van Kampen Investments Inc. The Administrator
maintains offices and regional

24
<PAGE> 25

representatives in major cities across the nation. VK is the principal
underwriter of the Common Shares in connection with the offering thereof by the
Fund. See "Purchase of Shares."

Pursuant to the administration agreement between the Fund and the
Administrator (the "Administration Agreement") and in consideration of its
administrative fee, the Administrator will (i) monitor the provisions of the
Loan Agreements and any agreements with respect to Participations and
Assignments and be responsible for recordkeeping with respect to Senior Loans in
the Fund's portfolio; (ii) arrange for the printing and dissemination of reports
to holders of Common Shares; (iii) arrange for the dissemination of the Fund's
proxy and any tender offer materials to holders of Common Shares, and oversee
the tabulation of proxies by the Fund's transfer agent; (iv) negotiate the terms
and conditions under which custodian services will be provided to the Fund and
the fees to be paid by the Fund in connection therewith; (v) negotiate the terms
and conditions under which dividend disbursing services will be provided to the
Fund, and the fees to be paid by the Fund in connection therewith and review the
provision of dividend disbursing services to the Fund; (vi) provide the Fund's
dividend disbursing agent and custodian with such information as is required for
such parties to effect payment of dividends and distributions and to implement
the Fund's dividend reinvestment plan; (vii) make such reports and
recommendations to the Board of Trustees as the Trustees reasonably request or
deem appropriate; and (viii) provide shareholder services to holders or
potential holders of the Fund's securities.

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

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

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

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

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

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

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

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

25
<PAGE> 26

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

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

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

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

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

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

The Board of Trustees of the Fund currently intends, each quarter, to consider
authorizing the Fund to make tender offers for all or a portion of its then
outstanding Common Shares at the net asset value of the Common Shares on the
expiration date of the tender offer. Although such tender offers, if undertaken
and completed, will provide some liquidity for holders of the Common Shares,
there can be no assurance that such tender offers will in fact be undertaken or
completed or, if completed, that they will provide sufficient liquidity for all
holders of Common Shares who may desire to sell such Common Shares. As such,
investment in the Common Shares should be considered illiquid. As of the date of
this Prospectus, the Fund has commenced and consummated tender offers in each
quarter since the commencement of investment operations. An early withdrawal
charge payable to VK will be imposed on most Common Shares accepted for tender
by the Fund which have been held for less than five years, as described below.

Although the Board of Trustees believes that tender offers for the Common
Shares generally would increase the liquidity of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the total assets of the
Fund and, therefore, have the effect of increasing the Fund's expense ratio.
Because of the nature of the Fund's investment objective and policies and the
Fund's portfolio, the Adviser anticipates potential difficulty in disposing of
portfolio securities in order to consummate tender offers for the Common Shares.
As a result, the Fund may be required to borrow money in order to finance
repurchases and tenders.

26
<PAGE> 27

The Fund's Declaration of Trust authorizes the Fund, without prior approval of
the holders of Common Shares, to borrow money in an amount up to 33 1/3% of the
Fund's total assets, for the purpose of, among other things, obtaining short-
term credits in connection with tender offers by the Fund for Common Shares. In
this connection, the Fund may issue notes or other evidence of indebtedness or
secure any such borrowings by mortgaging, pledging or otherwise subjecting as
security the Fund's assets. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowing, must have an "asset coverage" of at least
300%. With respect to any such borrowing, asset coverage means the ratio which
the value of the total assets of the Fund, less all liabilities and indebtedness
not represented by senior securities (as defined in the 1940 Act), bears to the
aggregate amount of such borrowing by the Fund. The rights of lenders to the
Fund to receive interest on and repayment of principal of any such borrowings
will be senior to those of the holders of Common Shares, and the terms of any
such borrowings may contain provisions which limit certain activities of the
Fund, including the payment of dividends to holders of Common Shares in certain
circumstances. Further, the terms of any such borrowing may and the 1940 Act
does (in certain circumstances) grant to the lenders to the Fund certain voting
rights in the event of default in the payment of interest on or repayment of
principal. In the event that such provisions would impair the Fund's status as a
regulated investment company, the Fund, subject to its ability to liquidate its
relatively illiquid portfolio, intends to repay the borrowings. Any borrowing
will likely rank senior to or pari passu with all other existing and future
borrowings of the Fund. Interest payments and fees incurred in connection with
borrowings will reduce the amount of net income available for payment to the
holders of Common Shares. The Fund does not intend to use borrowings for
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 (the "Credit
Agreement") among the Fund, as borrower, the banks party thereto (the "Financial
Institutions"), and Bank of America National Trust and Savings Association
("BofA"), as agent, pursuant to which the Financial Institutions have committed
to provide a credit facility of up to $250,000,000 to the Fund, which is not
secured by the assets of the Fund or other collateral. This credit facility can
provide the Fund with additional liquidity to meet its obligations to purchase
Common 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,
1998, unless extended by its terms. As of the date of this Prospectus, the Fund
had not drawn any of the funds available under the Credit Agreement. See
"Repurchase of Shares" in the Statement of Additional Information.

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

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

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

27
<PAGE> 28

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

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

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

EXCHANGES. Tendering shareholders may elect to receive, in lieu of cash, the
proceeds from the tender of Common Shares of the Fund in contingent deferred
sales charge shares ("Class B Shares") of certain open-end investment companies
distributed by VK ("VK Funds"). The Early Withdrawal Charge will be waived for
Common 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 Common
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 Common 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 Common
Shares which have a net asset value of at least $500. An exchange is a taxable
event and may result in a taxable gain or loss.
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON SHARES
- --------------------------------------------------------------------------------

The Fund is an unincorporated business trust established under the laws of the
Commonwealth of Massachusetts by a Declaration of Trust dated July 14, 1989, as
amended 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 Common Shares. The Declaration of Trust also authorizes the Fund to borrow
money or otherwise obtain credit and in this connection issue notes or other
evidence of indebtedness. The Fund does not intend to hold annual meetings of
the holders of Common Shares.

COMMON SHARES. The Declaration of Trust permits the Fund to issue an unlimited
number of full and fractional Common Shares of beneficial interest, $.01 par
value per Common Share. Each Common Share represents an equal proportionate
interest in the assets of the Fund with each other Common Share in the Fund.
Holders of Common Shares will be entitled to the payment of dividends when, as
and if declared by the Board of Trustees. The terms of any borrowings may limit
the payment of dividends to the holders of Common Shares. Each whole Common
Share shall be entitled to one vote as to matters on which it is entitled to
vote pursuant to the terms of the Fund's Declaration of Trust on file with the
SEC. Upon liquidation of the Fund, after paying or adequately providing for the
payment of all liabilities of the Fund, and

28
<PAGE> 29

upon receipt of such releases, indemnities and refunding agreements as they deem
necessary for their protection, the Trustees may distribute the remaining assets
of the Fund among the holders of the Common Shares. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Fund,
requires inclusion of a clause to that effect in every agreement entered into by
the Fund and indemnifies shareholders against any such liability. Although
shareholders of an unincorporated business trust established under Massachusetts
law, in certain limited circumstances, may be held personally liable for the
obligations of the trust as though they were general partners, the provisions of
the Declaration of Trust described in the foregoing sentence make the likelihood
of such personal liability remote.

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

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

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

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>

29
<PAGE> 30

As of February 20, 1998, the net asset value per Common Share was $9.98. The
following table sets forth certain information with respect to the Common Shares
as of February 20, 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 0 679,900,280
</TABLE>

To the knowledge of the Fund, as of February 23, 1998, no person held 5% or
more of the Fund's Common Shares either beneficially or of record. Further, as
of such date, officers and trustees of the Fund as a group owned less than 1% of
the Common Shares.

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

The Declaration of Trust requires the favorable vote of the holders of at
least two-thirds of the outstanding Common Shares then entitled to vote to
approve, adopt or authorize certain transactions with 5%-or-greater holders of
Common Shares and their associates, unless the Board of Trustees shall by
resolution have approved a memorandum of understanding with such holders, in
which case normal voting requirements would be in effect. For purposes of these
provisions, a 5%-or-greater holder of Common Shares (a "Principal Shareholder")
refers to any person who, whether directly or indirectly and whether alone or
together with its affiliates and associates, beneficially owns 5% or more of the
outstanding Common Shares of the Fund. The transactions subject to these special
approval requirements are: (i) the merger or consolidation of the Fund or any
subsidiary of the Fund with or into any Principal Shareholder; (ii) the issuance
of any securities of the Fund to any Principal Shareholder for cash; (iii) the
sale, lease or exchange of all or any substantial part of the assets of the Fund
to any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period); or (iv) the sale, lease or exchange to the Fund
or any subsidiary thereof, in exchange for securities of the Fund, of any assets
of any Principal Shareholder (except assets having an aggregate fair market
value of less than $1,000,000, aggregating for the purposes of such computation
all assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period).

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 Common 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.

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.

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

The Fund offers continuously its Common Shares through VK, the principal
underwriter, whose offices are located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. The Common Shares will also be offered through members of the
National Association of Securities Dealers, Inc. ("NASD") or eligible non-NASD
members who are acting as brokers or

30
<PAGE> 31

agents for investors ("broker-dealers"). The Fund reserves the right to
terminate or suspend the continuous offering of its Common Shares at any time
without prior notice.

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

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

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

VK will compensate broker-dealers participating in the continuous offering at
a rate of 3.0% of the dollar value of Common Shares purchased from the Fund by
such broker-dealers. If the Common Shares remain outstanding after one year from
the date of their original purchase, VK will compensate such broker-dealers at
an annual rate, paid quarterly, in an amount based on a percentage of the dollar
value of such Common Shares, in accordance with the following schedule:

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

At various times VK may implement programs under which a broker-dealer's sales
force may be eligible to win nominal awards for certain sales efforts. The value
of any such non-cash awards will not exceed $50 per person annually. These
incentives will not change the price investors pay for Common Shares or the
amount that the Fund will receive from the sale of Common Shares. The
compensation paid to broker-dealers at the time of purchase and any quarterly
payments mentioned above will 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 Common Shares held for less than five years that are accepted
for repurchase pursuant to a tender offer by the Fund. See "Repurchase of
Shares." The compensation paid to broker-dealers and 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. Common 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.

31
<PAGE> 32

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

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

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

- --------------------------------------------------------------------------------
COMMUNICATIONS WITH SHAREHOLDERS
- --------------------------------------------------------------------------------

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

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

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

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.

32
<PAGE> 33

- --------------------------------------------------------------------------------
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 Common 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, 1997, included in the
Statement of Additional Information, have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants, given
on the authority of said firm as experts in auditing and accounting.

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

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

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

33
<PAGE> 34

- --------------------------------------------------------------------------------
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-9

Management of the Fund...................................... B-10

Net Asset Value............................................. B-11

Taxation.................................................... B-13

Repurchase of Shares........................................ B-15

Independent Accountants' Report............................. B-18

Financial Statements for the Year Ended July 31, 1997....... B-19

Notes to Financial Statements............................... B-34
</TABLE>

34
<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
One Parkview Plaza
Oakbrook Terrace, IL 60181

Investment Adviser

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

Principal Underwriter

VAN KAMPEN FUNDS INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181

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

MARCH 9, 1998, AS SUPPLEMENTED
ON JULY 17, 1998 AND OCTOBER 6, 1998

LOGO
PRIT PRO 9/98